Yum China: Reports Fourth Quarter and FY 2022 Results

Shanghai / CN. (yb) Yum China Holdings Inc. reported unaudited results for the fourth quarter and year ended December 31, 2022.

Impact of Covid Outbreak and Mitigation Efforts

In the fourth quarter, there were substantial changes in Covid conditions and policies in China. In October and November, sporadic occurrences of Covid infection quickly evolved into major regional outbreaks, leading to tightened Covid-related health measures and lockdowns. The number of our stores that were either temporarily closed or offered only takeaway and delivery services increased in October and November, peaking at over 4,300 in late November.

In December, the government issued a series of new Covid response guidelines that significantly changed its Covid policies, including removing mass testing and central quarantine requirements as well as lifting travel restrictions. A massive wave of infections quickly surged in the country, spreading from major cities such as Beijing, Guangzhou and Shanghai. The northern and western regions of China were impacted first, followed by the southern and eastern regions. Due to widespread infections, we experienced a shortage of restaurant staff which led to over 1,300 stores on average being either temporarily closed or offering limited services during December. As a significant portion of the population was either infected or chose to stay home to avoid infection, dine-in traffic declined substantially. We quickly responded to the new challenges by reallocating crew resources among stores to prioritize stores with stronger demand. Many of the stores that remained open operated with shortened operating hours and a simplified menu to streamline operations. We also addressed off-premise demand by leveraging our dedicated riders, encouraging pick-up and promoting packaged food products.

Sales in January improved sequentially, driven by the resumption of normal services at our restaurants and an earlier Chinese New Year (“CNY”) holiday season, which coincided with the pivot in Covid policies. Many people traveled during the holiday for the first time since Covid began. According to government statistics, the number of domestic travelers and related tourism spending during the 7-day CNY holiday increased approximately 20 percent and 30 percent year over year, respectively, but remained over 10 percent and 30 percent below the 2019 level, respectively. Performance at our transportation and tourist locations was better than the statistics indicated. Overall same-store sales for the comparable CNY holiday also increased mid-single digit year over year, but remained below the 2019 level.

As the country enters the new phase of Covid response, we are cautiously optimistic. The overall business environment and consumer sentiment have improved but near term uncertainties remain. Consumers tend to be more careful with spending after holidays. Experiences in other countries also suggest further outbreaks following relaxation of Covid restrictions and emergence of different Covid variants are real possibilities. A portion of the population may remain cautious about going out in public, while macroeconomic factors such as an inflationary environment and softening global economic conditions may weigh on consumer spending. As such, we are staying alert in this fluid situation and planning for multiple scenarios to capture growth opportunities and mitigate risks when needed.

Fourth Quarter Highlights

• Total revenues decreased 9 percent year over year to USD 2.09 billion from USD 2.29 billion (a 2 percent increase excluding foreign currency translation (“F/X”)).
• Total system sales decreased 4 percent year over year, with decreases of 1 percent at KFC and 6 percent at Pizza Hut, excluding F/X.
• Same-store sales decreased 4 percent year over year, with decreases of 3 percent at KFC and 8 percent at Pizza Hut, excluding F/X.
• Opened 538 net new stores during the quarter.
• Restaurant margin was 10.4 percent, compared with 7.5 percent in the prior year period.
• Operating Profit decreased 94 percent year over year to USD 41 million from USD 633 million (a 93 percent decrease excluding F/X), primarily due to the non-cash re-measurement gain of USD 618 million from the consolidation of Hangzhou in the fourth quarter of 2021.
• Adjusted Operating Profit increased 152 percent year over year to USD 40 million from USD 16 million (a 189 percent increase excluding F/X).
• Effective tax rate was 29.9 percent.
• Net Income decreased 89 percent to USD 53 million from USD 475 million in the prior year period, primarily due to the decrease in Operating Profit.
• Adjusted Net Income increased to USD 52 million from USD 11 million in the prior year period (a 137 percent increase excluding the net gain of USD 4 million in the fourth quarter of 2022 and net loss of USD 9 million in the fourth quarter of 2021, respectively, from our mark-to-market equity investments; a 154 percent increase if further excluding F/X).
• Diluted EPS decreased 88 percent to USD 0.13 from USD 1.10 in the prior year period.
• Adjusted Diluted EPS increased to USD 0.13 from USD 0.03 in the prior year period (a 120 percent increase excluding the net gain from our mark-to-market equity investments in the fourth quarter of 2022 and net loss in the fourth quarter of 2021, respectively; a 140 percent increase if further excluding F/X).

Full Year Highlights

• Total revenues decreased 3 percent year over year to USD 9.57 billion from USD 9.85 billion (a 1 percent increase excluding F/X).
• Total system sales decreased 5 percent year over year, with decreases of 4 percent at KFC and 3 percent at Pizza Hut, excluding F/X.
• Same-store sales decreased 7 percent year over year, with decreases of 7 percent at KFC and 6 percent at Pizza Hut, excluding F/X.
• Total store count reached 12,947 as of December 31, 2022, with 1,159 net new store openings during the year.
• Restaurant margin was 14.1 percent, compared with 13.7 percent in the prior year.
• Operating Profit decreased 55 percent year over year to USD 629 million from USD 1.39 billion (a 53 percent decrease excluding F/X), primarily due to the non-cash gain from the re-measurement of our previously held equity interest in Hangzhou KFC in the fourth quarter of 2021.
• Adjusted Operating Profit decreased 17 percent year over year to USD 633 million from USD 766 million (a 14 percent decrease excluding F/X).
• Effective tax rate was 30.1 percent.
• Net Income decreased 55 percent to USD 442 million from USD 990 million in the prior year, primarily due to the decrease in Operating Profit, partially offset by loss from mark-to-market investments.
• Adjusted Net Income decreased 15 percent to USD 446 million from USD 525 million in the prior year (a 19 percent decrease excluding the net losses of USD 22 million and USD 52 million in 2022 and 2021, respectively, from mark-to-market equity investments; a 16 percent decrease if further excluding F/X).
• Diluted EPS decreased 54 percent to USD 1.04 from USD 2.28 in the prior year.
• Adjusted Diluted EPS decreased 13 percent to USD 1.05 from USD 1.21 in the prior year (a 17 percent decrease excluding the net losses in 2022 and 2021, respectively, from mark-to-market equity investments; a 14 percent decrease if further excluding F/X).