Yum China Reports Fourth Quarter and Full Year 2021 Results

Fourth quarter Total Revenues grew 1%; remained profitable amid COVID-19 impact
Full year Total Revenues grew 19% with Operating Profit of $1.39 billion and Adjusted Operating Profit of $766 million
Accelerated store expansion with record openings of 1,806 gross new stores or 1,282 net new stores in 2021

SHANGHAI, Feb. 9, 2022 /PRNewswire/ — Yum China Holdings, Inc. (the “Company” or “Yum China“) (NYSE: YUMC and HKEX: 9987) today reported unaudited results for the fourth quarter and year ended December 31, 2021.

Impact of COVID-19 Outbreak and Mitigation Efforts 

Multiple waves of Delta variant outbreaks persisted throughout the fourth quarter, spreading to nearly all provinces in China. Case counts in the fourth quarter were the highest since the first quarter of 2020. These widespread outbreaks resulted in more stringent public health measures nationwide in pursuit of a zero-COVID-19 case goal. These preventive measures, which include mass testing, regional lockdowns and travel restrictions, negatively affected the restaurant industry and our business. According to government statistics, total revenues of the restaurant industry in China declined year over year in the fourth quarter. Reduced traveling, fewer social activities and softened consumption demand were observed.

Fluid COVID-19 conditions caused significant volatilities in our fourth quarter operations. From a timing prospective, same-store sales recovered sequentially in early October when COVID-19 conditions were relatively stable. However, as COVID-19 outbreaks resurged, the same-store sales percentage declined by mid-teens year over year in November. Although sales trends recovered moderately, same-store sales still declined by more than 10% year over year in December. By region, the most impacted areas were northern and western China, especially Shaanxi province where the cases were concentrated. Eastern China was also impacted, especially Zhejiang province, which is one of the most economically vibrant provinces and our largest regional market.

Same-store sales in January 2022 improved modestly from the fourth quarter. But comparing to the comparable Chinese New Year holiday period in 2021, same-store sales were still down year over year. The situation remains volatile. In January, cases of the Omicron variant emerged in China, spreading to major cities including Beijing, Shanghai, Tianjin and Shenzhen. A lockdown in Xi’an, which started in December, lasted nearly the whole month of January. A number of regions were identified as medium to high risk with restrictive measures put in place. At the peak in January, over 500 of our stores were temporarily closed or offered only takeaway and delivery services, compared to nearly 300 stores in the fourth quarter. Many provinces have measures discouraging travel during the Chinese New Year holiday, which is one of the most important trading periods in the year. We have launched numerous campaigns to drive traffic and engage customers online and offline. We will also continue to adjust operations and promotional offers as the situation evolves.

Fourth Quarter Highlights

• In December 2021, the Company completed its investment of approximately $255 million for a 28% equity interest in Hangzhou Catering Service Group. As a result, the Company directly and indirectly holds an approximately 60% equity interest in the Hangzhou KFC joint venture (“Hangzhou KFC”). In connection with the transaction, the Company recognized a non-cash gain of $618 million from the fair value re-measurement of our previously held equity interest in Hangzhou KFC. The non-cash gain is recorded as a Special Item that impacts only the reported GAAP results of Yum China.
• Total revenues increased 1% year over year to $2.29 billion from $2.26 billion (a 2% decrease excluding foreign currency translation (“F/X”)).
• Total system sales decreased 3% year over year, with decreases of 3% at KFC and 2% at Pizza Hut, excluding F/X.
• Same-store sales decreased 11% year over year, with decreases of 12% at KFC and 8% at Pizza Hut, excluding F/X.
• Opened 563 gross new stores, or 373 net new stores.
• Restaurant margin was 7.5%, compared with 15.1% in the prior year period, primarily due to sales deleveraging as a result of worsened COVID-19 conditions.
• Operating Profit increased to $633 million from $180 million, primarily due to the non-cash gain of $618 million from the re-measurement of our previously held equity interest in Hangzhou KFC.
• Adjusted Operating Profit decreased 91% year over year to $16 million from $182 million (a 92% decrease excluding F/X).
• Effective tax rate was 25.1%.
• Net Income increased to $475 million from $151 million in the prior year period, primarily due to the increase in Operating Profit and partially offset by the loss from mark-to-market investment in Meituan Dianping (“Meituan”).
• Adjusted Net Income decreased 93% to $11 million from $153 million in the prior year period (an 85% decrease excluding the net loss of $9 million in the fourth quarter of 2021 and the net gain of $23 million in the fourth quarter of 2020, respectively, from the mark-to-market equity investment in Meituan; an 85% decrease if further excluding F/X).
• Diluted EPS increased to $1.10 from $0.35 in the prior year period.
• Adjusted Diluted EPS decreased 91% to $0.03 from $0.35 in the prior year period (an 83% decrease excluding the net loss in the fourth quarter of 2021 and the net gain in the fourth quarter of 2020, respectively, from the mark-to-market investment; an 83% decrease if further excluding F/X).
• Results include the consolidation of Hangzhou KFC since December 2021.

