Yum China (YUMC) Trims Q3 View on Delta Variant-Led Woes

·3 min read

Yum China Holdings, Inc. YUMC recently provided an update on its business for third-quarter 2021. As the Delta variant of coronavirus has caused unexpected shutdowns and supply chain-related challenges, the company trimmed its outlook for the third quarter of 2021. Following the news, the company’s shares declined 4.7% in after-hour trading session yesterday.

Q3 Outlook in Detail

As a result of the spread of the Delta variant, the company has witnessed substantial operating deleveraging. Adjusted operating profit (excluding special items) is likely to be reduced by nearly 50% to 60% for the third quarter of 2021 from the year-ago period.

During the height of the outbreak of the Delta variant this August, the company had to shut down more than 500 stores across 17 provinces and only continued the takeaway services. Same-store sales in August 2021 declined by mid-teens percentage year over year and nearly 20% from August 2019. This downside was primarily attributed to the 20-30% drop in same-store dine-in during August 2021. Also, on a same-store basis, the company witnessed a sudden drop in sales at transportation and tourist locations of roughly 40-50% year over year.

Although the third quarter is seen as a strong period for sales and margins, the impact of deleveraged sales owing to the spread of the Delta variant has sharply reduced sales.

Furthermore, restaurant margins are pressured by the declining favorable impact of commodity prices and wage inflation of mid-to-high single digits. Also, the company has started spending on promotions to drive traffic.

However, the company is optimistic regarding its long-term business growth in spite of the pandemic¬-related volatility. Strengthening its offerings for dine-in, delivery, takeaway and retail, Yum China expects to open 1,300 gross new stores in 2021.

Strategies Mitigating Challenges

Yum China considers its employees and customers to be its top most priority. The company exhibited flexibility in responding to the past outbreaks and will continue to focus on driving sales and building on its strength with the implementation of some strategies.

The company leverages over a 330-million-member base with various privilege programs, Super Apps and other digital channels that result in repeat purchases. Additionally, it captures off-premise occasions with its easy to deliver menu and appoints dedicated riders to ensure availability to drive off-premise sales. Yum China also attracts customers with innovated menu items like the upgraded hand-tossed pizza at Pizza Hut, which are mainly suitable for delivery. Moreover, Yum China strategizes various methods for cost cutting and improvisation of labor productivity.

So far this year, shares of Yum China have gained 7.3% compared to the Zacks Retail - Restaurants industry’s 14.2% rise. The company is benefiting from its gradual shift toward digital and content marketing to expand customer base. Also, continuous menu innovation, strategic investment in unit expansion and strong brand recognition are expected to effectively drive sales in 2021 and beyond.

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Zacks Rank & Key Picks

Currently, Yum China carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same industry include The Wendy's Company WEN, Yum! Brands, Inc. YUM and Jack in the Box Inc. JACK, each sporting a Zacks Rank #2 (Buy).

Wendy's earnings for 2021 are expected to rise 42.1%.

Yum! Brands has a three-five-year earnings per share growth rate of 12%.

Jack in the Box has a trailing four-quarter earnings surprise of 26.4%, on average.


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