Skip to Content
Stock Analyst Update

Coronavirus Sets Up Yum China for a Challenging 2020

Despite the outbreak, we're not planning material changes to our fair value estimate and see several reasons why investors should remain optimistic.

Mentioned:

Wide-moat Yum China's (YUMC) solid finish to 2019 (3% comps at KFC, flat comps at Pizza Hut, 90 basis points of restaurant margin expansion to 12.4%) was overshadowed by the impact of the coronavirus outbreak. While other consumer companies have provided cautionary statements about the impact of coronavirus, Yum China offered the most details to date, saying that had temporarily closed one third of its restaurants (more than 3,000) and that comps at those locations that remained open fell between 40%-50% during the Chinese New Year holiday (though it noted that delivery sales "have held up well"). Management also warned that the company could post an operating loss during the first quarter, and if sales trends continue, the full year. While the coronavirus situation remains fluid, we expect full-year comps to decline 15%-20% (including 30%-40% in the first quarter) with operating margins coming in just above breakeven.

While the impact of coronavirus appears to be more significant than previous illnesses in the region and Yum China has a long year ahead, we're not planning material changes to our $54 fair value estimate and see several reasons why investors should remain optimistic. First, delivery represented 21% of sales in 2019, and while this channel will not be sufficient to offset physical store traffic declines, near-term consumer adoption trends could lead to increased delivery order frequency as discretionary spending in the region recovers. Second, value-oriented players tend to outperform during times of uncertainty, positioning KFC (and Pizza Hut's recent price alignment efforts to a lesser extent) for transaction outperformance as the year progresses. Third, periods of uneven spending force consumer companies to become more efficient operators. This includes discussions with suppliers/landlords for more favorable pricing terms, something that could materialize as Yum China remains aggressive with restaurant openings (including 800-850 in 2020).

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.