Full Year Highlights

• Total revenues increased 19% year over year to $9.85 billion from $8.26 billion (a 12% increase excluding F/X).
• Total system sales increased 10% year over year, with increases of 8% at KFC and 14% at Pizza Hut, excluding F/X.
• Same-store sales decreased 1% year over year, with a decrease of 3% at KFC and an increase of 7% at Pizza Hut, excluding F/X.
• Total store count reached 11,788 as of December 31, 2021, with record gross new store openings of 1,806, or 1,282 net new store openings during the year.
• Restaurant margin was 13.7%, compared with 14.9% in the prior year.
• Operating Profit increased 44% year over year to $1.39 billion from $961 million (a 34% increase excluding F/X), primarily due to the non-cash gain from the re-measurement of our previously held equity interest in Hangzhou KFC in the fourth quarter of 2021.
• Adjusted Operating Profit increased 5% year over year to $766 million from $732 million (a 2% decrease excluding F/X).
• Effective tax rate was 26.5%.
• Net Income increased 26% to $990 million from $784 million in the prior year, primarily due to the increase in Operating Profit partially offset by loss from mark-to-market investments.
• Adjusted Net Income decreased 15% to $525 million from $615 million in the prior year (a 7% increase excluding the net loss of $52 million in 2021 and the net gain of $75 million in 2020, respectively, from mark-to-market investments; or a 1% decrease if further excluding F/X).
• Diluted EPS increased 17% to $2.28 from $1.95 in the prior year.
• Adjusted Diluted EPS decreased 21% to $1.21 from $1.53 in the prior year (a 1% decrease excluding the net loss in 2021 and the net gain in 2020, respectively, from mark-to-market investments; a 7% decrease if further excluding F/X).
• Approximately 41.9 million shares of common stock were issued as a result of the secondary listing in Hong Kong in September 2020. On a year over year basis, the dilution impact from the weighted average share count was 7% in 2021.

Key Financial Results

CEO and CFO Comments

Joey Wat, CEO of Yum China, commented, “As I reflect on the past year, I want to thank our team for their unwavering commitment and tremendous effort. Together, we overcame operating challenges, grew the business and delivered substantial profits for the full year. We continue to focus on offering good food, great value and a seamless customer experience. At KFC, new menu categories such as beef burgers and whole chicken have received great customer feedback and are now permanent items on the menu. With the strong brand positioning, KFC continues to set new records for its restaurant openings. Pizza Hut improved profitability and reaccelerated its store openings to the highest level since 2016. Lavazza expanded from four stores to 58 stores. Our new retail business is also gaining momentum in capturing at-home consumption. We continue to build our industry leading membership program, which has grown 20% in the past year to over 360 million members. With enhanced digital capabilities, digital sales exceeded $7 billion, or over 85% of Company sales. Moreover, we strengthened our market leadership with record openings of over 1,200 net new stores while maintaining healthy new store payback.”

