Revenue: Record high for Q1 2025. Net Income: Record high for Q1 2025, $292 million, up 3% year over year. Diluted EPS: Increased by 10% year over year to $0.77. Same-Store Sales Index: Reached 100% of prior year level for both KFC and Pizza Hut. Restaurant Margin: Improved by 100 basis points year over year to 18.6%. Operating Profit: Grew by 8% year over year to $399 million. KFC System Sales: Increased by 3% year over year. KFC Restaurant Margin: Expanded to 19.8%. KFC Store Count: Added 295 net new stores, totaling 11,943 stores. Pizza Hut System Sales: Increased by 2% year over year. Pizza Hut Same-Store Transactions: Grew by 17% year over year. Pizza Hut Store Count: Expanded to 3,769 stores with a net addition of 45 stores. Cash Position: Ended the quarter with $2.8 billion in cash. Shareholder Returns: Returned $262 million in Q1 through share repurchases and dividends. New Store Openings: Opened 247 new stores in Q1, with a full-year target of 1,600 to 1,800 net new stores.

Warning! GuruFocus has detected 2 Warning Sign with YUMC.

Release Date: April 30, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Yum China Holdings Inc (NYSE:YUMC) achieved record highs in revenue, net income, and diluted EPS for the first quarter of 2025. Same-store sales index reached 100% of the prior year level for both KFC and Pizza Hut, marking nine consecutive quarters of same-store transaction growth. Restaurant margins improved by 100 basis points year over year, with operating profit growing by 8% and diluted EPS increasing by 10%. KFC system sales grew by 3%, and the restaurant margin expanded to 19.8%, with 300 new KCOFFEE cafes opened, reaching a total of 1,000 locations nationwide. Pizza Hut achieved a 29% year-over-year growth in operating profit, with significant improvements in same-store sales index and margins, driven by a new menu and value-for-money proposition.

Negative Points

The average ticket for KFC in Q1 was RMB40, lower than the prior year period, indicating potential pricing pressure. Despite improvements, the cost of labor increased by 30 basis points year-over-year due to higher labor costs as a percentage of sales. The effective tax rate increased by 90 basis points year over year to 27.8%, impacting net income growth. There were more temporary store closures during the Chinese New Year, affecting sales growth in Q1. The company faces ongoing pressure from increased delivery costs due to rapid delivery growth, impacting overall rider costs.

Q & A Highlights

Q: Can you provide an update on the competition and demand trends post-Chinese New Year, especially with JD's push on delivery? A: Joey Wat, CEO: Our April performance aligns with expectations, and we haven't seen significant negative impacts. We remain vigilant and monitor trends closely. Despite a challenging macro environment, we've consistently thrived in various market conditions. We continue to work with all platforms, balancing short-term and long-term considerations. Over 70% of our sales occur outside delivery aggregators, maintaining strong control over our business.

Story Continues

Q: How do you view Pizza Hut's same-store sales trajectory for the rest of the year, especially with the all-you-can-eat campaign? A: Adrian Ding, CFO: We aim for 10 consecutive quarters of positive same-store transaction growth, but remain cautious about potential fluctuations. The all-you-can-eat campaign shifted from Q1 last year to Q2 this year, affecting quarterly margins. We expect Pizza Hut's margins to improve slightly this year and more significantly in the mid to long run.

Q: Can you discuss the consumer environment in China and KFC's transaction growth compared to the industry? A: Joey Wat, CEO: Consumer sentiment hasn't changed significantly, but there's a preference for wider price ranges and innovative food. KFC's transaction growth is strong, with delivery transactions up 24%. We see meaningful market share increases, particularly in delivery, and continue to focus on innovation and operational efficiency.

Q: Regarding new store expansion, how does the shift towards smaller stores impact revenue growth? A: Adrian Ding, CFO: We expect mid-single-digit system sales growth this year. Smaller stores contribute to lower initial sales, but they ramp up over three years. Despite opening smaller stores, our payback period remains healthy. We strategically closed more stores this quarter, but expect normalization as the year progresses.

Q: What is the long-term view for KCOFFEE, and how does it impact KFC store economics? A: Joey Wat, CEO: We plan to open 1,500 KCOFFEE cafes by the end of 2025. KCOFFEE adds to same-store sales growth and shares resources with KFC, protecting the bottom line. The business shows promising growth, with many members yet to try KCOFFEE, and we continue to innovate with new products.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.

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