Shanghai / CN. (yb) Yum China Holdings Inc. reported unaudited results for Q1-2022 that ended March 31.
Impact of Covid-19 Outbreak and Mitigation Efforts
The highly transmissible Omicron variant caused significant volatility in our business operations in the first quarter, and continues to have a severe impact in the second quarter. The Covid-19 situation was relatively stable in January and February. However, the situation rapidly deteriorated in March, resulting in the largest outbreak since Covid-19 first emerged in early 2020. This latest outbreak and the challenges we face are unprecedented. Compared to first quarter 2020, the case counts, duration, geographical coverage and restrictive measures experienced in the first quarter 2022 are much more severe:
- Covid-19 case counts have reached new records. In March, case counts (including asymptomatic cases) surpassed 2020 and 2021 combined. Cases in April further increased to nearly 600,000, which is approximately six times higher than that of March.
- Many cities across large swaths of China have been fully or partially locked down for weeks or even months, including economically important regions such as Shanghai, Tianjin, Jilin, Suzhou, Shenzhen and Guangzhou.
- Eastern China, the most vibrant economic region and most important market for us, accounting for 30-40 percent of our stores and sales, has been the most affected in this wave.
- Drastic public health measures are being stepped up nationwide in line with the strict enforcement of dynamic zero-Covid policy, resulting in further reductions of social activities, travel and consumption.
Stores temporarily closed or that offered only takeaway and delivery services significantly increased in March and April:
- January and February – Around 300 stores on average. Over 500 stores at the peak in January.
- March – Over 1,700 stores on average, of which approximately 40 percent of stores were temporarily closed.
- April – Around 3,000 stores, on average, of which approximately 50 percent of stores were temporarily closed.
- Temporary store closures are excluded from our same-store sales calculation.
- System sales are impacted by temporary store closures and same-store sales.
Same-store sales declined sharply in March and April:
- January and February combined – Decreased approximately 4 percent year over year, reflecting a sequential improvement from the fourth quarter.
- March – Decreased by more than 20 percent year over year, as the Covid-19 situation rapidly deteriorated.
- April (preliminary) – Decreased by more than 20 percent year over year, as the outbreak persisted.
We have responded quickly and taken measures intending to lessen the impact of these unprecedented headwinds.
- We designed alternative routes, set up temporary drop-off and pick-up sites and optimized sourcing to fulfill the demand of our store network. Our resilient supply chain management has enabled us to lessen disruptions from supply complexities and mobility restrictions.
- Nationwide, we have adjusted marketing campaigns, simplified menus and promoted off-premise services. Our digital capabilities have enabled us to engage customers directly and nimbly. Our hybrid delivery model has allowed us to maintain adequate rider capacity and continue operations in most places.
- In heavily impacted regions like Shanghai, to serve our community, we have quickly launched community purchasing (a new way of group ordering) across all our brands, promoted new retail packaged food, significantly cut down on menu offerings and shortened operating hours.
As a result of our tremendous efforts, first quarter operating profit of USD 191 million was in line with expectations indicated in the March business update. However, we were only able to partially mitigate Covid-19 impacts and incurred an operating loss in March. Unless conditions significantly improve in May and June, we expect to incur an operating loss in the second quarter, due to (1) the significant sales decline driven by the worsening Covid-19 situation, (2) a more pronounced sales deleveraging impact as the second quarter is seasonally a lower quarter for sales and profit margins and (3) increases in commodity prices, wages, and utility prices. In light of this, we are pulling back on advertising and promotional activities, temporarily postponing store remodels, negotiating rent relief, implementing austerity measures to reduce G+A, and optimizing our raw material cost structure.
First Quarter Highlights
- Total revenues increased 4 percent year over year to USD 2.67 billion from USD 2.56 billion (a 2 percent increase excluding foreign currency translation (F/X)).
- Total system sales decreased 4 percent year over year, with decreases of 4 percent at KFC and 1 percent at Pizza Hut, excluding F/X.
- Same-store sales decreased 8 percent year over year, with decreases of 9 percent at KFC and 5 percent at Pizza Hut, excluding F/X.
