Yum China (YUMC) Q1 2026 Earnings Transcript

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Date

Wednesday, April 29, 2026 at 7 a.m. ET

Call participants

- Chief Executive Officer — Joey Wat

- Chief Financial Officer — Adrian Ding

- Chief Communications Officer — Florence Lip

Full Conference Call Transcript

Joey Wat: Hello, everyone, and thank you for joining us. Once again, we delivered solid results in a dynamic environment, reflecting the successful execution of our RGM 3.0 strategy, which balances resilience, growth and moat. In quarter 1, revenue grew 10% and operating profit increased 12% in reporting currency, supported by a positive foreign exchange impact. We opened 636 net new stores, more than 1/3 of our full year target and ahead of schedule. Even as we accelerated store expansion to capture market opportunities, we maintained a dual focus on same-store sales growth and system sales growth. Same-store sales growth was slightly positive, though rounded to 0. Same-store transaction grew for the 13th consecutive quarter.

Excluding foreign exchange impact, system sales grew 4%, operating profit increased 6% and operating profit margin expanded 20 basis points year-over-year. This marks the eighth consecutive quarter in which we delivered growth across all 3 metrics at the same time. By brand, KFC remained resilient. Same-store sales grew 1%, the fourth consecutive quarter of growth. System sales increased by 5% and restaurant margins remained very healthy at 19.1%. Pizza Hut continued to grow in scale and profitability, delivering 18% operating profit growth on top of 27% growth in quarter 1 last year, both in reporting currency. Same-store transactions grew for the 13th consecutive quarter, while restaurant margins improved 60 basis points year-over-year to 15%.

I would like to say a big thank you to our team for delivering solid results in this fast-changing environment. We maintain a strong focus on innovation and operational efficiency. Let me share a few updates on our key initiatives, and then I will hand it over to Adrian to go through our results in more detail. It always begins with good food and great value. During Chinese New Year, we offered a wide range of options to cater to both group gatherings and solo diners. At KFC, in addition to our signature Golden Bucket, we launched classic limited time offers LTOs such as Shrimp Burger, beef wrap and Win Bucket to drive additional traffic.

Building on last year's hugely successful LTO campaign, Crackling Golden Chicken Wings became the first new permanent product we introduced during CNY to our menu. KFC's innovative side-by-side modules are scaling rapidly, delivering meaningful incremental sales and profit. KCOFFEE Cafes are now in over 2,600 locations and KPRO in more than 280 locations. KCOFFEE Cafe generated around mid-single-digit sales uplift and KPRO around 20% to their parent KFC stores in quarter 1. Our consumer insights help us identify consumer needs and our front-end segmentation and back-end consolidation approach help us meet these needs effectively by sharing resources with the parent stores. These modules cross-sell existing members and require far lower investment and operating costs, making them attractive business models.

Adrian will provide more updates on these 2 modules later in the call. At Pizza Hut, alongside our classic Super Supreme campaign for Chinese New Year, we collaborated with popular IPs like [ Gunder ] and Butterbear and launched our Signature All-You-Can-Eat campaign. In quarter 1, Pizza Hut accelerated expansion with 207 net new stores. That's nearly half of last year's full year net new openings. Over 100 new stores used the WOW format, most of them in new cities. Its lower CapEx model and simpler operations supported by franchisee model opened up opportunities in lower-tier cities.

We also continued to fine-tune the WOW model and enhance the menu, adding signature items from Pizza Hut's main menu while keeping its most popular value items to strengthen both relevance and appeal. Let me now turn the call over to Adrian. Adrian?

Adrian Ding: Thank you, Joey. Let me update key highlights by brand, starting with KFC. In quarter 1, KFC system sales grew 5%. Same-store sales increased 1%, marking its fourth consecutive quarter of growth. Same-store transactions also grew 1%, while ticket average was down 1%. The rapid growth of smaller orders was largely offset by the increased delivery mix, which carries a relatively higher ticket average. KFC's breakthrough side-by-side modules continue their strong momentum and drive incremental sales and profit to their parent stores. We added around 400 KCOFFEE Cafes in quarter 1, bringing the total to over 2,600 locations across all city tiers. With broader coverage and rising daily cups sold per store, KCOFFEE Cafe sales more than doubled year-over-year.

