Yum China Holdings, Inc. reported unaudited results for the fourth quarter and year ended 31st December, 2020.
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Fourth quarter operations improved sequentially from the third quarter. The company’s primary focus continues to be safety, efficiency and sales recovery. To counter the pandemic impact, the company ran strong value and digital campaigns to drive traffic. Delivery and takeaway remained popular, while dine-in recovered sequentially.
Proactive cost structure realignment, productivity improvements and one-off cost savings helped it achieve year-over-year expansion of restaurant margins and operating profit. However, the pace of recovery was uneven and non-linear, impacted by regional resurgences of COVID-19 in Qingdao, Xinjiang, Beijing, Dalian and elsewhere. October sales benefited from the National Day long holiday, but November and December sales were pressured by the regional outbreaks. Traffic at transportation hubs remained significantly below the prior year due to reduced travel.
The impact of regional resurgences has continued into the first quarter of 2021. In January, there were clusters of outbreaks, mostly in northern and northeastern China, resulting in tighter public health measures across China. There are now measures restricting travel and large gatherings, and recommendations against dining out. Several cities have been put on city-wide quarantine, including Shijiazhuang which has an 11-million population and is the capital city of Hebei province.
The company anticipates significant headwinds in the first quarter. The transportation and tourist locations, representing high single digits of sales mix, will likely be more significantly impacted. In the first few days of the Chinese New Year travel season, which started in late January, the number of travelers declined over 70% year-over-year. The important Chinese New Year holiday season will be subdued, with sales impacted by substantially less travel, smaller gatherings and generally reduced social activities. The Yum China teams are closely monitoring this fluid situation and adjusting marketing programs and operations accordingly. In 2020, COVID-related lockdowns started in late January, so they only impacted the last two months of that quarter. January 2020 sales were strong leading into Chinese New Year.
In the fourth quarter, total revenues increased 11% year over year to $2.26 billion from $2.03 billion (a 5% increase excluding foreign currency translation (“F/X”)). Total system sales increased 5% year over year, with an increase of 3% at KFC and a decline of 3% at Pizza Hut, excluding F/X. Same-store sales declined 4% year over year, with declines of 4% at KFC and 5% at Pizza Hut, excluding F/X. 505 new stores are opened during the quarter. Restaurant margin was 15.1%, compared with 12.4% in the prior year period.
Operating Profit increased 90% year over year to $180 million from $94 million (a 78% increase excluding F/X). Adjusted Operating Profit increased 72% year over year to $182 million from $105 million (a 61% increase excluding F/X). Effective tax rate was 28.0%. Net Income increased 68% to $151 million from $90 million in the prior year period, primarily due to the increase in Operating Profit.
Adjusted Net Income increased 56% to $153 million from $98 million in the prior year period (a 76% increase excluding the $23 million and $24 million net gains in the fourth quarter of 2020 and 2019, respectively, from our equity investment in Meituan Dianping; a 65% increase if further excluding F/X). Diluted EPS increased 52% to $0.35 from $0.23 in the prior year period. Adjusted Diluted EPS increased 40% to $0.35 from $0.25 in the prior year period (a 58% increase excluding the net gains from our equity investment in Meituan in 2020 and 2019; a 47% increase if further excluding F/X).
For the full year, total revenues declined 6% year over year to $8.26 billion from $8.78 billion. Total system sales declined 5% year over year, with declines of 5% at KFC and 15% at Pizza Hut, excluding F/X. Same-store sales declined 9% year over year, with declines of 8% at KFC and 14% at Pizza Hut, excluding F/X. 1,165 new stores opened during the year, bringing total store count to 10,506 across more than 1,500 cities.
Restaurant margin was 14.9%, compared with 16.0% in the prior year. Operating Profit increased 7% year over year to $961 million from $901 million, primarily due to the re-measurement gain of Suzhou KFC acquisition. Adjusted Operating Profit declined 20% year over year to $732 million from $912 million. Effective tax rate was 26.6%. Net Income increased 10% to $784 million from $713 million in the prior year, primarily due to the increase in Operating Profit. Adjusted Net Income declined 16% to $615 million from $729 million in the prior year (a 19% decline excluding $75 million and $63 million net gains in 2020 and 2019, respectively, from our equity investment in Meituan). Diluted EPS increased 6% to $1.95 from $1.84 in the prior year. Adjusted Diluted EPS declined 19% to $1.53 from $1.88 in the prior year (a 22% decline excluding the net gains from our equity investment in Meituan in 2020 and 2019). Results include the consolidation of Huang Ji Huang since April 2020, and Suzhou KFC since August 2020.