Wat continued, “Looking ahead, we continue to face significant uncertainties from the COVID-19 situation and other headwinds from the external environment. But with our product innovation capabilities, world-class operational excellence and agility, I am confident that we will emerge from the pandemic even stronger than before. We are staying the course to reach our next milestone of 20,000 stores. Our innovative store models are creating new opportunities, enabling us to penetrate further into lower-tier cities and expand more flexibly in higher-tier cities. We will continue to apply a disciplined and systematic approach in opening new stores to ensure profitable growth of the business.”

Andy Yeung, CFO of Yum China, added, “The COVID-19 situation presented tremendous volatility to our operations. We delivered strong performance in the first half of the year when COVID-19 conditions were relatively stable. In the second half, our business was significantly affected by regional outbreaks and tighter public health measures. The fourth quarter was particularly challenging with multiple widespread outbreaks and also being the seasonally smallest quarter. Nonetheless, with great effort from the entire team, we delivered positive revenue growth in the quarter. Proactive cost management and productivity enhancement enabled us to partially mitigate the headwinds from substantial sales deleveraging and cost inflation, generating profit in a very difficult quarter. For 2022, we expect our business and operating environment to remain challenging and volatile given the uncertainties of COVID-19, the weak macro environment, softening consumer sentiment and inflation headwinds. Despite the challenges, we have strong capabilities and are taking actions to drive sales and manage costs. We are also stepping up investments in supply chain, infrastructure and digital in 2022 to drive long-term sustainable growth of the business.”

Dividends and Share Repurchases

• The Board of Directors declared a cash dividend of $0.12 per share on Yum China’s common stock, payable as of the close of business on March 29, 2022 to shareholders of record as of the close of business on March 8, 2022.
• During the fourth quarter, we repurchased approximately 0.74 million shares of Yum China common stock for $41.4 million at an average price of $55.66 per share. As of December 31, 2021, approximately $617 million remained available for future share repurchases under the current authorization.

Digital and Delivery 

• The KFC and Pizza Hut loyalty programs exceeded 360 million members combined as of quarter-end. Member sales accounted for approximately 60% of system sales in the fourth quarter of 2021.
• Delivery contributed approximately 35% of KFC and Pizza Hut’s Company sales in the fourth quarter of 2021, an increase of approximately six percentage points from the prior year period as COVID-19 cases resurged during the quarter.
• Digital orders, including delivery, mobile orders and kiosk orders, accounted for approximately 88% of KFC and Pizza Hut’s Company sales in the fourth quarter of 2021.

New-Unit Development and Asset Upgrade

• Yum China opened 563 gross new stores, or 373 net new stores in the fourth quarter of 2021 and 1,806 gross new stores, or 1,282 net new stores in the full year 2021, mainly driven by development of the KFC and Pizza Hut brands.
• The Company remodeled 207 stores in the fourth quarter of 2021 and 842 stores in the full year 2021.

Restaurant Margin

• Restaurant margin was 7.5% in the fourth quarter of 2021, compared with 15.1% in the prior year period, primarily attributable to sales deleveraging, cost inflation, increased value promotions and increased rider cost associated with rising delivery volume.
• Restaurant margin was 13.7% in the full year 2021, compared with 14.9% in the prior year, primarily attributable to increased value promotions, lower temporary relief provided by landlords and government agencies and wage inflation, partially offset by lower commodity prices.

2022 Outlook

The Company currently expects:

• Approximately 1,000 to 1,200 net new stores.
• Capital expenditures in the range of $800 million to $1 billion, which includes stepped-up investments in supply chain, infrastructure and digital.

Other Updates

• Recognizing the tremendous effort of our employees especially in navigating the COVID-19 situation, the Company has upgraded the medical insurance coverage of its front-line employees. Medical insurance coverage for each eligible restaurant general manager (RGM) was increased to RMB 1 million. Critical illness insurance was extended to service team leaders and coverage was increased for family members of both RGMs and other restaurant management team members. These enhanced benefits are expected to cover around 100,000 front-line employees and their family members.
• In recognition of the Company’s commitment and continued progress in sustainability, the Company received an “A” rating in the MSCI Environmental, Social and Governance (ESG) Ratings for 2021 and one of the best scores out of 28 companies assessed in the Restaurant & Leisure Facilities Industry in the S&P Global Corporate Sustainability Assessment (CSA) 2021. Yum China was the only company from mainland China selected as a member of DJSI World. In addition, Yum China was named for the fourth consecutive year to the Bloomberg Gender-Equality Index (GEI).

