Yum China Stock Tumbles on 'Unprecedented' Covid-19 Impact Carried Into Q2

The fast food giant is approaching a Hong Kong offering, but a bad second-quarter and a potential pushback from environmental regulators may cause more short-term woes.

Author: Anna Vodopyanova   

The stock in Yum China Holdings Inc. (NYSE: YUMC) tumbled 6% in early trading Thursday on lower-than-expected revenue in the second quarter.

The operator of KFC, Pizza Hut, Taco Bell, and a number of domestic brands in China called the impact of the Covid-19 outbreak "unprecedented" this year, with sales affected especially by reduced transportation and tourism, as well as delayed and shortened school holidays. The negative effects will last into July, the company said in a statement after markets closed Wednesday.

Yum China posted revenues of $1.90 billion, down 10% compared to the second quarter of 2019. Net income declined 23% to $136 million, or 34 cents per share, according to the report. The drop was offset by $31 million net gains from equity investment in delivery services provider Meituan Dianping.

Despite the setbacks, Yum China continued on its expansion plans and opened 169 new locations during the trimester. Overall, it said, more than 99% of its stores are now open after the Covid-19 closures.

Joey Wat, the chief executive of Yum China, said in the statement that the company was able to adjust to the limitations and expressed thankfulness to the staff.

She stated, "Rapid innovation, our leading digital infrastructure and our membership program supported product launches and value offers that were necessary to drive traffic. We protected margins through the flexible cost structure we have developed and optimized over the years."

Wat also noted that Yum China has reached a milestone of operating 10,000 stores in July.

"Our 2020 target to open 800-850 gross new stores remains unchanged." Wat concluded, "With our innovation capabilities, strong digital strategy, and resilient business model, I believe we will emerge from this pandemic stronger than ever, and ready to capture the exciting long-term market opportunity in China."

Chief financial officer of Yum China, Andy Yeung, noted the improvement in same-store sales at Pizza Hut. The second quarter witnessed a recovery to 88% from 69% in the first trimester, he said.

The results sent China's fast food chain operator stock to $50.45 per American depositary share Thursday morning, on a below-average trading volume of 631,024. That's slightly above YUMC's early January level of near $48 per share and a significant recovery from the dip to $39 per share in mid-March.

Earlier, Yum China had suspended its share buyback plan and cash dividends through the end of the third quarter.

The fast food giant is approaching its secondary listing. Last month, news surfaced that Yum China has confidentially filed for a $2 billion offering in Hong Kong, hoping to follow NetEase (Nasdaq: NTES; HKEX: 9999), JD.com (Nasdaq: JD; HKEX: 9618), and Alibaba Group (NYSE: BABA; HKEX: 9988).

However, Chain Reaction Research (CRR), a provider of sustainability risk analysis, published a 17-page report last week alleging Yum China has a "sizeable deforestation footprint" and faces related financial risks that may raise red flags for ESG regulators – and for investors.

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