Joey Wat, CEO of Yum China, commented, “Fourth quarter results marked a strong finish to 2020, with same-store sales recovering sequentially and double-digit operating profit growth. Our foremost priority remains the safety of our employees and customers. The COVID-19 pandemic reinforced our determination to look after our employees and strive to be a responsible corporate citizen, an effort that is recognized by our industry.”
The Board of Directors declared a cash dividend of $0.12 per share on Yum China’s common stock, payable as of the close of business on 25th March, 2021 to shareholders of record as of the close of business on 3rd March, 2021.
The KFC and Pizza Hut loyalty programs exceeded 300 million members combined. Member sales increased to approximately 59% of system sales in the fourth quarter 2020, an increase of approximately 3 percentage points from the prior year period.
Delivery contributed to approximately 29% of KFC and Pizza Hut’s Company sales in the fourth quarter of 2020, an increase of approximately 7 percentage points from the prior year period.
Digital orders, including delivery, mobile orders and kiosk orders, accounted for approximately 83% of KFC and Pizza Hut’s Company sales in the fourth quarter of 2020, an increase of approximately 22 percentage points from the prior year period.
The Company opened 505 new stores in the fourth quarter and 1,165 new stores in the full year 2020, mainly driven by development of the KFC brand.
The Company remodeled 297 stores in the fourth quarter and 939 stores in the full year 2020.
Restaurant margin was 15.1% in the fourth quarter 2020, compared with 12.4% in the prior year period, primarily attributable to lower commodity prices, relief provided by landlords and government agencies, and other store cost savings, partially offset by pressure from the same-store sales decline and value promotions. In terms of cost of labor, higher productivity largely offset wage inflation, increased rider cost associated with the rise in delivery volume and the impact from lower sales.
Restaurant margin was 14.9% in the full year 2020, compared with 16.0% in the prior year, primarily attributable to same-store sales decline, temporary store closures impacted by COVID-19 and value promotions, partially offset by higher productivity and relief provided by landlords and government agencies.
The company’s targets for fiscal year 2021 are to open approximately 1,000 new stores (gross) and to make capital expenditures of approximately $600 million.
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Joey Wat, CEO of Yum China, said, “Looking into 2021, we will continue to manage the impact of the pandemic. We will swiftly adjust our operations according to market conditions and drive traffic with compelling offers for both dine-in and off-premise occasions. Our industry-leading digital capabilities enable us to stay agile in this ever-evolving situation. We remain committed to growth and intend to open approximately 1,000 new stores in the year ahead. Our confidence in the long-term potential of China is unshaken. We are focused on growing our store footprint and developing our emerging brands. We will also step up investment in digitization and infrastructure to create an even stronger foundation to accelerate expansion. I am confident that with the strength of our team together with our resilient business model, culture of innovation and execution capabilities, we will overcome these short-term challenges and achieve attractive long-term growth.”
Andy Yeung, CFO of Yum China, added, “Fourth quarter operations improved sequentially, although the recovery was uneven and non-linear, impacted by regional outbreaks. We improved our margins in the quarter with solid productivity gains, temporary relief and one-off savings. Recent surges in COVID-19 outbreaks resulted in the government tightening measures nationwide, including city-wide quarantine in several cities, advice against travel during the Chinese New Year holiday period and large gatherings. These measures resulted in a very challenging condition. Traffic is significantly lower in transportation and tourist locations. Accordingly, we will continue to adjust our operations and leverage our digital and delivery resources to capture dine-in and off-premise demand. We also plan to step up our value campaigns and tailor offers according to city tiers and trade zones. Despite these challenges, we will continue to invest for the long term, focusing on building our capabilities, making our business model more resilient, and driving long-term growth. Our healthy balance sheet and strong cash position enable us to handle potential contingencies, while laying the foundation for us to capture market opportunities and achieve sustainable growth in the long run.”