Here's Why You Should Hold on to Yum China Stock for Now
Yum China Holdings, Inc. YUMC is poised to benefit from digitalization, menu innovation and expansion efforts. In the past three months, shares of the company have rallied 21.1% compared with the Zacks Retail – Restaurants industry’s 10.3% growth. However, rise in labor costs along with coronavirus-related woes is concerning.
Let us delve into factors highlighting why investors should hold on to the stock for the time being.
Factors Driving Growth
Yum China holds a leadership position in China’s restaurant space when it comes to delivery, mobile order and pay and loyalty membership. The company is increasingly shifting toward digital and content marketing to expand its customer base. It has adopted a high-grade delivery strategy that covers collaborations with aggregators to source traffic and fulfill orders by the company’s Kentucky Fried Chicken (or KFC) riders. This is expected to help the company drive volume and leverage the extensive network to control quality simultaneously.
In second-quarter 2020, delivery contributed nearly 27% to KFC's company sales and 35% to Pizza Hut's company sales, up from approximately 18% and 24% in the prior-year period, respectively. Digital orders in the second quarter accounted for 86% of sales at KFC (up 24 percentage points year over year) and 61% of sales at Pizza Hut (32).
The company is focused on continual menu innovation to drive the top line. KFC’s extraordinary performance can be attributed to greater sales of menu offerings, including crayfish burger, stuffed chicken wing and spicy chicken burger. It also launched Spicy Skewers and stew pots in 10 cities, gradually expanding its reach. Yum China is also serving coffee across its restaurants and expanding the dessert category. The company will increase investment to expand presence in the coffee segment as it believes that the beverage has strong demand in China.
Yum China is focused on relentless unit growth of restaurants in order to drive incremental sales. It recently acquired a controlling stake in Huang Ji Huang that has more than 640 restaurants, almost all of which are franchise-based. In second-quarter 2020, the company opened 169 new restaurants and remodeled 310.
Despite the coronavirus pandemic, the company expects to open 800-850 stores in 2020. Approximately, the company possesses five restaurants per million people in China, which is expected to grow to 15 stores per million. Moreover, with continuous rise in middle-class discretionary spending, growth opportunities in the restaurant base remain viable.
Concerns
The coronavirus outbreak has rattled the Retail - Restaurants industry, and Yum China is not immune to the effects. Although the situation in China is under control and the company has opened its restaurants, traffic is still below pre-outbreak levels. The pace of recovery is uneven as people continue to avoid going out and practice social distancing. Dismal traffic is likely to hurt the company same-store sales.
Moreover, Yum China has been continuously shouldering increased expenses, which have been detrimental to margins. Apart from wage inflation, the company is bearing additional costs stemming from promotion, menu innovation and technological novelty.
Zacks Rank & Key Picks
Yum China currently 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 space include Papa John's International, Inc. PZZA, Jack in the Box Inc. JACK and El Pollo Loco Holdings, Inc. LOCO. Papa John's sports a Zacks Rank #1, while Jack in the Box and El Pollo Loco carry a Zacks Rank #2 (Buy).
Papa John's has a three-five year earnings per share growth rate of 8%.
Jack in the Box 2021 earnings are expected to surge 17.7%.
El Pollo Loco has a trailing four-quarter earnings surprise of 94.1%, on average.
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Click to get this free report Jack In The Box Inc. (JACK) : Free Stock Analysis Report Papa Johns International, Inc. (PZZA) : Free Stock Analysis Report El Pollo Loco Holdings, Inc. (LOCO) : Free Stock Analysis Report Yum China Holdings Inc. (YUMC) : Free Stock Analysis Report To read this article on Zacks.com click here.
