Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Yum China Holdings Inc (YUMC, Financial) reported record levels of revenue, operating profit, and EPS for the second quarter.
- System sales grew 4% on top of 32% growth in the same period last year, and core operating profit grew 12% to USD 275 million.
- EPS increased by 19%, showcasing strong financial performance.
- Innovative business models like K-Coffee and Pizza Hut WOW achieved encouraging initial results, contributing to incremental same-store sales and profit.
- Operational efficiency initiatives, such as Project Fresh Eye and Project Red Eye, have led to significant cost savings and improved margins.
Negative Points
- Despite the positive financial results, the company is navigating a complex and dynamic environment, which presents ongoing challenges.
- Same-store sales for Pizza Hut were at 92% of the prior year level, indicating some struggles in maintaining consistent sales growth.
- The company faces a lower ticket average, which could impact overall revenue despite increased transactions.
- There is a need for continuous investment in value for money and product innovation to sustain growth, which could pressure margins.
- The macroeconomic environment in China remains uncertain, which could affect consumer sentiment and spending patterns.
Q & A Highlights
Q: Can you provide more details about the economics and contributions of the new K-Coffee side-by-side stores and Pizza Hut WOW stores?
A: Joey Wat, CEO: The K-Coffee side-by-side stores share kitchens and operations with existing KFC stores, offering a distinct menu and dining area. The model has shown healthy margins and incremental same-store sales and profit. Pizza Hut WOW stores, which feature simpler operations and excellent value for money, have also shown encouraging results with significant same-store sales uplift. We plan to expand both models aggressively.
Q: How should we view the same-store sales trends and operational efficiency in different market tiers?
A: Joey Wat, CEO: Lower-tier cities are recovering faster than higher-tier cities, and residential locations are more resilient. We are not seeing significant changes in market conditions or consumer sentiment going into Q3. Our strategies to drive operational efficiency and innovate new products and store models are showing strong initial results, leading to robust transaction growth and stabilized margins.
Q: What is driving the improvements in food and paper costs and labor costs despite intense promotions?
A: Andy Yeung, CFO: Improvements are due to favorable commodity prices, smart value initiatives, and supply chain efficiencies. Labor productivity has also improved significantly. We expect cost savings from our efficiency projects to continue in the second half, positioning us well for sustainable and profitable value propositions.
Q: Will the new Pizza Hut WOW model be used for new store openings, and how many existing stores can be converted?
A: Joey Wat, CEO: We are testing the WOW model in different parts of China and will provide clearer numbers later in the year. Some new stores will open as WOW stores. For K-Coffee, we plan to have 500 to 600 side-by-side stores by year-end, testing in various locations and city tiers.
Q: How should we think about same-store sales for the second half of the year given the easier comparisons?
A: Andy Yeung, CFO: While the macro environment remains challenging, our initiatives to drive sales and control costs are showing results. We caution against being overly optimistic but remain confident in our ability to manage growth and profitability through our innovative business models and efficiency improvements.
Q: What is Yum China's pricing strategy for KFC and Pizza Hut in the coming quarters?
A: Joey Wat, CEO: For KFC, we will maintain a balanced approach to ticket average (TA), focusing on value and widening the price range to drive traffic. For Pizza Hut, we will continue to lower TA by design to tap into more value-conscious consumers and solo diners, while also offering higher ticket items with strong value for money.
Q: Have you considered disposing of smaller businesses to focus on efficiency?
A: Joey Wat, CEO: We constantly review our portfolio. For example, we are reducing our packaged food business as its historical mission is accomplished. We remain disciplined in investing in smaller businesses, focusing on those with potential like Lavazza, which is making good progress.
Q: How do you view the long-term growth potential in China despite current challenges?
A: Joey Wat, CEO: China remains a growing market with significant opportunities, especially in lower-tier cities. We focus on both system sales and same-store sales, opening new stores in strategic locations to manage sales transfer. The opening of new shopping malls also presents growth opportunities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
