Here’s the 1 Reason Yum China Is the Restaurant Growth Stock You Need

Mainland China’s largest restaurant chain, Yum China, is starting to lap depressed financial results from when the pandemic started over a year ago, and it’s creating some dramatic operating results upside for the company. But COVID-19 is still a serious problem for the sole operator of KFC and Pizza Hut in China (it licenses the two fast-food brands from former parent Yum! Brands.

No bother. Yum China had already built a huge digital presence before the pandemic, and that’s helping it remain in growth mode despite ongoing disruption. This is the restaurant growth stock investors need for a post-pandemic world.

A long road to retaking pre-pandemic sales

Yum China is already on a path to recovery, but the road ahead will still be fraught with challenges. New restrictions on travel within China during the more than one-month-long Chinese New Year period in January and February took a bite out of some of the rebound as KFC, Pizza Hut, and Yum China’s wholly owned brands started to lap the initial outbreak of COVID-19 from last year. The company cited government statistics showing travel during first-quarter 2021 was down some 40% from 2020 levels and 70% from 2019.

Nevertheless, all was not lost. It will take time for average store sales volume to return to pre-pandemic figures, but Yum China’s more than 1,400 new locations in operation (total count of 10,725 at the end of March compared to 9,295 a year ago) helped. So did a rally in same-store sales (traffic and guest ticket size at existing stores), even though on average 2019 remains the high water mark for most of the existing KFCs and Pizza Huts in China.

Metric Q1 2021 Q1 2020 Q1 2019
Revenue $2.56 billion $1.75 billion $2.30 billion
Same-store sales increase (decrease) 10% (15%) 4%
Restaurant margin 18.7% 10.7% 18.5%
Adjusted net income $233 million $63 million $230 million

The world’s largest digital restaurant ecosystem

The rising number of restaurants in Mainland China is only part of the story here. Despite the average KFC and Pizza Hut still selling less food than pre-pandemic, how is Yum China generating new all-time high revenue and profitability? In a word: Mobility.

You see, Yum China has the world’s largest online membership database in the restaurant industry. At the end of March 2021, it reported over 315 million members and counting — up from some 300 million reported just three months ago. Roughly 84% of total revenue in the quarter was placed digitally, and 29% of it was delivered to the customer. Ongoing COVID-19 restrictions or not, Yum China built itself for the digital age in which we now live.

Though movement is limited at the moment, that isn’t too big of a hindrance here. Dining rooms will remain under pressure until novel coronavirus stops spreading, but most of Yum China’s sales occur off-premises. This massive digital fan base that’s bigger than most countries’ population is a key competitive advantage for China’s restaurant leader.

After the Q1 report, this is one reasonably priced restaurant stock. Shares trade for 33 times trailing 12-month adjusted earnings per share, a figure that will improve dramatically as Yum China laps more depressed financial results in the second and third quarters. Add in management’s expectation for about 1,000 new location openings, and the stock looks like a long-term value. I remain a buyer here.

Nicholas Rossolillo, The Motley Fool