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Bear of the Day: Yum China (YUMC)

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  • YUMC

Yum China Holdings Inc. YUMC is dealing with the Delta variant outbreak in China, which has entailed restrictions and shutdowns. This Zacks Rank #5 (Strong Sell) is expected to see the weakness continue in the fourth quarter.

Yum China is a licensee of Yum! Brands in mainland China. It operates KFC, Pizza Hut and Taco Bell in mainland China. It also owns the Little Sheep, Huang Ji Huang, East Dawning and COFFii & JOY concepts outright.

Additionally, Yum China has partnered with Lavazza to develop the Lavazza coffee shop concept in China.

It has 11,415 restaurants in over 1,600 cities.

A Miss in the Third Quarter

On Oct 27, Yum China reported its third quarter results and missed on the Zacks Consensus Estimate.

Earnings were $0.22 versus the consensus of $0.26. It was the second consecutive miss in a row.

Revenue rose 9% to $2.255 billion from $2.35 billion in 2020.

But the COVID delta variant outbreak in China really ate into same-store sales, which decreased 7% year-over-year, including a fall of 8% at KFC and 5% at Pizza Hut.

It was the most widely spread outbreak since the one in the first quarter of 2020 and included lock downs of several major cities including Nanjing and Yangzhou, which are key cities for Yum China in eastern China.

There have been fewer social activities and travel has been significantly impacted.

Even with the COVID challenges, Yum China managed to open 524 new stores during the quarter. Total store count reached 11,415, up 1,265 over the past year.

Restaurant margin fell to 12.2% from 18.6% in the year ago quarter, primarily due to sales deleveraging.

COVID Impacts Still Happening in the Fourth Quarter

According to Yum China, COVID-19 outbreaks continued into the fourth quarter, causing cautious consumer spending and subdued travel volume.

The seven-day National Day holiday which started on Oct 1 saw a decline in travel from 2020 and 2019.

Yum China's same-store sales are going take time to rebound.

As a result, the analysts have cut earnings for 2021.

4 estimates have been lowered in the last week, pushing down the Zacks Consensus to $1.45 from $1.91 just 60 days ago.

That's an earnings decline of 5.2% as the company made $1.53 last year.

3 estimates have also been lowered in the last week for 2022 as analysts remain bearish about next year.

The 2022 Zacks Consensus Estimate has fallen to $2.06 from $2.25.

Shares Fall in the Last 3 Months

Shares have fallen 7.4% over the last 3 months, and are now up just 0.4% year-to-date, on worries about the pandemic and Chinese growth.

Zacks Investment Research
Zacks Investment Research

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But you won't get much of a deal as they still trade with an expensive forward P/E of 38.8.

For investors interested in the restaurant stocks, they might want to consider other restaurants that operate in several markets that could cushion the China COVID outbreaks such as McDonald's Corp. MCD and Chipotle Mexican Grill, Inc. CMG. McDonald's is a Zacks Rank #2 (Buy) and Chipotle is a Zacks Rank #3 (Hold).

But the outbreaks won't last forever, either.

Investors may want to keep Yum China on their watch lists.

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