Shanghai / CN. (yb) Yum China Holdings Inc. reported unaudited results for the first quarter ended March 31, 2020.
Impact of Covid-19 Outbreak and Mitigation Efforts
As the Covid-19 outbreak progressed, Yum China further heightened its focus on safeguarding the health and safety of its employees and customers. The Company implemented stringent health measures at its restaurants and workplaces, and provided extended healthcare and other support to employees.
First quarter operations were significantly affected by the outbreak. Working closely with local health authorities to safeguard the public, the Company began temporary store closures in late January where appropriate. Approximately 35 percent of stores were closed by mid-February at the peak of the outbreak, with significant regional differences. As of the date of this release, approximately 99 percent of stores in China are either partially or fully open.
For restaurants that remained open, same-store sales declined due to shortened operating hours and reduced traffic, with a significant portion of stores providing only delivery and takeaway services. Our results were strong for the first three weeks of January, but then the outbreak led to subsequent same-store sales declines of 40-50 percent compared to the comparable Chinese New Year holiday period in 2019. As the first quarter progressed, sales performance recovered gradually, with same-store sales down approximately 20 percent in late March. The pace of recovery is uneven with recent sales and traffic still below pre-outbreak levels as people continue to avoid going out and practice social distancing. Same-stores sales were still down by more than 10 percent month-to-date.
Yum China pioneered contactless delivery and contactless takeaway in late January to enhance preventative health measures. Those services proved popular with customers and have supported the businesses during this period of reduced dine-in traffic. Delivery contributed to 35 percent of Company sales in the first quarter, an increase of 16 percentage points year over year.
Sales deleveraging and additional costs incurred reduced restaurant margin and Operating Profit for the quarter. Those negative impacts were partially offset by effective cost management, labor productivity improvement, and one-time relief provided by our landlords and government agencies.
During the quarter, the Company opened 179 new stores, with the majority opened in January before the Chinese New Year. After that, openings were interrupted due to outbreak-related traffic restrictions and unavailability of construction workers. The Company subsequently resumed new store construction with four store openings in late March.
First Quarter Highlights
- Total revenues declined 24 percent year over year to USD 1.75 billion from USD 2.30 billion (a 21 percent decline excluding foreign currency translation (“F/X”)).
- Total system sales declined 20 percent year over year, with declines of 15 percent at KFC and 38 percent at Pizza Hut, excluding F/X.
- Same-store sales declined 15 percent year over year, with an 11 percent decline at KFC and 31 percent decline at Pizza Hut, excluding F/X.
- Restaurant margin was 10.7 percent, compared with 18.5 percent in the prior year period.
- Operating Profit declined 68 percent year over year to USD 97 million from USD 303 million (67 percent decline excluding F/X). Adjusted Operating Profit declined 67 percent year over year to USD 98 million from USD 303 million (66 percent decline excluding F/X).
- Effective tax rate was 32.7 percent.
- Net Income declined 72 percent to USD 62 million from USD 222 million in the prior year period, primarily due to the decline in Operating Profit and mark-to-market loss from our equity investment in Meituan Dianping.
- Adjusted Net Income declined to USD 63 million from USD 230 million in the prior year period. (68 percent decline excluding the mark-to-market loss of USD 8 million in the first quarter of 2020 and mark-to-market gain of USD 10 million in the first quarter of 2019 from our equity investment in Meituan Dianping, 67 percent decline excluding F/X).
- Diluted EPS declined 72 percent to USD 0.16 from USD 0.57 in the prior year period.
- Adjusted Diluted EPS declined to USD 0.16 from USD 0.59 in the prior year period (68 percent decline excluding the mark-to-market loss and gain from our equity investment in Meituan Dianping in 2020 and 2019, respectively, 67 percent decline excluding F/X).
- Opened 179 new stores during the quarter, bringing total store count to 9,295 across more than 1,400 cities.
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Digital and Delivery
- As of March 31, 2020, the KFC and Pizza Hut loyalty programs had over 250 million members. KFC member sales represented approximately 62 percent of KFC’s system sales and Pizza Hut member sales represented approximately 44 percent of Pizza Hut’s system sales in the first quarter of 2020.
- Delivery contributed to 32 percent of Company sales at KFC and 48 percent of Company sales at Pizza Hut in the first quarter of 2020, an increase of 14 and 24 percentage points, respectively, year over year.
- Digital orders, including delivery, mobile orders and kiosk orders, accounted for 84 percent of Company sales at KFC and 65 percent of Company sales at Pizza Hut in the first quarter of 2020, an increase of 29 and 36 percentage points, respectively, year over year.
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2020 Outlook
The Company provides the following fiscal year 2020 targets, subject to revision based on future impacts of Covid-19 that cannot be predicted at this time:
- To open between 800 and 850 new stores (gross), excluding Huang Ji Huang.
- To make capital expenditures between USD 500 million and USD 550 million
The Company believes that the Covid-19 outbreak is likely to have a material and extended adverse impact on its operational and financial results for full year 2020. Future operations, as well as the Company’s cash flows and financial position, may be materially and adversely influenced by further developments related to this global outbreak, including potential additional announcements and actions from governments and local authorities, disruption in our supply chain, our inability to provide safety measures to protect our employees, or other reasons.
