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Here's Why Investors Should Retain Yum China (YUMC) Stock
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Yum China Holdings, Inc. (YUMC - Free Report) is likely to benefit from its digital initiatives, menu innovation efforts and unit expansion. Also, the focus on the loyalty program bodes well. However, a volatile macro environment and wage inflation pose concern.
Let us discuss the factors highlighting why investors should retain the stock for now.
Catalysts
Yum China is capitalizing on the benefits of its technology. The company is increasingly shifting toward digital and content marketing to expand its customer base. It has adopted a high-grade delivery strategy that includes collaborations with aggregators to source traffic and fulfill orders by the company’s KFC riders. The company is expanding the usage of AI technology to significantly enhance customer experience, store operations and human resource management.
Coming to loyalty membership, Yum Brands created a robust loyalty program with more than 445 million members cumulatively. The company's digital ecosystem is essential for attracting new members, driving engagement and maximizing sales performance. In the second quarter of 2023, member sales accounted for nearly 66% of system sales.
Moving ahead, the company focuses on geographic-specific deals to attract new members and increase the spending of existing customers. Also, it emphasized digital capabilities (like restaurant sales forecasting system and pocket manager) and delivery 3.0 version to streamline restaurant efficiency. The company anticipates the initiatives and supply chain infrastructure to drive growth in the upcoming periods.
Yum China's growth potential lies in its continuous menu innovation to boost revenue. Increased sales of popular menu items such as the crayfish burger, stuffed chicken wing and spicy chicken burger drive the company's performance. The company plans to increase investments in the coffee segment and expand its presence in the coffee and dessert categories.
Yum China is focused on the relentless unit growth of restaurants to drive incremental sales. During the first half of 2023, Yum China opened 655 net new restaurants. The company reported a payback period for the new stores of two years (for KFC) and three years (Pizza Hut).
For 2023, the company has increased its net new stores target to 1,400-1,600, compared with its previous target of 1,100-1,300. Attributes of flexible store formats, healthy recent store payback periods and a strong store pipeline will likely add to the positives. The company claimed that China has a lot of untapped potential and aims to increase addressable markets across city tiers.
Concerns
Image Source: Zacks Investment Research
Yum China’s shares have declined 16.1% in the past six months compared with the industry’s 11.4% fall. The downside was mainly caused by commodity and wage inflation.
Yum China is facing the structurally high cost of labor and rentals. Apart from wage inflation, the company bears additional expenses from promotion, packaging upgrades, menu innovation and technological novelty. In second-quarter 2023, total costs and expenses amounted to $2,397 million, up 17% from the $2,047 million reported in the prior-year quarter.
The company anticipates uncertain macroeconomic conditions and wage inflation to persist for some time. Our model predicts 2023 company restaurant expenses to rise 10.4% year over year.
Zacks Rank & Key Picks
Yum China currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector include:
The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS suggests rises of 19.2% and 13%, respectively, from the year-ago period’s levels.
El Pollo Loco Holdings, Inc. (LOCO - Free Report) currently carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 23.7%, on average. Shares of LOCO have declined 7.5% in the past year.
The Zacks Consensus Estimate for LOCO’s 2024 sales and EPS indicates a 3.5% and an 18.3% growth, respectively, from the year-ago period’s levels.
FAT Brands Inc. (FAT - Free Report) currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 28.7% on average. Shares of FAT have increased 30.8% so far this year.
The Zacks Consensus Estimate for FAT’s 2024 sales and EPS indicates 36.3% and 29.6% growth, respectively, from the year-ago period’s levels.
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Here's Why Investors Should Retain Yum China (YUMC) Stock
Yum China Holdings, Inc. (YUMC - Free Report) is likely to benefit from its digital initiatives, menu innovation efforts and unit expansion. Also, the focus on the loyalty program bodes well. However, a volatile macro environment and wage inflation pose concern.
Let us discuss the factors highlighting why investors should retain the stock for now.
Catalysts
Yum China is capitalizing on the benefits of its technology. The company is increasingly shifting toward digital and content marketing to expand its customer base. It has adopted a high-grade delivery strategy that includes collaborations with aggregators to source traffic and fulfill orders by the company’s KFC riders. The company is expanding the usage of AI technology to significantly enhance customer experience, store operations and human resource management.
Coming to loyalty membership, Yum Brands created a robust loyalty program with more than 445 million members cumulatively. The company's digital ecosystem is essential for attracting new members, driving engagement and maximizing sales performance. In the second quarter of 2023, member sales accounted for nearly 66% of system sales.
Moving ahead, the company focuses on geographic-specific deals to attract new members and increase the spending of existing customers. Also, it emphasized digital capabilities (like restaurant sales forecasting system and pocket manager) and delivery 3.0 version to streamline restaurant efficiency. The company anticipates the initiatives and supply chain infrastructure to drive growth in the upcoming periods.
Yum China's growth potential lies in its continuous menu innovation to boost revenue. Increased sales of popular menu items such as the crayfish burger, stuffed chicken wing and spicy chicken burger drive the company's performance. The company plans to increase investments in the coffee segment and expand its presence in the coffee and dessert categories.
Yum China is focused on the relentless unit growth of restaurants to drive incremental sales. During the first half of 2023, Yum China opened 655 net new restaurants. The company reported a payback period for the new stores of two years (for KFC) and three years (Pizza Hut).
For 2023, the company has increased its net new stores target to 1,400-1,600, compared with its previous target of 1,100-1,300. Attributes of flexible store formats, healthy recent store payback periods and a strong store pipeline will likely add to the positives. The company claimed that China has a lot of untapped potential and aims to increase addressable markets across city tiers.
Concerns
Image Source: Zacks Investment Research
Yum China’s shares have declined 16.1% in the past six months compared with the industry’s 11.4% fall. The downside was mainly caused by commodity and wage inflation.
Yum China is facing the structurally high cost of labor and rentals. Apart from wage inflation, the company bears additional expenses from promotion, packaging upgrades, menu innovation and technological novelty. In second-quarter 2023, total costs and expenses amounted to $2,397 million, up 17% from the $2,047 million reported in the prior-year quarter.
The company anticipates uncertain macroeconomic conditions and wage inflation to persist for some time. Our model predicts 2023 company restaurant expenses to rise 10.4% year over year.
Zacks Rank & Key Picks
Yum China currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector include:
Arcos Dorados Holdings Inc. (ARCO - Free Report) sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 35%, on average. The stock has gained 19.6% in the past year. You can see the complete list of today’s Zacks Rank #1 stocks here.
The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS suggests rises of 19.2% and 13%, respectively, from the year-ago period’s levels.
El Pollo Loco Holdings, Inc. (LOCO - Free Report) currently carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 23.7%, on average. Shares of LOCO have declined 7.5% in the past year.
The Zacks Consensus Estimate for LOCO’s 2024 sales and EPS indicates a 3.5% and an 18.3% growth, respectively, from the year-ago period’s levels.
FAT Brands Inc. (FAT - Free Report) currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 28.7% on average. Shares of FAT have increased 30.8% so far this year.
The Zacks Consensus Estimate for FAT’s 2024 sales and EPS indicates 36.3% and 29.6% growth, respectively, from the year-ago period’s levels.