Yum Brands Inc.’s (YUM, Financial) decision to spin off its Chinese business has been one of the most prudent moves undertaken by the company. Yum China Holdings Inc. (YUMC, Financial), the newly formed entity, is the most popular quick-service restaurant chain operater in China with lots of room to develop considering the country’s densely populated cities and customer preferences favor its growth. Despite the recent economic slowdown seen in China, the country has one of the fastest-growing economies, offering tremendous growth for various consumer industries. As such, Yum China presents a great investment opportunity.
The China edge
The decision to spin off the Chinese business has aided the company in operating freely and expanding its operations in the mainland. Management now has the leeway to make decisions that would apply specifically to the Chinese market. The company's performance in the last two quarters is evidence the spinoff has been a success.
Two of the three restaurants the company operates, Pizza Hut and KFC, have been able to solidify their footprints with growing market share through more than 7,600 locations in China. That compares to McDonald’s (MCD, Financial) 2,600 locations.
In May, Yum China announced it purchased a major stake in Daojia, a deliver service. This is a strategic move considering the growing importance of delivery services in the densely populated areas of the country. The impact from the deal was evident in the second-quarter results, where 13% of sales were generated from deliveries across 4,900 locations throughout the country.
Financial health – a snapshot of the latest quarter
Yum China’s net income stood at $107 million in the second quarter, or 27 cents per share, up from $77 million, or 21 cents per share, in the year-ago quarter. In contrast, total revenue dropped a meager 0.4% to $1.59 billion. Operating profit spiked 64% to $143 million, which was primarily supported by retail tax reforms as well as impressive same-store sales growth. EPS for the quarter was 27 cents, up 29% year over year on a diluted basis.
Yum China’s comparable store sales surged 3%, mainly driven by a 4% sales growth from KFC. In contrast, comps at Pizza Hut were flat compared with last year. The slowdown in Pizza Hut was more than offset by KFC during the period.
More positives
During the most recent quarter, the company opened 90 new restaurants and modernized roughly 200 KFCs. The company currently has 7,685 outlets in China. Yum China appears to be extremely keen on accelerating growth in this Asian economy where it has been struggling to regain its lost glory since 2012.
But things have changed. Yum China is thriving in the digital and delivery sector as well. Of the company's total sales last quarter, mobile payments constituted nearly 40% while cashless payments reached an astounding $900 million. Total delivery sales reached $200 million during the period, representing 13% of the company’s total sales.
Last word
Yum China has been exhibiting strong overall growth with solid comparable store sales growth and impressive margin improvements. It is also important to note Pizza Hut, though still struggling, is showing continued signs of improvement. Pizza Hut’s stagnating growth is the only factor of concern. Otherwise, the company has good cash flow and attractive growth prospects that should provide it sustainable growth in the future. Overall, Yum China is showing great upside potential with strengthening comparable store sales and strong fundamentals.
Disclosure: I do not hold any position in the stocks mentioned in this article.
