Image Source: Yum China

Yum China (NYSE: YUMC and HKEX: 9987), China’s largest restaurant operator, showed strong performance in the third quarter, setting new Q3 records for store openings, revenue and adjusted operating profit.

The company, whose portfolio in China includes KFC and Pizza Hut, opened 500 net new stores in the quarter, and has opened 1,155 net new stores year-to-date. New store payback periods remain stable, at 2 years for KFC and 3 years for Pizza Hut. The company is on track to meet its updated target of 1,400 to 1,600 net new stores for the full year. Total stores now exceed 14,000 stores across the country. 

Yum China reported total revenues of $2.91 billion in Q3, growing 15% year-on-year. Adjusted operating profit reached $327 million for the quarter. Excluding temporary reliefs, this represented a 21% year-on-year increase. The above figures exclude the impact of currency translation. 

For the first nine months of 2023, operating profit and adjusted operating profit also reached record levels, both at approximately $1 billion.

The company has set ambitious goals to reach 20,000 stores by 2026 while achieving double digit EPS CAGR over the coming three years and returning $3 billion to shareholders in dividends and share repurchases. These targets were announced at Yum China’s 2023 Investor Day in Xi’an in September as part of its new growth-oriented “RGM 2.0” strategy.

During its Q3 earnings call, Yum China CEO Joey Wat expressed long-term confidence in the China market, adding that its healthy new unit payback, along with flexible store formats and modules, will enable it to reach its 20,000-store target.

“Looking forward, the growth potential in China remains vast even with moderate economic growth,” Yum China CEO Joey Wat said. “Evolving consumer preferences in the post-pandemic environment require us to stay agile and vigilant. Our robust supply chain and innovative digital ecosystem have enabled us to quickly adapt to changing market conditions. I’m confident we can continue to create long-term value for our shareholders.”

Wat added that Yum China is well-positioned to capture sales as consumer preferences change the post-pandemic era. “We have benefited from more cautious and more rational spending from consumers. And it has been a consistent focus for our company to focus not only on value, but on innovative products and a fun experience,” she said.

The company is catering to a broader range of customers, expanding entry price points while also adding more premium products for diners who want to treat themselves. KFC, for example, is expanding its premium beef burger and whole chicken categories, while also adding more items to its 19.9 RMB value menu. Pizza Hut is expanding its pizza selection below 50 RMB to gain additional market share in this growing segment, along with offering a wider array of single-person meals. 

Following Yum China’s Q3 earnings call, analysts acknowledged the company’s strategies to capture underserved demand in the China market, and continued to view its digital capabilities as a key sales growth driver. Market watchers also viewed the company’s unchanged 2024-2026 growth targets as a confidence-booster. Goldman Sachs and UBS maintained “Buy” ratings for Yum China’s stock while JP Morgan and Morgan Stanley kept their current “Outperform” rating.

Diluted EPS for Q3 reached 0.58, an 18% year-over-year gain. The company also returned $211mn to shareholders in cash dividends and share repurchases in the quarter, on track to return $600-800mn for the full year 2023. On November 2, the company expanded its share repurchase authorization by $1 billion to further enable future buybacks.

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