Yum China (NYSE:YUMC) Beats Expectations in Strong Q4, Stock Jumps 14%

Fast-food company Yum China (NYSE:YUMC) reported Q4 FY2023 results topping analysts' expectations, with revenue up 19.4% year on year to $2.49 billion. It made a non-GAAP profit of $0.25 per share, improving from its profit of $0.12 per share in the same quarter last year.

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Yum China (YUMC) Q4 FY2023 Highlights:

• Revenue: $2.49 billion vs analyst estimates of $2.33 billion (7% beat)
• EPS (non-GAAP): $0.25 vs analyst estimates of $0.19 (31.6% beat)
• Long-term multi-year guidance reaffirmed: 2024 to 2026 high-single-to-double-digit CAGR for system sales and operating profit, and a double-digit CAGR for EPS
• Free Cash Flow was -$72 million, down from $243 million in the previous quarter
• Gross Margin (GAAP): 15.8%, down from 29.2% in the same quarter last year
• Same-Store Sales were up 4% year on year (beat vs. expectations of up 3.1% year on year)
• Store Locations: 14,644 at quarter end, increasing by 1,697 over the last 12 months (0.8% beat vs. expectations of 14,517)
• Market Capitalization: $14.57 billion

(4) System sales and same-store sales percentages exclude the impact of F/X. Effective January 1, 2018, temporary store closures are normalized in the same-store sales calculation by excluding the period during which stores are temporarily closed. (5) See "Reconciliation of Reported GAAP Results to Non-GAAP Measures" included in the accompanying tables of this release for further details.

One of China’s largest restaurant companies, Yum China (NYSE:YUMC) is an independent entity spun off from Yum! Brands (NYSE:YUM) in 2016.

Traditional Fast FoodTraditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Sales GrowthYum China is one of the most widely recognized restaurant chains in the world and benefits from brand equity, giving it customer loyalty and more influence over purchasing decisions.

As you can see below, the company's annualized revenue growth rate of 5.8% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was weak , but to its credit, it opened new restaurants and grew sales at existing, established dining locations.

This quarter, Yum China reported robust year-on-year revenue growth of 19.4%, and its $2.49 billion in revenue exceeded Wall Street's estimates by 7%. Looking ahead, Wall Street expects sales to grow 10.8% over the next 12 months, a deceleration from this quarter.

Number of StoresThe number of dining locations a restaurant chain operates is a major determinant of how much it can sell and how quickly company-level sales can grow.

When a chain like Yum China is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. Yum China's restaurant count increased by 1,697, or 13.1%, over the last 12 months to 14,644 locations in the most recently reported quarter.

Over the last two years, Yum China has rapidly opened new restaurants, averaging 11.2% annual increases in new locations. This growth is among the fastest in the restaurant sector. Analyzing a restaurant's location growth is important because expansion means Yum China has more opportunities to feed customers and generate sales.

Same-Store SalesA company's same-store sales growth shows the year-on-year change in sales for its restaurants that have been open for at least a year, give or take. This is a key performance indicator because it measures organic growth and demand.

Yum China's demand within its existing restaurants has barely risen over the last eight quarters. On average, the company's same-store sales growth has been flat. This performance suggests that Yum China should consider improving its foot traffic and efficiency before opening new locations.

In the latest quarter, Yum China's same-store sales rose 4% year on year. This growth was a well-appreciated turnaround from the 4% year-on-year decline it posted 12 months ago, showing the business is regaining momentum.

Key Takeaways from Yum China's Q4 Results We were also excited its revenue outperformed Wall Street's estimates, driven by better-than-expected same store sales and a higher number of locations. Profitability was solid, leading to an EPS beat. Looking ahead, the company reiterated that from 2024 to 2026, system sales and profit profit will grow at high-single-to-double-digit CAGRs, leading to a double-digit CAGR for EPS. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The stock is up 11.7% after reporting and currently trades at $41.85 per share.