Yahoo Finance Here's Why Investors Should Retain Yum China (YUMC) Stock
Yum China Holdings, Inc. YUMC is likely to benefit from unit expansion, digital efforts and strategic menu enhancements. Also, the focus on flexible store models and franchise partnerships bodes well. However, wage inflation is a concern.
Let us discuss the factors that highlight why investors should retain the stock for now.
Catalysts
Yum China is dedicated to relentless unit growth of its restaurants to drive incremental sales. The company is optimistic about the Chinese market, recognizing significant potential for expansion. The country's rapid development, with hundreds of new shopping malls, residential complexes and commercial developments opening each year, supports this strategy.
The urbanization and long-term consumption upgrades in Tier 2 cities and below are particularly appealing for Yum China, due to more affordable housing and living costs. With considerable untapped consumption potential, the company plans to open nearly 30% of its new stores in 2024 in new cities or strategic locations such as transportation hubs and tourist spots.
YUMC’s flexible store models and franchise partnerships facilitate growth by enabling expansion across various city tiers. YUMC projects 15% to 20% of its net new stores over the next three years to be franchised, with 19% of KFC's new stores (in the first quarter) already following this model. This disciplined strategy underpins their accelerated expansion. Consistent payback periods of two years for KFC and improved payback periods of two to three years for Pizza Hut ensure the successful opening of high-quality new stores.
YUM China is leveraging the advantages of technology by increasingly shifting towards digital and content marketing to broaden its customer base. The company adopted a high-grade delivery strategy, collaborating with aggregators to source traffic and fulfill orders through its KFC riders. The company integrates cutting-edge technologies like in-store Internet of Things (IoT), automation and artificial intelligence (AI) to optimize operational efficiency.
In first-quarter 2024, digital sales totaled $2.5 billion, with digital ordering accounting for approximately 89% of total Yum China sales. The drivers of online traffic include the Super APP, mini program, delivery aggregators and local services. Given the brand’s strong market presence, the company is optimistic and anticipates the momentum to continue in the upcoming periods.
Yum China's approach to boosting sales focuses on offering quality food and compelling value propositions. Notably, sales of premium items like beef burgers and whole chickens saw substantial double-digit growth in the first quarter, aided by the introduction of new products such as the Super Juicy Pineapple Beef Burger and value-oriented weekday combos. Looking ahead, the company prioritizes strategic menu enhancements, including expanding entry-level combo selections and introducing affordable pizza options, to drive incremental sales. Additionally, adjustments to the delivery pricing model are underway to better cater to market trends and appeal to budget-conscious consumers.
Concerns
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Yum China’s shares have declined 15.7% in the past three months compared with the industry’s 6.4% fall. An uncertain macro environment mainly caused the downside.
Yum China is facing the 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. In first-quarter 2024, total costs and expenses amounted to $2.58 billion compared with $2.5 billion reported in the prior-year quarter. For the remaining part of 2024, the company is cautious about the uncertain macro environment and expenses regarding marketing campaigns and wage inflation.
Zacks Rank & Key Picks
Yum China currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector include:
Wingstop Inc. WING sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter negative earnings surprise of 21.4%, on average. The stock has surged 89.5% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for WING’s 2024 sales and earnings per share (EPS) suggests a rise of 27.5% and 36.7%, respectively, from the year-ago levels.
Brinker International, Inc. EAT sports a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 213.4%, on average. EAT’s shares have risen 65.8% in the past year.
The Zacks Consensus Estimate for EAT’s 2024 sales and EPS indicates 5% and 39.2% growth, respectively, from the year-earlier actuals.
El Pollo Loco Holdings, Inc. LOCO carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 19.4%, on average. LOCO’s shares have risen 11.7% in the past year.
The Zacks Consensus Estimate for LOCO’s 2025 sales and EPS indicates 3.8% and 9.4% growth, respectively, from the prior-year figures.
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Yum China (YUMC) : Free Stock Analysis Report