Note on Non-GAAP Adjusted Measures

Reported GAAP results include Special Items, which are excluded from non-GAAP adjusted measures. Special Items are not allocated to any segment and therefore only impact reported GAAP results of Yum China. See “Reconciliation of Reported GAAP Results to Non-GAAP Adjusted Measures” within this release.

Conference Call

Yum China’s management will hold an earnings conference call at 7:00 p.m. U.S. Eastern Time on Tuesday, February 8, 2022 (8:00 a.m. Beijing/Hong Kong Time on Wednesday, February 9, 2022).  

A live webcast of the call may be accessed at https://edge.media-server.com/mmc/p/vs49ywki.

To join by phone, please register in advance of the conference through the link provided below. Upon registering, you will be provided with participant dial-in numbers, a passcode and a unique registrant ID.

Pre-registration Link:              http://apac.directeventreg.com/registration/event/1696142
Conference ID:                       1696142

A replay of the conference call will be available two hours after the call ends until 8:00 a.m. U.S. Eastern Time on Wednesday, February 16, 2022 (9:00 p.m. Beijing/Hong Kong Time on Wednesday, February 16, 2022) and may be accessed by phone at the following numbers:

Additionally, this earnings release, the accompanying slides, a live webcast and an archived webcast of this conference call will be available at Yum China’s Investor Relations website at http://ir.yumchina.com. 

For important news and information regarding Yum China, including our filings with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange, visit Yum China’s Investor Relations website at http://ir.yumchina.com. Yum China uses this website as a primary channel for disclosing key information to its investors, some of which may contain material and previously non-public information.

Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including under “2022 Outlook.” We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as “expect,” “expectation,” “believe,” “anticipate,” “may,” “could,” “intend,” “belief,” “plan,” “estimate,” “target,” “predict,” “project,” “likely,” “will,” “continue,” “should,” “forecast,” “outlook” or similar terminology. These statements are based on current estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable under the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Forward-looking statements include, without limitation, statements regarding the future strategies, growth, business plans, investment, dividend and share repurchase plans, earnings, performance and returns of Yum China, anticipated effects of population and macroeconomic trends, the expected impact of the COVID-19 pandemic, the anticipated effects of our innovation, digital and delivery capabilities and investments on growth and beliefs regarding the long-term drivers of Yum China’s business. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks and uncertainties that are difficult to predict and could cause our actual results or events to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or assumptions will be achieved. The forward-looking statements included in this press release are only made as of the date of this press release, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. Numerous factors could cause our actual results or events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: whether we are able to achieve development goals at the times and in the amounts currently anticipated, if at all, the success of our marketing campaigns and product innovation, our ability to maintain food safety and quality control systems, changes in public health conditions, including the COVID-19 pandemic and regional outbreaks caused by existing or new COVID-19 variants, our ability to control costs and expenses, including tax costs, as well as changes in political, economic and regulatory conditions in China. In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q) for additional detail about factors that could affect our financial and other results.

About Yum China Holdings, Inc.

Yum China Holdings, Inc. is a licensee of Yum! Brands in mainland China. It has exclusive rights in mainland China to KFC, China’s leading quick-service restaurant brand, Pizza Hut, the leading casual dining restaurant brand in China, and Taco Bell, a California-based restaurant chain serving innovative Mexican-inspired food. Yum China also owns the Little Sheep, Huang Ji Huang, East Dawning and COFFii & JOY concepts outright. In addition, Yum China has partnered with Lavazza to explore and develop the Lavazza coffee shop concept in China. The Company had 11,788 restaurants in over 1,600 cities at the end of December 2021.

