Yum China (NYSE:YUMC) Misses Q3 Sales Targets, Stock Drops 11.1%

Fast-food company Yum China (NYSE:YUMC) fell short of analysts' expectations in Q3 FY2023, with revenue up 8.53% year on year to $2.91 billion. Turning to EPS, Yum China made a non-GAAP profit of $0.59 per share, improving from its profit of $0.49 per share in the same quarter last year.

Is now the time to buy Yum China? Find out by reading the original article on StockStory.

Yum China (YUMC) Q3 FY2023 Highlights:

• Revenue: $2.91 billion vs analyst estimates of $3.09 billion (5.65% miss)
• EPS (non-GAAP): $0.59 vs analyst expectations of $0.62 (5.15% miss)
• Gross Margin (GAAP): 17.9%, down from 19.3% in the same quarter last year
• Same-Store Sales were up 4% year on year
• Store Locations: 14,102 at quarter end, increasing by 1,693 over the last 12 months

1 See "Reconciliation of Reported GAAP Results to non-GAAP Adjusted 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 5.11% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre, but to its credit, it opened new restaurants and grew sales at existing, established dining locations.

This quarter, Yum China's revenue grew 8.53% year on year to $2.91 billion, missing analysts' expectations. Looking ahead, the analysts covering the company expect sales to grow 15% over the next 12 months.

Number of StoresWhen 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. Since last year, Yum China's restaurant count increased by 1,693, or 13.6%, to 14,102 locations in the most recently reported quarter.

Taking a step back, Yum China has rapidly opened new restaurants over the last eight quarters, averaging 11% annual increases in new locations. This growth is much higher than other restaurant businesses. 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 has outpaced the broader restaurant sector over the last eight quarters. On average, the company has grown its same-store sales by a robust 9.37% year on year. With positive same-store sales growth amid an increasing number of restaurants, Yum China is reaching more diners and growing sales.

In the latest quarter, Yum China's same-store sales rose 4% year on year.

Key Takeaways from Yum China's Q3 Results With a market capitalization of $22 billion, a $3.13 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Yum China has the resources needed to pursue a high-growth business strategy.

We struggled to find many strong positives in these results. Its revenue, gross margin, and EPS were below Wall Street's estimates. These misses were driven by its lower-than-expected same-store sales growth, which is usually higher margin revenue than sales from new restaurants. Investors are likely concerned about the decelerating same-store sales because of the company's rapid restaurant expansion strategy - typically, higher same-store sales are what justify new locations. Overall, this was a mixed quarter for Yum China. The company is down 11.1% on the results and currently trades at $46.7 per share.

The author has no position in any of the stocks mentioned in this report.