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Here's Why Investors Should Retain Yum China (YUMC) Stock

·5-min read

Yum China Holdings, Inc. YUMC will likely benefit from its digital initiatives, menu simplifications and unit expansion efforts. Also, focusing on the loyalty program bodes well. However, higher expenses and coronavirus-induced soft traffic are a headwind.

Let us discuss the factors highlighting why investors should retain the stock for the time being.

Catalysts

Yum China is capitalizing on the benefits of its technology. The company is increasingly shifting toward digital and content marketing to expand the customer base. It has adopted a high-grade delivery strategy that includes collaborations with aggregators to source traffic and fulfills orders by the company’s KFC riders. YUMC launched a digital mini program to make community purchasing easier. Digital orders during first-quarter 2022 contributed 88% to KFC and Pizza Hut's company sales. During the quarter, the company’s delivery contributed nearly 36% to KFC and Pizza Hut's company sales, up nearly five percentage points from the prior-year quarter’s levels. Coming to loyalty membership, Yum Brands created a robust loyalty program with more than 370 million loyalty members cumulatively. Pizza Hut membership increased by 100 million members. In the first quarter, member sales accounted for nearly 62% of system sales.

The company focuses on digital R&D Center to drive operational excellence through consolidating and expanding dedicated resources to develop solutions and services. This involves using technologies in big data, artificial intelligence, middle office and digital SaaS to drive end-to-end digitalization. The initiative allows the company to boost in-house digital capabilities across various functions like customer experience concerning membership programs; efficient store operations and decision making; smart delivery in order queuing, trade zones and rider routing; and supply-chain management. The company stated that it has set aside $1-1.5 billion for investment in the digital and technology space over the next five years. As part of this initiative, the company intends to invest $100-200 million and hire up to 500 in the Digital R&D Center to support its business.

Yum China focuses on simplifying its menu to streamline operations and drive growth. During the first quarter of 2022, the company benefited from cross-selling opportunities arising from community purchasing. Notably, positive customer feedback was witnessed with respect to optimized menu offerings such as fried chicken combo (KFC), fried rice and ready-to-cook steak and pasta (Pizza Hut) and Hawker, Fried Chicken and Burritos DIY package (Taco Bell). Going forward, the company remains optimistic with respect to its new business opportunity and anticipates the initiative to boost awareness of its emerging brands.

Yum China is focused on relentless unit growth of restaurants to drive incremental sales. During first-quarter 2022, Yum China opened 522 gross new restaurants driven by the development of the KFC and Pizza Hut brands. As of Mar 31, 2022, the company's total restaurant count was 12,117, up 1,392 stores year over year. In 2022, Yum China expects to open 1,000-1,200 new stores.

Concerns

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Zacks Investment Research


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Shares of Yum China have declined 23.7% in the past year compared with the Industry’s 17.8% fall. The dismal performance was primarily caused by the coronavirus crisis. In the first quarter 2022, the company’s operations were affected by the Omicron variant. The company stated that many cities across China had been fully (or partially) locked down to counter the crisis. Also, it emphasized on the enforcement of the “dynamic zero-COVID” policy in the region, thereby leading to reduced traveling, fewer social activities and softened consumption demand. The company anticipates the Omicron variant to have a severe impact on its operations in the upcoming quarter.

The company has been continuously shouldering increased expenses, which have been detrimental to margins. Restaurant margin in first-quarter 2022 was 13.8%, down 490 basis points from the year-ago quarter's levels. The downside was primarily due to sales deleveraging, higher inflation in commodity, wage and utility costs, and an increase in rider cost related to rising delivery volume. The company anticipates the inflationary environment to continue in the second quarter of 2022.

Zacks Rank & Key Picks

Yum China currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail-Wholesale sector are Dollar Tree Inc. DLTR, BBQ Holdings, Inc. BBQ and Arcos Dorados Holdings Inc. ARCO.

Dollar Tree sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 13.1%, on average. Shares of the company have gained 57.2% in the past year.

The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and earnings per share (EPS) suggests growth of 6.7% and 40.5%, respectively, from the year-ago period’s levels.

BBQ Holdings carries a Zacks Rank #2 (Buy). BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have decreased 43.2% in the past year.

The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and EPS suggests growth of 46.1% and 67.6%, respectively, from the year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2. Arcos Dorados has a long-term earnings growth of 34.4%. Shares of the company have risen 14.7% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 83.3%, respectively, from the year-ago period’s levels.


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