Yum China: Reports Second Quarter 2022 Results

Shanghai / CN. (yb) Yum China Holdings Inc. reported unaudited results for the second quarter ended June 30, 2022.

Impact of Covid Outbreak and Mitigation Efforts

The most severe Covid outbreaks to date in China continued to significantly affect the restaurant industry and our operations in the second quarter. According to government statistics, the restaurant industry in China experienced a revenue decline of approximately 16 percent year over year in the quarter.

  • Nationwide, regional Covid outbreaks impacted large portions of the country. During peak outbreak periods, hundreds of millions of people were in some type of lockdown.
  • During April and May, over 2,500 of our stores in China, on average, were either temporarily closed or offered only takeaway and delivery services. Of these stores, approximately 45 percent were temporarily closed. Same-store sales declined by more than 20 percent year over year.
  • Shanghai was in city-wide lockdown throughout April and May. During this period, only approximately 30 percent of our stores in Shanghai were open and able to offer limited services. Closed stores gradually re-opened in June with dine-in services resuming at reduced capacity in late June.
  • Beijing tightened Covid control measures in May, including partial lockdowns and suspension of restaurant dine-in services. Dine-in services at reduced capacity subsequently resumed in early June.
  • In June, Covid-related restrictive measures began to ease across the country. The number of stores temporarily closed or offering only takeaway and delivery services reduced to approximately 800 by the end of the month. Sales performance improved sequentially with same-store sales recording a decline of approximately high single digits year over year.

Yum China demonstrated exemplary resilience in the second quarter. In cities experiencing lockdowns, we reacted quickly by innovating and introducing initiatives to sustain operations. We immediately paused all promotional activities. Leveraging community purchasing as early as mid-March and packaged food products, we captured sharply changed consumer demand despite having a limited number of open stores and significant staff shortages. Our real-time inventory visibility from logistics centers to stores helped enable us to lessen supply disruptions with timely and accurate deployment of raw materials. We continued to rebase our cost structure to be more flexible. Across the country, we took prompt actions to rationalize advertising and promotional discounts, drive productivity gains with simplified menu offerings and shortened operating hours, as well as actively secure relief from landlords and government agencies. Through these extraordinary efforts we averted an operating loss, and delivered a profitable quarter, recording USD 81 million in operating profit for the period.

Entering the third quarter, we are seeing a gradual recovery. However, the Covid situation remains tenuous with potential intermittent outbreaks. We continue to expect the recovery of restaurant traffic to take time and likely be uneven and nonlinear. The number of cases has increased significantly in July, compared to June, as the highly transmissible new Covid sub-variant reached more cities. Many cities across a large swath of China have tightened Covid curbs or undergone full, partial lockdowns, or district-based control measures as new clusters have emerged. Nationwide, strict Covid-related health measures continue to restrict mobility, curtail travel and dampen consumer spending. As of the third week of July, approximately 2 percent of our stores remained temporarily closed or offered only delivery or takeaway services. Against this backdrop we remain committed to driving customer traffic with good food at great value. Moreover, we have developed multiple scenario-based operating plans with regional focus that are ready to be deployed. Moving forward we will be sharp-eyed in capturing consumer demand and further strengthening our business model to be more nimble and agile.

Second Quarter Highlights

  • Total revenues decreased 13 percent year over year to USD 2.13 billion from USD 2.45 billion [an 11 percent decrease excluding foreign currency translation (F/X)].
  • Total system sales decreased 16 percent year over year, with decreases of 15 percent at KFC and 14 percent at Pizza Hut, excluding F/X, primarily due to same-store sales decline and temporary store closures.
  • Same-store sales decreased 16 percent year over year, with decreases of 16 percent at KFC and 15 percent at Pizza Hut, excluding F/X.
  • Opened 53 net new stores during the quarter; total store count reached 12,170 as of June 30, 2022.
  • Restaurant margin was 12.1 percent, compared with 15.8 percent in the prior year period, primarily due to sales deleveraging resulting from the most severe Covid-related disruptions to date in the quarter.
  • Operating Profit decreased 65 percent year over year to USD 81 million from USD 233 million (a 63 percent decrease excluding F/X).
  • Adjusted Operating Profit decreased 65 percent year over year to USD 82 million from USD 237 million (a 63 percent decrease excluding F/X).
  • Effective tax rate was 26.5 percent.
  • Net Income decreased 54 percent to USD 83 million from USD 181 million in the prior year period, primarily due to the decrease in Operating Profit, partially offset by the net gain from our mark-to-market investment in Meituan Dianping.
  • Adjusted Net Income decreased 55 percent to USD 84 million from USD 185 million in the prior year period (a 62 percent decrease excluding the net gains of USD 16 million and USD 5 million in the second quarter of 2022 and 2021, respectively, from our mark-to-market equity investments; a 60 percent decrease if further excluding F/X).
  • Diluted EPS decreased 52 percent to USD 0.20 from USD 0.42 in the prior year period.
  • Adjusted Diluted EPS decreased 52 percent to USD 0.20 from USD 0.42 in the prior year period (a 61 percent decrease excluding the net gains from our mark-to-market equity investments in the second quarter of 2022 and 2021, respectively; a 59 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, «We have been battling the pandemic for the past two and a half years. The second quarter was the most challenging to date. I could not be prouder of the morale and resilience demonstrated by our employees. Our dedicated teams collaborated across brands and functions. We worked around the clock to adapt to rapidly changing market conditions and quickly came up with innovative solutions. Even in the extremely difficult operating environment, we captured new opportunities and strengthened our business along the way. In cities under lockdown, we were able to sustain operations with an extremely lean work force through community purchasing, simplified menus and packaged food products. Some of these measures helped us think outside the box and provided us ideas to further grow and improve efficiency. I am also excited by the breakthroughs our emerging brands achieved during this period. By immediately launching packaged food offerings, leveraging Yum China’s infrastructure and adapting business models, Taco Bell, Lavazza and Little Sheep were able to capture meaningful sales with few stores open in Shanghai during lockdown periods. More importantly, throughout the period we have been strengthening our strong emotional connection with consumers and bringing some joy into their lives through good food and exciting marketing campaigns.»

