Yum China Holdings, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Performance Overview: Delivered solid results in Q1 with record highs in revenue, net income, and diluted EPS. Same-store sales index for KFC and Pizza Hut reached 100% of prior year level for the first time since Q1 2024. Restaurant margin expanded by 100 basis points year-over-year. Operating profit grew 8% and diluted EPS increased by 10%.
• Brand Strategies: KFC's 85th anniversary of Original Recipe Chicken and collaborations with IPs engaged customers. Pizza Hut's new menu, including limited-time offers like Super Supreme pizza at half price, boosted traffic. KCOFFEE sustained strong growth with 20% year-over-year increase in cups and sales.
• Store Models: Expanding store portfolio with innovative and flexible models. KFC Small Town Mini and Pizza Hut WOW models target lower-tier cities and specific customer segments. Simplified operations and automation improved margins.

Segment Performance

• KFC: In the first quarter, KFC delivered solid sales and profit growth. System sales increased 3% year-over-year. Same-store sales index reached 100% of prior year level, fueled by 4% same-store transactions growth. Added 295 net new stores, bringing total to 11,943 stores. Restaurant margin expanded to 19.8%. KCOFFEE cafes reached 1,000 locations nationwide in Q1 with cups and sales up around 20% year-over-year.
• Pizza Hut: System sales grew 2% year-over-year. Same-store sales index was 100% of prior year level, up 2 percentage points vs quarter four last year. Same-store transactions grew 17% year-over-year. Restaurant margin improved 190 basis points year-over-year. Added 45 net new stores in Q1, totaling 3,769 stores. Full-year net-new store growth expected to be double-digit percent. The new menu launched in December 2024 and further upgrades in March boosted consumer traffic.

Guidance

• System Sales: Mid-single-digit system sales growth expected for 2025.
• Store Openings: Target to open 1,600 to 1,800 net-new stores in 2025. KCOFFEE aims for 1,500 locations by end of 2025, 200 more than original target.
• Margins: Target to maintain or slightly improve core OP margins. Cost of sales expected to be between 31% and 32% year-over-year. Restaurant margin at KFC expected to be healthy and stable, while Pizza Hut's margin to improve in mid to long run.

Risks

• Consumer Environment: Uncertainty in consumer spending and market conditions.
• Competition: Intense competition from delivery aggregators like JD, with potential impact on business if not managed properly.
• Cost Pressures: Labor cost pressure due to rapid delivery growth, though efforts are made to offset with automation and simplification.

Q: How is the business trend after first-Q with general consumption slowdown post Chinese New Year and impact of delivery aggregator competition?

A: April performance is in line with expectations, no significant negative impact observed yet. Open to work with all platforms, but over 70% of sales are outside delivery aggregators including dine-in, takeaway, and own delivery channels.

Q: What is the same-store sales trajectory for Pizza Hut in the rest of the year and impact on margins?

A: Striving for 10 consecutive quarters of positive same-store transaction growth in Q2. Pizza Hut's all-you-can-eat campaign timing shifted, but margin outlook remains unchanged with core OP margin expected to stay steady or slightly improve.

Q: Talk about consumer environment in China and KFC's market share compared to industry?

A: Consumers prefer wider price ranges and innovative food. KFC's transaction growth is solid with 4% growth, and seen to have meaningful market share increase, especially in delivery business.

Q: Impact of new store expansion on revenue growth?

A: New store contribution to revenue growth is around 4%, with smaller stores opened and strategic closures. Net-new store open figure will normalize as year progresses, and same-store sales growth is important for top-line system sales.

Q: Long-term view on KCOFFEE and its impact on KFC store economics?

A: Committed to KCOFFEE with target of 1,500 cafes by end 2025. It adds to top-line sales and is margin-protective due to shared equipment, location, and labor costs.

Q: New observations and plans regarding brand marketing?

A: Continue to work with IPs and introduce new concepts like KPRO stores in Tier-1 and Tier-2 cities offering lighter meals. Look forward to Investor Day for more details on new products and concepts.