Yum China Holdings, Inc. YUMC reported weak second-quarter 2021 results, wherein both earnings and revenues missed the Zacks Consensus Estimate. However, both the metrics improved year over year. The top and bottom lines missed the respective consensus mark after beating the same in the trailing six quarters. Following the results, the company’s shares declined 3.8% in after-hour trading session on Jul 28.

Earnings & Revenue Discussion

During the second quarter, the company reported adjusted diluted earnings of 42 cents that missed the Zacks Consensus Estimate of 43 cents by 2.3%. The reported figure increased 20% from the year-ago quarter (excluding the mark-to market losses from equity investments). Excluding losses from foreign currency translation, the bottom line surged 37%.

Revenues of $2,451 million lagged the consensus mark of $2,490 million but improved 29% on a year-over-year basis. Excluding foreign currency translation, the top line increased 17% year over year.

Yum China Holdings Inc. Price, Consensus and EPS Surprise

Yum China Holdings Inc. price-consensus-eps-surprise-chart | Yum China Holdings Inc. Quote

Total system sales in the reported quarter rose 14% year over year. System sales at KFC moved up 14%, while the same at Pizza Hut increased 16%.

Meanwhile, same-store sales climbed 5% year over year, primarily owing to an increase of 4% at KFC and 11% at Pizza Hut.

Operating Highlights

In the second quarter, total costs and expenses expanded 25% year over year to $2,218 million compared with $1,774 million in the year-ago quarter. The upsurge can primarily be attributed to a 23% rise in food and paper costs, a 41% increase in payroll and employee benefits and a 25% surge in occupancy and other operating expenses.

Restaurant margin in the quarter under review was 15.8%, up 210 basis points from the year-ago quarter’s levels.

During the quarter, adjusted operating profit totaled $237 million, up 79.5% from the year-ago quarter. Adjusted net income amounted to $185 million compared with $136 million in the prior-year quarter.

Balance Sheet

Cash and cash equivalents as of Jun 30, 2021, totaled $1,209 million compared with $1,158 million as on Dec 31, 2020. Inventories in the second quarter were $380 million compared with $398 million at 2020-end.

The company’s board of directors announced a dividend of 12 cents per common share. The dividend is payable on Sep 16, 2021, to shareholders of record at the close of business as of Aug 25.

Unit Development and Other Updates

In the second quarter, Yum China opened 404 new restaurants. In the first-half of 2021, the company had opened 719 gross new stores. During the quarter under review, the company’s delivery contributed nearly 30% of KFC and Pizza Hut's company sales, up nearly one percentage point from the prior-year quarter.

Digital orders during the second quarter accounted fot 85% of KFC and Pizza Hut's company sales compared with 84% in the previous-year quarter. Loyalty programs and member sales of KFC and Pizza Hut led to year-over-year growth. The KFC and Pizza Hut loyalty programs increased to 330 million members.

2021 Outlook

Yum China continues to focus on expanding store footprint and developing emerging brands. The company expects to open 3,000 (gross) new stores in 2021, up from the prior estimate of 1,000 stores. Increased investments in terms of digitization and infrastructure are likely to support its expansion plans. Meanwhile, capital expenditures in 2021 are anticipated at $700-800 million, compared with the prior estimate of $600 million.

Zacks Rank & Key Picks

Yum China currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the same space include The Cheesecake Factory Incorporated CAKE, Cracker Barrel Old Country Store, Inc. CBRL and Dine Brands Global, Inc. DIN. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cheesecake Factory earnings in 2021 is anticipated to witness growth of 253%.

Cracker Barrel earnings in fiscal 2021 is anticipated to witness growth of 163.7%.

Dine Brands Global has reported better-than-expected earnings in three of the trailing four quarters and missed once, the average surprise being 40.3%.

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