Yum China 2024Q1 Earnings Report Interpretation: Weak performance growth, revenue below expectations

On Tuesday, April 30, before the U.S. stock market opened, Yum China released its first-quarter 2024 earnings report. Yum China reported revenue of $2.96 billion for the first quarter, a 7% year-over-year increase, slightly below the market expectation of $3.055 billion. $YUM China(YUMC.US) $McDonald's(MCD.US) $Dow Jones Industrial Average(.DJI.US) $S&P 500(.SPX.US) $NASDAQ Composite Index(.IXIC.US) $Hang Seng Index(00HSI.HK) $Yum! Brands(YUM.US) $Domino's(DPZ.US) $Invesco QQQ Trust(QQQ.US) $Proshares UltraPro QQQ(TQQQ.US)

I. Summary of Personal Views

1. Yum China's performance this quarter showed weak momentum, with revenue growth falling short of market expectations and profits being relatively mediocre.

2. Under its aggressive store expansion plan, Yum China's same-store sales and restaurant profit margins were underwhelming, raising market concerns.

3. Against the backdrop of a sluggish recovery in the overall restaurant industry and a continued decline in the sector, Yum China's performance has also been lackluster, with its stock price trending weakly. A cautious approach is advised.

Overall, Yum China's performance this quarter reflects weak growth, with revenue falling short of market expectations and profits being relatively mediocre. Despite significant progress in its aggressive store expansion plan, same-store sales and restaurant profit margins have been disappointing, sparking market concerns. In the current environment of sluggish recovery in the restaurant industry and continued sector declines, Yum China's performance has also been impacted, with its stock price trending weakly. Therefore, investors considering Yum China are advised to remain cautious in the current market conditions.

II. Financial Analysis: Weak Growth, Revenue Below Expectations

In terms of revenue, Yum China reported $2.96 billion for the first quarter, a 1% year-over-year increase, slightly below the market expectation of $3.055 billion, indicating subpar growth. System-wide sales grew 6% year-over-year, primarily driven by new store openings.

In terms of profitability, Yum China reported net income of $287 million for the quarter, flat year-over-year, aligning with the revenue growth trend. First-quarter earnings per share were $0.71, compared to $0.69 in the same period last year.

III. Operational Insights: Weak Same-Store Sales, Hidden Risks in Rapid Store Expansion, and Active Development of Delivery Business

1. Weak Same-Store Sales

A deeper dive into Yum China's sales data reveals underwhelming same-store sales performance. Same-store sales declined 3% year-over-year this quarter, worsening from the previous quarter. While growth was slow last quarter, it at least showed some year-over-year increase. Breaking it down by brand, KFC's same-store sales fell 2%, while Pizza Hut's decline was steeper at 5%.

Although system-wide sales continued to grow, this was largely due to the aforementioned aggressive store expansion. New stores contributed to overall sales growth but also reflected declining per-store sales performance.

For comparison, McDonald's latest earnings showed a 0.2% decline in international same-store sales. This minor drop suggests McDonald's remains relatively stable in international markets. Compared to Yum China, McDonald's same-store sales performance appears more resilient, highlighting the differing strategies and outcomes of the two companies in facing market challenges.

2. Hidden Risks in Rapid Store Expansion

In 2023, Yum China adopted an extremely aggressive store expansion strategy, initially planning to add 1,500 stores but ultimately exceeding this target with nearly 1,700 new stores. This achievement highlights Yum China's strong market expansion capabilities and brand influence, further solidifying its leading position in the fast-food industry. As of March 31, 2024, Yum China's total store count reached 15,022, including 10,603 KFC stores and 3,425 Pizza Hut stores. The company added a net 378 stores this quarter, a record high, demonstrating its strong execution in store expansion.

Yum China's medium-term goal is to increase its store count to 20,000 by 2026. This ambitious target reflects the company's confidence in future growth and its commitment to expanding market share.

However, despite Yum China's impressive store expansion, market concerns persist regarding store operations, particularly the declining restaurant profit margins at Pizza Hut and KFC.

Specifically, KFC's restaurant profit margin was 19.3% this quarter, still relatively high but down 190 basis points year-over-year due to cost pressures from wage inflation and value-focused product strategies. Pizza Hut's restaurant profit margin was 12.5%, down 100 basis points year-over-year, further fueling market pessimism.

3. Active Development of Delivery Business

In the digital era, Yum China's delivery business has shown remarkable vitality and potential. The delivery business grew at a double-digit annual rate, with a 12% increase in the first quarter, accounting for 38% of KFC and Pizza Hut's total sales. This has become a key driver of growth, especially with lower delivery fees now in place. KFC's delivery sales grew 14% year-over-year after reducing delivery fees, a significant improvement. This strategy has attracted new customers and expanded market share in lower-tier cities.

Additionally, Yum China has diversified its product and service offerings, such as adding breakfast and late-night menus and providing delivery and pickup options, enhancing convenience for consumers. Moving forward, Yum China plans to further optimize its delivery strategy to unlock more market potential.

This article represents my personal analysis of the quarterly report, based on my own insights. Feedback is welcome. Additionally, this article does not constitute investment advice, and readers are encouraged to conduct their own research.