We expect KCOFFEE Cafe to keep growing rapidly to unlock further potential and reach 5,000 locations by year-end 2027, 2 years ahead of our original target shared at our last year's Investor Day. KPRO also gained momentum, reaching 280 locations, up from 200 at the end of 2025. While primarily focused on Tier 1, Tier 2 cities, we're expanding into select Tier 3 cities as well, especially in Eastern and Southern China, where the demand for live meals is stronger. KPRO is performing well and showing margin improvement, driven by agile module iteration, including menu innovation and reduced investment requirements.

With that, we're raising our KPRO target to 600 locations by year-end, an increase of 200 compared to our plan shared earlier this year. Now moving on to Pizza Hut. In quarter 1, system sales grew 4% year-over-year and same-store sales were 99% of the prior year period's level. This year's CNY took place considerably later than usual. Pizza Hut as a casual dining concept saw a modest impact as dining and gathering patterns shifted around the Chinese New Year holiday. In March, we brought back our popular All-You-Can-Eat campaign for a limited time. Now in its fifth year, this campaign has become a signature, attracting consumers to try new dishes, effectively driving traffic and broadening appeal.

Same-store transactions grew 5% in quarter 1, marking its 13th consecutive quarter of growth. Ticket average was down 5% year-over-year, in line with our mass market strategy and driven mainly by better value for money offerings. Pizza Hut TA is moving closer to our long-term target range of CNY 60 to CNY 70 as shared at last year's Investor Day. Even with the lower TA, Pizza Hut restaurant margin expanded by 60 basis points year-over-year to 15.0%. OP margin also increased by 100 basis points. Efficiency continued to improve at Pizza Hut as we streamlined store operations, centralized processes and advanced automation, supported by our strong food innovation, supply chain and digital capabilities. Now moving on to store opening.

We accelerated store openings in quarter 1 to record levels for Yum China, KFC and Pizza Hut. With 636 net new stores in the quarter, we're on track to open more than 1,900 net new stores for the full year and to surpass 20,000 total stores in 2026. Franchisees contributed 42% of KFC and Pizza Hut's net new stores in quarter 1, helping us capture incremental opportunities in lower-tier cities, remote areas and strategic locations. Our franchise portfolio exceeded 2,500 stores at the end of the quarter 1, up from around 1,800 a year ago. We expect to continue driving store network growth with capital efficiency and improving our ROIC over time.

Our flexible store models continue to support franchise growth. Pizza Hut's WOW store model is making good progress. Store count doubled year-over-year to around 390. In quarter 1, restaurant margins of new equity WOW stores were already in line with the Pizza Hut's main model. In addition to standard WOW stores, we're also opening WOW stores side-by-side with KFC, which we refer to as the Gemini model. Nearly 80 WOW openings in quarter 1 were Gemini stores, mostly in new lower-tier cities and operated by franchisees. With rising car ownership and the expansion of highway network, we're leveraging franchisees resources to tap into the growing on-the-road demand.

We have already signed franchise agreements with more than a dozen provincial and municipal highway operators, [indiscernible] to open stores at their highway service stations. In just over a year, we added nearly 100 stores and are accelerating the pace this year. We're also meeting new customer needs through innovative solutions. Traditionally, drive-thrus require dedicated car lanes. We expand on this by offering car side pickup at locations without such length but with pullover areas, where our crew brings orders straight to consumers' cars. This approach significantly reduces capital expenditure requirements and give us the greater flexibility in driving takeaway sales.

Today, more than 7,000 KFC stores offer either the traditional drive-thru or car side pickup services, up from around 2,000 a year ago. While still early in building awareness and habits, in quarter 1, nearly 1/3 of drive-thru customers made repeat purchases, showing strong potential and stickiness. We're partnering with multiple car companies, including BYD, to enable in-car ordering and select stores will have fast charging stations in store nearby to offer even greater convenience. Let me now go through our Q1 P&L. System sales grew 4% year-over-year. Same-store sales grew slightly year-over-year, but rounded down to 100% of prior year levels. Our performance in January and February was broadly in line with our expectations.

