Yum China Holdings, Inc. (YUMC) Earnings

Management highlights

- Overall Company Performance * Delivered 9 consecutive quarters of simultaneous system sales growth, operating profit growth, and operating margin expansion * Excluding foreign exchange impact, system sales grew 6% in Q2 (up from 4% in Q1), outperforming the broader Chinese catering industry * Opened 560 net new stores in Q2, with 1,200 net new stores in H1 2026 (double the pace of H1 2025), entering over 200 new cities * 40% of H1 new stores were franchise stores, enabling expansion into lower-tier and remote areas; franchise stores currently only represent 18% of total stores, leaving significant expansion room - Pizza Hut Strategic Updates * Same-store sales returned to positive growth, and new store openings accelerated to nearly double the Q2 2025 pace, with 381 net new stores in H1 2026 (nearly matching full-year 2025 total openings) * New product launches performed well: the new multigrain pizza crust became the best-selling new crust since launch, and the low-calorie individual multigrain pizza attracted solo and light-meal diners * The new Pizza Hut Burger Bar side-by-side concept expanded to over 200 locations, delivering double-digit incremental sales to parent stores; the brand plans to accelerate rollout to 500-600 locations by end of 2026 (10% of Pizza Hut's ~5,000 store portfolio) * The acquisition of full Pizza Hut brand ownership for mainland China is on track to close in August 2026; the deal will eliminate 3% annual license fees, adding 2.8% to Pizza Hut's restaurant operating margins (60 bps to Yum China overall), and will enable accelerated net new store openings to over 800 per year starting 2027, up from the original target of over 600 - KFC Strategic Updates * KFC remains Yum China's top growth driver, with continued strong core platform growth: Whole Chicken generated over 2 billion yuan in 2025 sales and remains on track for double-digit growth in 2026, while the Zinger platform is on track to exceed 5 billion yuan in full-year 2026 sales * Side-by-side modules scaled rapidly: K-Coffee Cafe expanded to over 3,300 locations, on track to reach 5,000 locations by end of 2027; K-Pro expanded to over 450 locations, with the year-end 2026 rollout target raised from 400 to 800 locations, and is expanding into select lower-tier cities * Over 8,000 KFC stores now offer drive-through or car-side pickup, with over 7 million members using the service in 2026 to date, leaving significant room for adoption growth - Operational Efficiency * Capital expenditure for K-Coffee and K-Pro has been cut in half from 2025 levels, with both modules delivering solid margin improvements * Rent costs improved 90 bps year-over-year via lease renegotiations and favorable lower-tier city rent terms, offsetting higher cost of sales and labor costs driven by delivery mix growth * New initiatives are on track to hit 1 billion yuan in annual sales milestones: K-Coffee targets ~2 billion yuan in 2026 sales, K-Pro targets over 1 billion yuan in 2027 sales, car-side pickup targets 1 billion yuan in 2026 sales, and Pizza Hut Burgers targets over 1 billion yuan in 2026 sales (5-6% of Pizza Hut's total sales)

Guidance

- Full-year 2026 core guidance (excluding the Pizza Hut brand acquisition) is maintained, consistent with prior targets: same-store sales index of 100 to 102, mid-to-high single-digit system sales growth, high single-digit operating profit growth, double-digit EPS growth, and a slight improvement in consolidated restaurant and operating margins * Yum China remains on track to reach 20,000 total stores by end of 2026 * The Pizza Hut acquisition is expected to be slightly accretive to diluted EPS in 2026, and mid-single-digit accretive in 2027 and 2028 * The acquisition will add 30-40 bps of positive margin impact to Yum China's Q3 2026 restaurant and operating margins, and 20-30 bps of positive impact for full-year 2026 - Q3 2026 guidance: July trading is in line with expectations, management targets positive same-store sales growth and the 15th consecutive quarter of positive same-store transaction growth. Excluding the Pizza Hut acquisition, Q3 restaurant margin is expected to be stable to slightly positive year-over-year, and operating margin is expected to be roughly in line with Q3 2025 * Incremental rider cost pressure from delivery mix growth is expected to moderate slightly in H2 2026, and continued operational efficiency improvements will support margins - Capital return guidance: Yum China remains on track to return $1.5 billion to shareholders in 2026 (≈10% of current market cap), with $718 million returned in H1 2026. Starting 2027, the company will commit to returning ~100% of annual free cash flow (after non-controlling interest dividends) to shareholders, translating to $900 million to over $1 billion annually in 2027-2028, and over $1 billion annually beyond 2028

