Kentucky Fried Comps Better Than Expected For Yum China

Morgan Stanley analyst John Glass maintains his Overweight rating and $41 price target on Yum China Holdings Inc (NYSE: YUMC), after the company reported strong second-quarter earnings.

“Following a Q/Q acceleration in KFC SSS, management remains positive on the near-term outlook and is confident in delivering long growth, driven by delivery and digital payment," Glass said. "PH comps remain lackluster, and growing sales is the key to a turnaround. Margin expansion more modest from here, but possible."

KFC Looks To Bring In More Traffic

Bringing in more traffic is one of management’s key priorities going forward, and Glass believes the company’s current estimates are very conservative: “Leverage on strong KFC comps, pricing, and additional store level efficiencies remain potential levers, but even with modest 2H margin expansion, we expect YUMC restaurant margins will be just shy of Yum China Holdings’ long-term restaurant margin goal of 17% by year end, especially as commodity inflation moderates in 2H17.”

Key Takeaways From Earnings

• Traffic-led comps: KFC SSSG at +4 percent (driven by +3-percent growth in traffic and +1 percent in ticket size). Additionally, KFC's same-store sales were in-line with Morgan Stanley's above-consensus estimate.
• Margins: Up 270 basis points to 15.3 percent.
• Delivery and mobile payment: Has grown to 13 percent of sales (12 percent in Q1).
• Number of stores/units: Revamped 287 units (90 new units, 197 were remodeled).
• Loyalty program: Grew from 93 million to 109 million in Q2.
• Guidance: “Management maintained the target of double digit operating growth, with a long-term restaurant level margin of 17% and effective tax rate at high twenties.”

Additional earnings metrics are available on Benzinga Pro.

Overall Outlook

“While we initially favored YUMC as a multiple re-rating story, we believe it is increasingly becoming an earnings revision story and we believe our LT estimates of 3% SSS and 16.5% margins may prove conservative.”

While Glass sees Yum China Holdings as a very difficult company to value, he is clearly eyeing upside from an increase in same-store sales and margin leverage.

At time of publication, shares of Yum China were down 13.58 percent at $34.68.

Related Links

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