Yum China, during its Q3 2023 earnings conference call, unveiled its RGM 2.0 growth strategy, which aims to reach 20,000 stores by 2026, achieve double-digit EPS CAGR, and return $3 billion to shareholders via dividends and share repurchases. Despite anticipating a softer demand in Q4, the company remains hopeful about its long-term growth potential in China. Key takeaways from the call include:
- Yum China opened 500 net new stores in Q3, bringing its total to over 14,000.
- System sales and adjusted operating profit grew by 15% and 21% YoY, respectively.
- The company plans to track sales and cost efficiency amidst expected softening demand in Q4.
- Yum China reported a margin impact of 70 basis points, equivalent to $17 million, due to factors such as wage increase for front-line staff.
- The company generated $410 million in operating cash flow and $243 million in free cash flow in the third quarter.
- KFC's CEO, Joey Wat, announced plans to launch Chinese-style burger products.
- The company is focusing on expanding its product offerings and capturing untapped potential in lower-tier cities.
During the call, the company reported opening 500 net new stores in Q3, bringing its portfolio to over 14,000 stores. System sales grew by 15% YoY, and adjusted operating profit increased by 21% YoY. However, they anticipate softening demand in the fourth quarter and will focus on tracking sales and cost efficiency.The company experienced a margin impact of 70 basis points, equivalent to $17 million, due to factors such as wage increase for front-line staff and normalized staffing levels. Occupancy and other expenses were 40 basis points lower than the prior year due to improvements in rent and depreciation expenses.KFC's CEO, Joey Wat, announced plans to launch Chinese-style burger products. The products have already been test-launched in three provinces, and the progress has been positive. The price point for the burgers is competitive and affordable, targeting lower-tier cities. Wat also mentioned that the company has been able to manage food and paper costs at a stable level over the years.The executives also discussed their plans to expand their product offerings to capture more market share, including the opportunity to serve single-person meals. They are focused on offering affordable products to attract customers in lower-tier cities. The executives acknowledged that the foreign exchange was a challenge for their business but stated that they were doing well in constant currency. The company discussed its approach to managing labor costs and maintaining quality food offerings. They prioritize products that use existing ingredients and are easy to make, while also considering the number of items that staff can handle in stores. The company emphasized the importance of having a strong operational team. When asked about restaurant margins in different tier cities, the company explained that higher tier cities have higher throughput but also higher costs, while lower tier cities have smaller throughput but lower costs, resulting in slightly higher margins. The company expects continued improvement in occupancy and other expenses to sales ratio, due to long-term lease contracts and cost structure initiatives. Overall, Yum China is confident in their RGM 2.0 strategy and aims to reach 20,000 stores by 2026, despite anticipating a softer Q4 in terms of sales and profit.
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