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Yum China (YUMC) Stock Decline Analysis Unfavorable Conditions Cause Significant Drop in Yum China Stock

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Shares of Yum China Holdings, Inc. YUMC have plummeted a staggering 25.2% over the last year, a stark contrast to the industry’s 9.1% rise. What exactly is causing this drastic decline in the company’s stock prices?

This Zacks Rank #5 (Strong Sell) company recently reported underwhelming third-quarter 2023 results, with earnings failing to meet the Zacks Consensus Estimate. The company garnered adjusted earnings per share (EPS) of 59 cents, falling short of the Zacks Consensus Estimate of 66 cents. This is a significant drop from the adjusted EPS of 49 cents reported in the year-ago quarter.

Experts have downgraded earnings estimates for 2024 by 12.4% to $2.18 per share over the past 60 days. So, what are the specific factors contributing to this downfall we’re witnessing?

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Primary Concerns

Yum China has fallen prey to the adverse effects of inflation on commodities and wages, as well as a challenging macro environment.

The company witnessed a whopping 9.4% increase in total costs and expenses to $2,591 million in the third quarter of 2023. Cost of sales as a percentage of total revenues surged to 31.1%, marking a 40-basis point rise compared to the previous year. This surge was primarily driven by intensified promotional activities and higher poultry prices. Labor costs also soared to 25.3%, depicting a stark 180-basis point increment from the previous year.

Restaurant margins for the company declined significantly by 180 basis points to 17% during the quarter. This was attributed to the conclusion of austerity measures and a temporary easing observed in the prior year.

Yum China anticipates continuous uncertainty in the macroeconomic landscape, potential wage inflation in the upcoming quarters, and the comparison to temporary relief measures from the previous year. Additionally, the potential phasing out of VAT deductions has further compounded the company’s woes.

Despite implementing strategic price adjustments to tackle inflationary costs, the company expects these challenges to persist in the short term. Projections for the fourth quarter of 2023 indicate an anticipated mid-single-digit wage inflation and a return to more standard staffing levels in their stores.

With the post-pandemic economic recovery seemingly following a fluctuating and non-linear path, Yum China is cautiously keeping an eye on sales performance metrics and cost efficiencies to ride out these troubling times.

Alternatives for Investors

Despite the bleak situation for Yum China, there are better alternatives for investors in the Retail-Wholesale sector, including:

Arcos Dorados Holdings Inc. ARCO, a Zacks Rank #1 (Strong Buy) company, which has witnessed a substantial 55.9% surge in the past year. The Zacks Consensus Estimate for ARCO’s 2024 sales and earnings per share (EPS) indicates a remarkable 10.6% and 15.5% growth, respectively, from the year-ago period’s levels.

Brinker International, Inc. EAT also holds a Zacks Rank #1 and has achieved a remarkable 38.9% increase in the past year. The Zacks Consensus Estimate for EAT’s 2024 sales and EPS indicates 5.1% and 26.2% growth from the year-ago period’s levels.

Wingstop Inc. WING, another Zacks Rank #1 company, has seen a phenomenal 83.6% surge in the past year. The Zacks Consensus Estimate for Wingstop’s 2024 sales and EPS suggests an incredible 15.8% and 18.2% rise, respectively, from the year-ago period’s levels.

Despite Yum China’s struggles, there are several companies representing the Retail-Wholesale industry that offer potential for growth and investment.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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