Segment performance

**KFC**: System sales grew 7% year-over-year, same-store sales grew 1%, with same-store transactions up 4% offsetting a 3% average ticket decrease. Restaurant margin expanded 20 bps to 17.1%, and operating profit also grew 7% year-over-year. K-Coffee delivered mid-single-digit sales uplift to parent stores, while K-Pro delivered a 20% uplift. KFC contributed approximately 80% of total system sales based on segment growth and store count. **Pizza Hut**: System sales grew 6% year-over-year, same-store sales returned to positive growth at 1%, with same-store transactions up 13% offsetting an 11% average ticket decrease. Restaurant margin was down 40 bps year-over-year in Q2 due to delivery mix and new initiative investment, but first-half 2026 restaurant margin was up 10 bps year-over-year, and operating profit margin expanded 60 bps. Pizza Hut contributed approximately 20% of total system sales based on segment and company-wide results. **Yum China Consolidated**: System sales grew 6% year-over-year, same-store sales grew 1%. Revenue grew 13% year-over-year, operating profit was $348 million (up 7% year-over-year), net income was $244 million (up 6% year-over-year), diluted EPS was $0.70 (up 14% year-over-year). Restaurant margin held flat year-over-year at 16.1%, and operating profit margin expanded 20 bps to 11.1%, marking the 9th consecutive quarter of operating profit margin expansion.

Risks & headwinds

- Tough year-over-year sales comparisons are expected in H2 2026 as the company laps the high delivery sales base from H2 2025 * Rising rider costs from the growing delivery sales mix (which increased from 45% in Q2 2025 to 54% in Q2 2026) continue to create margin pressure, though the impact has moderated sequentially and is mostly offset by operational efficiency initiatives * Weak broader consumer demand and uncertain macroeconomic conditions create pressure on pricing and promotional activity, though Yum China's diversified growth initiatives have allowed it to outperform the broader industry * All long-term financial guidance depends on the successful completion and integration of the Pizza Hut brand acquisition, and long-term refinancing for the acquisition carries potential dilution risk if a convertible bond is selected, even with mitigation strategies

Analyst Q&A

• Q: Given a softer overall consumption environment in China in Q2 and Q3 2026, what trends are you observing, and is there increased risk of aggressive promotional pricing competition? How do you balance promotions and margin while driving growth? /

  A: Management noted a rebound in June retail sales from May, and July 2026 trading is in line with expectations, with extreme weather impacts only temporary and regional. Consumers still spend on growing categories including coffee and light meals, and prioritize innovative, high-value, high-experience products. Pricing has stabilized industry-wide, and delivery platform competition has become more rational. Ongoing industry chainification and tighter government oversight of ghost kitchens (which Yum China benefits from due to its strong food safety systems) are positive trends. The company remains on track to hit its Q3 growth targets.

• Q: What are your long-term refinancing plans for the $1.2 billion bridge loan for the Pizza Hut acquisition, and what is the potential dilution impact if you choose to issue a convertible bond? /

  A: All refinancing options (syndicated loans, bonds, convertible bonds) remain on the table, with no final decision made yet. If a convertible bond is selected, management can use strategies like adding a cap call option to raise the conversion premium to 70-80%, and use net share settlement to only issue new shares for the in-the-money portion of the bond. This limits potential dilution significantly, and dilution would only occur if the share price rises substantially, which benefits all shareholders.

• Q: Does the expected second-half Pizza Hut margin improvement include the license fee savings from the brand acquisition, and how will you balance accelerated store expansion with maintaining positive same-store sales? /

  A: The margin improvement guidance excludes the acquisition impact; underlying margin improvement comes from moderating rider cost pressure, as the year-over-year delivery mix growth delta will be much smaller in H2. For store expansion, there is significant untapped opportunity for Pizza Hut, especially in lower-tier cities where it is underrepresented relative to KFC and local QSR brands. Cannibalization of existing stores is limited by opening new locations in closed strategic channels (hospitals, campuses), lower-tier cities, and high-tier city outskirts, allowing the company to balance expansion and comp sales performance.

• Q: Will the Pizza Hut Burger Bar cannibalize existing Pizza Hut or KFC sales, and where does its incremental growth come from? /

  A: The overall Chinese burger market is growing rapidly, and Pizza Hut Burger Bar has a unique value proposition: fresh in-store baked buns and made-to-order patties that differentiate it from KFC products and most competing burger brands. Incremental sales come primarily from competitors focused on beef burgers, not from Yum China's existing brands. The concept delivers double-digit incremental sales to parent Pizza Hut stores with solid margins, so there is minimal meaningful cannibalization of existing business.