Published on 12 Apr 2022 on Zacks via Yahoo Finance
Yum China (YUMC) Banks on Expansion Efforts, Hurt by Cost Woes
Yum China Holdings, Inc. YUMC will likely benefit from unit expansion, strategic investments and menu innovations. Also, focus on digital initiatives bodes well. However, higher expenses and coronavirus-induced soft traffic are a headwind.Let us discuss the factors highlighting why investors should retain the stock for the time being.
Catalysts
Yum China is focused on relentless unit growth of restaurants to drive incremental sales. During fourth-quarter 2021, Yum China opened 563 gross new restaurants owing to the development of the KFC and Pizza Hut brands. As of Dec 31, the company’s total restaurant count stood at 11,788, up 1,282 stores year over year. In 2022, Yum China expects to open 1,000-1,200 new stores.More than 80% of the company's current portfolio has been remodeled or built in the past five years. On Mar 16, 2021, the company acquired a 5% equity interest in Fujian Sunner Development Co., Ltd. This strategic investment is intended to enhance the company’s supply chain security. The collaboration with Sunner will help the company’s product development and menu innovation. On Mar 26, 2021, Yum China announced the beginning of the construction of its Southwest supply chain support center in Chengdu. This center is part of Yum China’s intelligent supply chain initiative that integrates the Internet of Things technology, big data platforms and high-quality cold chain logistics facilities, supporting its rapid developments. In third-quarter 2021, the company initiated logistics center construction in Huai'an (Jiangsu Province). YUMC stated that it has several other sites in the pipeline. The company intends to open 45-50 logistics centers and consolidation centers over the next several years to support expansion and increase efficiency.Another riveting growth potential of Yum China resides in its continual menu innovation to boost the top line. In fourth-quarter 2021, KFC reported solid sales concerning menu offerings such as Juicy Whole Chicken and Angus Beef Burger. Also, solid customer acceptance was witnessed in Chicken and Duck Sandwich, spicy Crayfish Wrap, Beef and lamb kebab (from Northwestern China) and cold noodles with sesame sauce (from Wuhan). During the quarter, the company partnered with Chinese brands Zhou Hei Ya from Hubei and Wen He You to design and innovate new menu items. Pizza Hut initiated the rollout of special winter-themed pizzas, featuring grilled cheese, tiger prawns and filet mignon. The company stated to witness higher average tickets backed by the flexibility of option offerings for pizza toppings.Yum China’s constant focus on digital initiatives bodes well. In 2021, the company emphasized in-store digitalization using AI, automation and IoT. To this end, the company unveiled a new system in KFC that tracks real-time store-level inventory and evaluates the quality of food products based on color and shape. Also, the system dispatches coupons to digital ordering users to reduce food waste. With a focus on improving customer experience and operating efficiency, the company stated continued investments in this direction. The company set aside $1 billion in IT and digital-related investments over the next few years.