March came in slightly softer than expected as it fell between the Chinese New Year holidays and the additional spring break in several provinces and compared against last year's strong IP campaigns. Our restaurant margin was 18.2%, 40 basis points lower year-over-year. The decrease was primarily due to increased rider cost from higher delivery mix, partially offset by improved operational efficiency. Cost of sales was 31.6%, 40 basis points higher year-over-year, mainly due to strong value for money offerings. The tailwind from favorable commodity prices is also less than before. Cost of labor was 26.7%, 100 basis points higher year-over-year.

Rider costs increased year-over-year, driven by the strong growth in delivery sales mix, which went up from 42% last year to 54% this year. Rider costs now account for close to 30% of our cost of labor. The margin impact was 190 basis points, and we mitigate around half of that through enhanced store operations. Occupancy and other was 23.5%, 100 basis points lower year-over-year, mainly due to better rent and other initiatives to improve operational efficiency. Our OP margin was 13.7%, 20 basis points higher year-over-year, achieving the eighth consecutive quarter of OP margin expansion. Savings in G&A expenses helped improve OP margins. Operating profit was $447 million, a first quarter record, growing 6% year-over-year.

Net income was $309 million, flat year-over-year. Excluding our investment in Meituan, net income grew 4% year-over-year. Our investment in Meituan had a negative impact of $9 million in quarter 1 compared to a positive impact of $2 million in quarter 1 last year. As a reminder, we recognized $10 million less in interest income in quarter 1 this year due to a lower cash balance resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was $0.87, 7% higher year-over-year or up 11% year-over-year, excluding our investment in Meituan. Now moving on to our 2026 outlook, starting with the second quarter.

On sales, we are working hard to deliver positive same-store sales growth and the 14th consecutive quarter of positive same-store transaction growth. March, sitting between Chinese New Year and the extra school spring break in April was slightly softer. However, April benefited from the additional traffic. Taken together, March and April were broadly in line with our expectations, giving us confidence that same-store sales growth will sequentially improve for Yum China, KFC and Pizza Hut in quarter 2. On margins, rider costs remain the biggest headwind. Although delivery platform subsidies have moderated slightly, we expect delivery sales to continue growing, which means rider cost pressure will persist.

That said, the tough year-over-year comparison we faced in quarter 1 restaurant margin will ease slightly in quarter 2. At this point in time, we expect the situation in the Middle East to have limited impact on the cost of sales this year. We have already secured the majority of this year's procurement contracts. We'll continue to monitor the situation closely and manage our procurement and logistics nimbly. We'll maintain our dual focus on driving same-store sales growth and system sales growth while keeping our operations efficient. All in all, we strive to maintain OP margin roughly in line with the prior year period in quarter 2.

As for second half, we expect sequential improvement in year-over-year margin comparisons versus the first half. With higher delivery sales mix last year, the incremental rider cost pressure should moderate. Our initiatives to optimize operational efficiency and store costs, including rent, labor productivity, capital expenditure are also expected to support margin expansion. We are confident in meeting the full year targets for 2026, which are consistent with the ranges we shared at our Investor Day last year and in February. These include same-store sales index of 100 to 102, mid- to high single-digit system sales growth, high single-digit operating profit growth, double-digit EPS growth, a slight improvement in restaurant margin and OP margin for Yum China.

Additionally, we remain on track to reach 20,000 stores by year-end. In terms of capital returns to shareholders, in quarter 1, we returned $316 million with $214 million in share repurchases and $102 million in quarterly cash dividends. We're on track to return $1.5 billion to shareholders for the full year 2026, around 9% of our current market cap. Of the $1.5 billion, we expect around $400 million to be distributed as dividends and $1.1 billion to be allocated to share repurchases through a mix of systematic and discretionary buybacks. From 2027, we plan to return approximately 100% of our annual free cash flow after subsidiaries dividend payments to noncontrolling interest.

This is expected to be an average of $900 million to $1 billion plus in 2027 and 2028 and exceed $1 billion in 2028 and onwards. With that, let me hand it back to Joey for her closing remarks.

Joey Wat: Thanks, Adrian. Let's take a moment to highlight our key growth drivers in quarter 2 and beyond. At KFC, our 6 hero products provide a solid foundation, accounting for around 30% of sales and are purchased by about 80% of our active members. We keep innovating to driv