(Bloomberg) -- Yum China Holdings Inc.’s stock surged in Hong Kong as investors cheered the fast food operator’s ability to grow its profit amid a bruising price war.
Shares jumped as much as 11% on Tuesday morning, its biggest one-day gain since February, after the company reported higher-than-expected second quarter profit despite stepping up promotions to lure thriftier diners.
Operating profit grew 4% year-on-year to $266 million and adjusted earnings were 55 cents per share in the second quarter, the company said in a statement. Revenue of $2.68 billion was up 0.9% on-year, just short of analysts’ prediction of $2.78 billion.
Still, in a sign that China’s retail price wars could be taking a toll on restaurants, Yum China’s same-store sales fell 4% amid its aggressive meal-deal campaigns, more than the 3% analysts had forecast. Its KFC outlets fell 3%, while Pizza Hut plunged 8%. The drops come after key rival McDonald’s Corp. last month highlighted Chinese consumers’ “deal-seeking” in discussing the impact on its international business.
Fast food giants across China have been locked in a race to roll out budget meals as an economic slowdown makes consumers more cautious, sending some of the world’s biggest brands scrambling to lure them back.
Since the start of the year, Yum China has bombarded customers with cheap promotions including a 9.90 yuan ($1.40) chicken sandwich and 29.90 weekend combo meal. Pizza Hut has also launched a more budget-friendly offshoot, Pizza Hut Wow, to cater to frugal diners across the country. The company said it plans to have more than 200 Pizza Huts converted to Pizza Hut Wow outlets by year-end.
The promotional run comes as Yum China is increasingly expanding into China’s hinterland, where residents have less disposable income and competition from local rivals has prompted a reduction in menu prices. Yum China opened 401 stores in the quarter and operates 15,423 total outlets, 13% more than the same period last year. The company plans to build a 20,000-store network in the mainland by 2026.
Yum China is banking on its move into lower-tier cities to drive growth going forward as it adapts to an environment in which consumers are becoming less enthusiastic about premium consumption. It’s also identified opportunities in locations including college campuses, fuel stations and highway service centers, Chief Executive Joey Wat said.
KFC posted a per-ticket average that was 7% lower than the same period last year, while Pizza Hut’s dropped 9%, Yum China Chief Financial Officer Andy Yeung said during a post-earnings call. Lower totals per order were partially offset by an increased number of transactions, he said.
Total transactions grew by 13%, as the operator works to widen the price range available on its menus, offer food at great value and open new stores, according Yum China’s statement.
Yum China’s restaurant margin remained resilient at 15.5% — beating the estimated 14.6% — amid efforts to improve the efficiency of its operations, including reducing procurement costs by sourcing directly from farmers and producers. Major restaurant management tasks, from sales forecasting to inventory management, have been automated, the company said, including the deployment of automated fried rice machines and robotic servers at Pizza Hut stores.
The company “took proactive actions” to improve operational efficiency, stabilizing restaurant margin and expanding operating profit margin year-on-year, Citigroup Inc. analysts wrote in a note Tuesday.
--With assistance from Catherine Ngai.
(Updates markets information.)
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