Financial Associated Press (Shanghai, editor Zhou Xinyang) news, on the morning of the 28th, Yum China (09987) released its third quarter financial report, net profit of 104 million US dollars, down 76% year-on-year, mainly due to the reduction in operating profit and the loss of market value equity investment in Meituan (03690).
The decline in performance has not affected the expansion rate of Yum China, and the financial report shows that 524 new stores were opened in the third quarter, a record high for single quarter stores, and Yum also plans to raise the number of new stores opened in 2021 from the original 1300 to 1700.
Yang Jiawei, chief financial officer of Yum China, said the third-quarter results were in line with Yum's previously announced expectations. He pointed out that the recent macro environment remains challenging, and the COVID-19 pandemic (especially the outbreak caused by the Delta variant) will continue to affect consumer behavior and affect the recovery of same-store sales.
He admits that sales and margins in the fourth quarter are usually the lowest, and small changes in sales and operations will affect profit levels. He expects restaurant margins to come under pressure in the fourth quarter on several fronts, including lower same-store sales, higher raw material prices and higher wages.
Increase in revenue without increasing profits
Yum China's total revenue for the third quarter was US$2.55 billion, up 9% year-on-year; system sales increased by 1% year-on-year, of which KFC and Pizza Hut both increased by 1%, but in terms of same-store sales, down 7% year-on-year, of which KFC and Pizza Hut decreased by 8% and 5% respectively. The decline in same-store sales dragged down restaurant profit margins in the third quarter by 6.4 percentage points year-on-year to 12.2%.
Net profit for the same period was $104 million, down 76 percent from $439 million in the year-ago quarter, primarily due to lower operating profit and losses in the market-to-market equity investment in Meituan. Yum China's holdings of Meituan lost $32 million in the third quarter.
In the report, Yum China noted that its third-quarter results have been affected by the outbreak of the Delta variant strain since late July. The outbreak became the most widespread regional outbreak in the country since the first quarter of 2020. In East China, one of the company's important markets, major cities such as Nanjing and Yangzhou were blockaded. Zhengzhou, the capital of Henan Province, and Wuhan, the capital of Hubei Province, were also severely affected. In mid-September, there were also small regional outbreaks in Fujian and Heilongjiang provinces. Strict implementation of various epidemic prevention and control measures across the country, including the closure of many attractions, has led to a reduction in social activities, a significant reduction in travel volumes, and the cancellation of summer trips.
According to government statistics, revenue in China's catering industry slowed in August, falling by about 10% compared to August 2019. Despite a modest recovery in september, monthly revenue rose about 2 percent compared to the same period in 2019, the slowest pace since March 2021.
For the fourth quarter, Yum China believes that since entering the fourth quarter, strict epidemic prevention and control measures have been implemented nationwide. The impact of COVID-19 continues, such as reduced social activities, consumer spending caution, and reduced travel volumes. Due to the recent regional outbreak in 12 provinces and the strict and tight implementation of national epidemic prevention and control measures, the company continues to expect that it will take time for same-store sales to recover.
The company stressed that due to the significant impact on overall dine-in volumes and passenger traffic at transportation hubs, same-store sales are gradually recovering, but they are still below pre-pandemic levels last year and 2019. The company will strengthen its sales capabilities and strengthen the mixed takeaway model.
KFC and Pizza Hut stores accelerate expansion
As of September 30, the total number of stores in Yum China reached 11,415, an increase of 1,265 over the same period last year. Looking ahead to the full year 2021, Yum raised its target for new stores from 1,300 to 1,700, mainly due to the expansion of KFC and Pizza Hut stores, with expected capital expenditures of $700 million to $800 million.
Yum China CEO Qu Cuirong said that the regional epidemic has severely affected the catering industry, bringing challenges to the third quarter. The company quickly adjusted its operations to drive non-dine-in demand.
She said that as digital channels reach consumers faster, system sales continued to grow in the third quarter, with growth in new restaurants offsetting and outpacing the decline in same-store sales. Despite the challenges facing the company in the short term, it will still implement the development strategy outlined at the September Investor Day to enhance resilience and accelerate growth.
With a record 524 new stores opening in the third quarter, she added, more than 1,700 stores are expected to open in 2021. And Yum deepened its cooperation with lavazza, accelerating the layout of lavazza coffee shops in China, with a goal of opening 1,000 stores by 2025. In addition, Yum has become a strategic investor in Hangzhou Catering Service Group, which plays a vital role in Hangzhou becoming one of the largest markets for Yum China. The company will accelerate the growth of its multi-brand in Zhejiang Province.
The Zhejiang market is a key target of Yum
In addition, in September 2021, Yum acquired a 28% stake in Hangzhou Food & Beverage Services Group ("Hangzhou Drink") for a total cash consideration of approximately US$250 million. Hangzhou Beverage Service holds a 45% stake in Hangzhou KFC. Yum currently owns a 47% stake in Hangzhou KFC, which operates more than 700 KFC stores in hangzhou and surrounding areas.
Yum expects to close the transaction in the fourth quarter of 2021, subject to customary closing conditions and regulatory approvals. Upon completion of the transaction, the Company will directly and indirectly own approximately 60% of Hangzhou KFC and include Hangzhou KFC in its consolidated statements. In addition to holding Hangzhou KFC, Hangzhou Beverage also operates about 60 Chinese restaurants with four long-established brands of Zhiweiguan, Hangzhou Restaurant, Kuiyuanguan and Tianxianglou, as well as a high-growth food processing business.
The major shareholders of Hangzhou Beverage also own more commercial real estate in the area. Yum China believes that through this acquisition, Yum China will deepen its partnership with Hangzhou Beverage & Beverage and its major shareholders in terms of product innovation, retail product cooperation and accelerating the expansion of the company's multi-brand stores in Zhejiang Province.
In addition, the joint venture between Yum China and Lavazza is also expected to become lavazza's exclusive distributor in the mainland, introducing more products from the international market of the lavazza brand. Yum China holds a 65% stake in the joint venture and will include it in the consolidated financial statements after the agreement comes into effect in September 2021.