Yum China Profit Plunged 89% In 4th Qtr As Covid Wave Hurt Spending

Widespread Covid outbreaks in mainland China in the fourth quarter of 2022 hurt earnings and revenue at Yum China, the country’s largest restaurant company.

Net income at the operator of KFC and Pizza Hut eateries plunged by 89% from a year earlier to $53 million, the company said in a new filing. Revenue in Oct.-Dec. fell by 9% to $2.09 billion.

Nevertheless, Yum China said it was “cautiously optimistic” this year and aims to make new investments and expand.

Spun off from Yum! and run as an independent company since 2016, Yum China is the largest restaurant chain in the mainland with nearly 13,000 restaurants across 1,800 cities as of December. CEO Joey Wat ranked No. 76 on the 2022 Forbes Powerwomen List published last December.

“In December, the government issued a series of new COVID response guidelines that significantly changed its COVID policies, including removing mass testing and central quarantine requirements as well as lifting travel restrictions,” the company said. “A massive wave of infections quickly surged in the country, spreading from major cities such as Beijing, Guangzhou and Shanghai.”

“Due to widespread infections, we experienced a shortage of restaurant staff which led to over 1,300 stores on average being either temporarily closed or offering limited services during December. As a significant portion of the population was either infected or chose to stay home to avoid infection, dine-in traffic declined substantially.”

Yum China reallocated crew among stores to prioritize stores with stronger demand. “Many of the stores that remained open operated with shortened operating hours and a simplified menu to streamline operations,” it said.

Looking ahead, Yum China said: “ As the country enters the new phase of COVID response, we are cautiously optimistic. The overall business environment and consumer sentiment have improved but near term uncertainties remain.”

“Consumers tend to be more careful with spending after holidays,” it noted. “Experiences in other countries also suggest further outbreaks following relaxation of Covid restrictions and emergence of different Covid variants are real possibilities. A portion of the population may remain cautious about going out in public, while macroeconomic factors such as an inflationary environment and softening global economic conditions may weigh on consumer spending.”

Nevertheless, Yum China said it plans to add a net 1,100 to 1,300 new stores, and spend $700 million to $900 million on capital expenditure, in 2023.

Investors hoping for better growth this year have bid up the company’s U.S.-traded shares by more than 55% since late October, when China started to ease its stringent “zero-Covid” measures. Its shares also trade in Hong Kong.

The country’s economic outlook remains better than many countries this year. The International Monetary Fund projects GDP will grow 5.2% this year compared with 3% in 2022.

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@rflannerychina