Here's Why Yum China Stock Dropped Today

Shares of restaurant company Yum China (YUMC -6.42%) — parent company of KFC, Pizza Hut, and more in China — dropped on Tuesday after it reported financial results for the first quarter of 2024. The company grew sales by opening new restaurants, but sales at existing restaurants fell, which was not something investors cared for. As of 10 a.m. ET, Yum China stock was down 6%, but it had been down 10% earlier in the day.

The growth engine is still purring

In Q1, Yum China surpassed 15,000 restaurant locations, including over 10,600 KFC locations and over 3,400 Pizza Hut locations. Overall, the company opened nearly 400 new restaurants in Q1, which boosted total sales by 6% year over year. However, same-store sales pulled back by 3%, weighing negatively on the stock today.

Also weighing negatively on Yum China is its profitability. The company had a Q1 operating margin of 12.7%, which isn’t bad in absolute terms. However, it is a step back from the 14.3% operating margin it had in the prior-year period.

This lower profit margin caused Yum China’s operating profit to drop by 5% year over year. And when factoring in an unfavorable currency exchange rate, the company’s operating profit dropped 10% in dollar terms.

What’s in it for shareholders?

Yum China opened a record number of restaurants in Q1 and expects to open 1,500 to 1,700 total for the year. That’s strong double-digit growth for this portfolio of brands that’s resonating in China. Moreover, management for Yum China plans to give $1.5 billion back to shareholders this year between stock buybacks and dividend payments.

For perspective, Yum China has a market capitalization of just a little more than $14 billion. Relative to its size, the company is planning big growth and compelling returns to shareholders in the coming year. With today’s drop in price, I think Yum China deserves a place on a watch list at least.