Wat added, «We continue to make strides in reinforcing our RGM (Resilience-Growth-Moat) strategic framework. Our second quarter results have demonstrated business resilience. While we slowed new store openings in the second quarter, going forward we intend to expand our store network at a robust pace by focusing on small store formats, given the healthy payback and strong new unit economics. Our leading digital capabilities, in-house and tailor-made supply chain management system as well as hybrid delivery model gave us an edge in navigating the profound disruptions. We plan on further strengthening these elements of our strategic moat. We believe that these combined efforts will help enable us to maintain market leadership, drive long-term growth, and generate shareholder value in the years ahead.»

Andy Yeung, CFO of Yum China, stated «Sales in the second quarter were severely impacted by the significant disruptions brought by Covid. However, we were able to generate meaningful profit in the quarter that exceeded our expectations. We achieved that through swiftly adjusting offers and promotions as well as our tremendous efforts in driving productivity gains, securing one-time relief and rebasing the cost structure. As we look into the third quarter, we remain cautious on same-store sales, given Covid uncertainties, weakening consumer sentiment, downward economic pressure and commodity price inflation. We expect sales recovery to be gradual, uneven and potentially volatile. Our focus is to drive sales recovery through innovative products and marketing, strong value propositions and greater promotional activities. We are delighted with the better than planned cost savings in the second quarter, but we are dialing back some austerity measures to sustain long term growth and operational excellence. In addition, sales deleveraging impact will likely continue to impact our margins. Undeterred by the short-term challenges, we remain confident about our long-term prospects and will continue to invest for growth while fortifying resilience.»

Share Repurchases and Dividends

  • During the second quarter, we repurchased approximately 4.1 million shares of Yum China common stock for USD 168 million at an average price of USD 41.37 per share. As of June 30, 2022, approximately USD 1.2 billion remained available for future share repurchases under the current authorization.
  • The Board of Directors declared a cash dividend of USD 0.12 per share on Yum China’s common stock, payable on September 15, 2022 to shareholders of record as of the close of business on August 25, 2022.

Digital and Delivery

  • The KFC and Pizza Hut loyalty programs exceeded 385 million members combined, as of quarter-end. Member sales accounted for approximately 62 percent of system sales in the second quarter of 2022.
  • Delivery contributed approximately 38 percent of KFC and Pizza Hut’s Company sales in the second quarter of 2022, an increase of approximately eight percentage points from the prior year period as a result of more severe outbreaks in the quarter which significantly impacted dine-in occasions and drove strong demand for delivery.
  • Digital orders, including delivery, mobile orders and kiosk orders, accounted for approximately 89 percent of KFC and Pizza Hut’s Company sales in the second quarter of 2022.

New-Unit Development and Asset Upgrade

  • The Company opened 246 gross new stores, or 53 net new stores in the second quarter of 2022, mainly driven by development of the KFC and Pizza Hut brands.
  • The Company remodeled 121 stores in the second quarter of 2022.

Restaurant Margin

  • Restaurant margin was 12.1 percent in the second quarter of 2022, compared with 15.8 percent in the prior year period, primarily attributable to sales deleveraging, inflation in commodity, wage and utility costs, as well as increased rider cost associated with rising delivery volume, partially offset by higher productivity as well as temporary relief provided by landlords and government agencies.

2022 Outlook

Yum China remains focused on capturing long-term opportunities in China. The Company’s fiscal year 2022 targets remain unchanged from those originally disclosed on February 8, 2022:

  • To open approximately 1,000 to 1,200 net new stores.
  • To make capital expenditures in the range of approximately USD 800 million to USD 1 billion.

Other Updates

  • In June 2022, Yum China submitted for validation the Company’s near-term science-based greenhouse gas emissions reduction targets to the Science Based Target Initiative (SBTi). The specific targets, in line with criteria and recommendations of SBTi, are expected to be announced before the end of 2022 following official approval from SBTi. The targets will provide a clearly defined pathway for Yum China to reach its goal of net-zero value chain GHG emissions by 2050. The Company also published its 2021 Sustainability Report and its first Task Force on Climate-Related Financial Disclosures (TCFD) report. Both reports are accessible on the Company’s website.
  • In July 2022, Yum China announced the commencement of construction of its Jiading Supply Chain Management Center in Shanghai with a total investment of approximately USD 90 million. This facility is Yum China’s largest greenfield supply chain center project to date and will serve as the headquarters of the Company’s supply chain operations. Completion is anticipated in 2024. This latest project is part of Yum China’s continued effort in expanding supply chain network to support store and portfolio growth as well as enhance intelligent supply chain operations that ensure food safety and quality management throughout the value chain.
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