In 2021, Yum China ranked # 363 on the Fortune 500 list and was named to TIME100 Most Influential Companies list. Yum China has also been selected as member of both Dow Jones Sustainability Indices (DJSI): World Index and Emerging Market Index. In 2022, the Company was named to the Bloomberg Gender-Equality Index and was certified as a Top Employer 2022 in China by the Top Employers Institute, both for the fourth consecutive year. For more information, please visit http://ir.yumchina.com.

In this press release:

• The Company provides certain percentage changes excluding the impact of foreign currency translation (“F/X”). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the F/X impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.
• System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our restaurant concepts, except for non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the Company at an average rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurant sales are not included in Company sales in the Condensed Consolidated Statements of Income; however, the franchise fees are included in the Company’s revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth.
• Effective January 1, 2018, the Company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year, excluding the period during which stores are temporarily closed. We refer to these as our “base” stores. Previously, same-store sales growth represented the estimated percentage change in sales of all restaurants in the Company system that have been open for one year or more, including stores temporarily closed, and the base stores changed on a rolling basis from month to month. This revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores.
• Company sales represent revenues from Company-owned restaurants. Company Restaurant profit (“Restaurant profit”) is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales.

Reconciliation of Reported GAAP Results to Non-GAAP Adjusted Measures
(in millions, except per share data)
(unaudited)

In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) in this press release, the Company provides non-GAAP measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted Earnings Per Common Share (“EPS”), Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, net, investment gain or loss, certain non-cash expenses, consisting of depreciation and amortization as well as store impairment charges, and Special Items.

The following table set forth the reconciliation of the most directly comparable GAAP financial measures to the non-GAAP adjusted financial measures.

Net income, along with the reconciliation to Adjusted EBITDA, is presented below:

Details of Special Items are presented below:

⁽¹⁾  In the quarters ended December 31 and September 30, 2021, as a result of the consolidation of Hangzhou KFC and the Lavazza joint venture, the Company recognized a gain of $618 million and $10 million, respectively, from the re-measurement of our previously held equity interest at fair value. In the quarter ended September 30, 2020, the Company recognized a re-measurement gain of $239 million as a result of the consolidation of Suzhou KFC. The re-measurement gains were not allocated to any segment for performance reporting purposes.

⁽²⁾  In February 2020, the Company granted Partner PSU Awards to select employees who were deemed critical to the Company’s execution of its strategic operating plan. These PSU awards will only vest if threshold performance goals are achieved over a four-year performance period, with the payout ranging from 0% to 200% of the target number of shares subject to the PSU awards. Partner PSU Awards were granted to address increased competition for executive talent, motivate transformational performance and encourage management retention. Given the unique nature of these grants, the Compensation Committee does not intend to grant similar, special grants to the same employees during the performance period. The impact from these special awards is excluded from metrics that management uses to assess the Company’s performance. The Company recognized share-based compensation cost of $1 million and $8 million associated with the Partner PSU Awards for the quarter and year ended December 31, 2021, respectively, and $2 million and $7 million for the quarter and year ended December 31, 2020, respectively.

⁽³⁾  In the quarter ended June 30, 2020, the Company derecognized a $3 million indemnification asset previously recorded for the Daojia acquisition as the indemnification right expired pursuant to the purchase agreement. The amount was included in Other income, net, but was not allocated to any segment for performance reporting purposes.

⁽⁴⁾  The tax expense was determined based upon the nature, as well as the jurisdiction, of each Special Item at the applicable tax rate.

The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax, interest income, net, investment gain or loss, depreciation and amortization, store impairment charges, and Special Items. Store impairment charges included as an adjustment item in Adjusted EBITDA primarily resulted from our semi-annual impairment evaluation of long-lived assets of individual restaurants, and additional impairment evaluation whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If these restaurant-level assets were not impaired, depreciation of the assets would have been recorded and included in EBITDA. Therefore, store impairment charges were a non-cash item similar to depreciation and amortization of our long-lived assets of restaurants. The Company believes that investors and analyst may find it useful in measuring operating performance without regard to such non-cash item.

These adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP.  Rather, the Company believes that the presentation of these adjusted measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to their nature.