<Results first take> Yum China (9987.HK) 1Q22 operating profit declined 44%; in-line with earlier Company profit warning
<Results first take> Yum China (9987.HK) 1Q22 operating profit declined 44%; in-line with earlier Company profit warning
- Yum China (9987.HK) adjusted net earnings declined 56% y-o-y, with operating profit declining by 44% to US$191m – in line with the Group’s earlier operating profit estimate.
- Mar-Apr situation remains dire, with several cities having been on full or partial lockdown. In Mar, >1,700 stores were closed, with further deterioration seen in April, >50% of stores were temporarily closed.
- Unless situation improves in May-June, it is expected 2Q22 to incur an operating loss due to sales deleverage, seasonal impact (typically a low season), higher commodity, wage, and utility cost trend. That said, the Company is pulling back A&P activities and more to offset this.
- The Company maintains 2022 store expansion targets unchanged, with share repurchased authorization raised by US$1bn to US$2.4bn. Quarterly DPS of US$0.12/sh was declared. Despite challenging times, we retain a BUY on the Company, TP at HK$430
Yum China adjusted net earnings declined 56% to US$102m in 1Q22. Operating profit declined 44% to US$191m, in-line the Group’s earlier operating profit estimate.
Revenue rose 4% to US$2.67bn in 1Q22. Several cities have been on full or partial lockdown for weeks or even months, including Shanghai, Tianjin, Jilin, Suzhou, Shenzhen and Guangzhou. East China accounts for 30-40% or its store and sales and has been the most affected amidst the Omicron variant wave. Strict public health measures were stepped up nationwide in line with dynamic zero-COVID policy, which had resulted in lessor social activities, travel, and overall consumption.
A significant proportion of stores were temporarily closed, or that offered only takeaway and delivery services increased in March and April. In March, over 1,700 stores on average (c.40%) were temporarily closed. In April, the situation deteriorated further with c.3,000 stores (c.50%) of stores temporarily closed. Excluding the temporary closure of stores, SSSG declined more than 20% in Mar-April. With the closure of stores, delivery contribution rose 5ppt to 36% of KFC and Pizza Hut’s Company sales.
Restaurant margin contracted 4.9ppt to 13.8%, attributable to sales deleverage, inflationary pressure from commodity, wage and utility costs, as well as higher ride costs due to higher delivery volume.
The Company opened 522 gross new stores, or 329 net new stores in 1Q22, driven by KFC and Pizza Hut brands, and partly offset by the closure of Huang Ji Huang, and Little Sheep brands. Yum China has a total of 12,117 units as of Mar’22 (KFC: 8,441; Pizza Hut: 2,679, Others: 997)
Looking ahead, the Company has kept their 2022 target unchanged: to open 1,000-1,200 net new stores, and to maintain capital expenditure to range between US$0.8-1bn. In Apr’22, Yum China has amended development milestone for the Taco Bell Brand with Yum! Brands to expand Taco Bell stores by at least 100 stores by the end of 2022, and at least 225 stores by end 2025 with investment support from Yum! Brand.
Unless situation improves drastically in May and June, Yum China expects to incur an operating loss in 2Q22, due to sales deleveraging driven by COVID-19, sales deleverage impact as 2Q22 is seasonally lower quarter for sales and profit margin, rises in commodity prices, wages, and utility prices. The Company is pulling back A&P activities, temporarily postponing store remodels, negotiating rental relief, reducing G&A and optimizing raw material cost structure.
In Mar’22, Yum China had raised share repurchase authorization by US$1bn totaling up to US$2.4bn. In 1Q22, Yum China has purchased 5m shares at US$232m at US$46.57sh. A remainder of US$1.4bn is available for future share repurchases. The Company has declared a cash dividend of US$0.12/sh.