- Opened 329 net new stores during the quarter; total store count reached 12,117 as of March 31, 2022.
- Restaurant margin was 13.8 percent, compared with 18.7 percent in the prior year period, primarily due to sales deleveraging as a result of the worsened Covid-19 situation.
- Operating Profit decreased 44 percent year over year to USD 191 million from USD 342 million (a 45 percent decrease excluding F/X).
- Adjusted Operating Profit decreased 44 percent year over year to USD 193 million from USD 345 million (a 45 percent decrease excluding F/X).
- Effective tax rate was 33.1 percent.
- Net Income decreased 57 percent to USD 100 million from USD 230 million in the prior year period, primarily due to the decrease in Operating Profit and the loss from our mark-to-market investment in Meituan Dianping.
- Adjusted Net Income decreased 56 percent to USD 102 million from USD 233 million in the prior year period (a 47 percent decrease excluding the net losses of USD 30 million and USD 16 million in the first quarter of 2022 and 2021, respectively, from our mark-to-market equity investments; a 48 percent decrease if further excluding F/X).
- Diluted EPS decreased 57 percent to USD 0.23 from USD 0.53 in the prior year period.
- Adjusted Diluted EPS decreased 56 percent to USD 0.24 from USD 0.54 in the prior year period (a 46 percent decrease excluding the net losses from our mark-to-market equity investments in the first quarter of 2022 and 2021; a 47 percent decrease if further excluding F/X).
- Results for the current year period include the consolidation of Hangzhou KFC.
CEO and CFO Comments
Joey Wat, CEO of Yum China, commented, «Foremost, I want to thank frontline workers and volunteers for their selfless and noble efforts. The country and our company are facing the toughest challenges yet in the battle against Covid-19. Frontline employees in our stores and supply chain are once again rising to the occasion. Our teams worked together across the brands and functions, and quickly developed ways to address the fast-changing conditions. In the cities on lockdown, where most business activities have halted, we are one of the first authorized essential food suppliers serving communities in need. We have also been prioritizing meals to the frontline workers fighting the crisis and to disadvantaged and vulnerable groups. I hope we have been able to bring some joy to people in need during this difficult time.»
Wat continued, «Our ability to quickly adapt to this ever-changing operating environment is at the core of our resilience. Nationwide, we swiftly designed detour routes and optimized supply sourcing to lessen the impact of supply chain disruptions. In Shanghai, when less than 10 percent of our restaurants were open and operating with limited capacity, we launched community purchasing across all brands in a matter of days. This breakthrough allowed us to efficiently deploy limited resources to serve more customers. We seized at-home demand with our ready-to-eat products which are easy to store during the lockdown. We believe our solid business fundamentals and agility will continue to help us navigate the near-term challenges. Despite the current Covid-19 situation, we will remain focused on executing our RGM strategic framework to fortify resilience, accelerate growth and widen our strategic moat to drive long-term and sustainable growth.»
Andy Yeung, CFO of Yum China, added, «First quarter operational performance was significantly impacted by the surge of Omicron variant in March. The case counts, duration, coverage, and severity of restrictive measures are far more extensive than previous outbreaks. Our quick response to sustain operations in areas on lockdown, drive off-premise sales and proactively manage costs partially mitigated the impact. While we generated operating profit in the first quarter, we experienced a loss for the month of March. Unless the Covid-19 situation improves significantly in May and June, we expect to incur an operating loss in the second quarter. During this enormously difficult time, our priority is to operate our restaurants safely in order to serve customers and communities in need.»
Yeung continued, «We continue to employ a disciplined and balanced capital allocation strategy, ensuring that we have sufficient cash to sustain operations and deal with potential contingencies. While the pace of store remodeling and expansion may be temporarily impacted by the Covid-19 outbreak, our new unit development pipeline remains robust, powered by healthy unit economics. We will continue to make significant capex investments in digital, supply chain infrastructure and our store network expansion. We remain confident these investments will widen our strategic moat, drive sustainable growth and capture attractive long-term opportunities in China.»