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MARKETS LIVE BLOG:

STOCKS SLIDE AFTER META'S REALITY CHECK, DOWNBEAT GDP

Caterpillar sinks 7% after earnings, management sees weakness in Europe, Asia-Pacific

Yum China's (YUMC) Sales Building Efforts Aid Amid Cost Woes

Zacks Equity Research
·3 min read

Yum China Holdings, Inc. YUMC has been witnessing growth trends courtesy of various approaches like menu innovation, robust loyalty program, expansion efforts, strong brand recognition and focus on digitalization. However, macroeconomic risks in China, coronavirus-related risks and inflationary pressure have been hurting its performance.

Driving Factors

YUMC’s riveting growth potential resides in its continual menu innovation to encourage top-line growth. The company is expanding its presence in the coffee segment, as it believes that the beverage has strong demand in China. The company is expanding its takeaway and ready-to-cook business through menu innovation and making it more convenient for consumers.

The company, which shares space with McDonald's Corporation MCD, Yum! Brands, Inc. YUM, Starbucks Corporation SBUX, holds a leadership position in the Chinese restaurant space when it comes to delivery, mobile order and pay and loyalty membership. The company is increasingly shifting toward digital and content marketing to expand its customer base.

The company has been leveraging the power of its two most important brands — KFC and Pizza Hut— to drive long-term growth. It focuses on relentless unit growth of restaurants to drive incremental sales. The company emphasizes on expanding its supply chain network to support store and portfolio growth and enhance intelligent supply chain operations.

Despite unfavorable economic conditions, the company opened 246 and 403 gross new restaurants, respectively, driven by the development of the KFC and Pizza Hut brands, during the second and third quarters of 2022. As of Jun 30, the company's total restaurant count was 12,409.

Concerns

Traffic continues to be impacted due to coronavirus-related regulations. In the third quarter, the company's operations were affected by multiple COVID outbreaks in China. Tightened COVID curbs (including partial lockdowns and suspension of restaurant dine-in services) were implemented to counter the same. The measures resulted in restricted mobility and reduced travel.

Moreover, Yum China is facing structurally high cost of labor and rentals. Apart from wage inflation, the company is bearing additional costs stemming from promotion, packaging upgrades, menu innovation and technological novelty. To curb labor costs, it is increasingly focusing on delivery channels, which is expected to curb margins in the near term. Costs related to transactions and franchises are expected to increase in the near future.

A Brief Review of the Other Players

McDonald's: The company continues to impress investors with robust comps growth. In third-quarter 2022, global comps advanced 9.5%. McDonald’s increased focus on menu innovation and loyalty program expansion is commendable. The company is also undertaking every effort to drive growth in international markets. Robust digitalization is likely to help the company to drive long-term growth and capture market share.

Yum! Brands: The company has been benefiting from continued focus on off-premise channels, strategic investments in digital technology and refranchising efforts. Moreover, it has implemented various digital features in mobile and online platforms across all brand segments to enhance the guest experience. The company has been working toward accelerating its delivery services and the results have been positive so far. Also, emphasis on unit expansion efforts bodes well.

Starbucks: The company is benefiting from operating fundamentals such as a solid global footprint, successful innovations and digital offerings. North America comps continue to impress investors. For fiscal 2023, the company anticipates global comparable sales to reach the high end of 7%-9% target range.

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Zacks Investment Research