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Coronavirus Disrupts Yum China Business, as Many Restaurants Close

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Yum China operations in the PRC have been “significantly impacted” by the outbreak of the novel coronavirus in Wuhan, which according to official government statistics has been attributed to at least 1,016 deaths and 42,638 confirmed infections nationwide since late December (an additional 462 cases and two deaths have been confirmed outside of mainland China). More than 30% of the chain’s 9,200 restaurants in over 1,300 cities have been temporarily closed to “protect employees, customers and business partners,” the company announced on February 5 in a statement detailing quarterly sales results.

Total revenues rose 6% to $2.03 billion in Q4 2019 at Yum China outlets, which include KFC, Pizza Hut, Taco Bell, Little Sheep, East Dawning and COFFii & Joy. Restaurant margin was up 12.4% compared with 11.5% in the fourth quarter of 2018. Operating profit increased 14% year-over-year to $94 million, while net income advanced 22% to $90 million.

Since the start of the 2020, the coronavirus crisis has negatively affected operations. The situation is complex and rapidly evolving, and the full effect on business cannot yet be calculated. However, based on information currently available, Yum China management believes that the outbreak is likely to have a materially adverse impact on operating and financial results for the first quarter and the full calendar year.

For restaurants that remain open at this time, same-store sales since the Chinese New Year holiday period were down 40-50% compared to the comparable Chinese New Year holiday period in 2019, due to shortened operating hours, reduced traffic and other factors related to the outbreak.

At this moment, the Shanghai-headquartered company cannot forecast when the closed restaurants will re-open (and at what rate) and when normal traffic will be restored, or the other factors relating to the viral infection crisis that will continue to impact operations. Furthermore, the restaurant chain may be required or otherwise decide to close additional stores, reduce operating hours, or take other steps, as the situation warrants.

Meanwhile, Q4 2019 financial results marked a strong finish to a solid year.

“We achieved our 13th consecutive quarter of system sales growth since the spin-off (from Louisville, Kentucky, USA-headquartered Yum! Brands), and our operating profit grew double digits,” said Joey Wat, chief executive officer of Yum China. “In 2019, we expanded our footprint with over a thousand new stores, setting a new record for company annual store openings and further strengthening our leading market position.”

Moving forward, as the nation’s medical and scientific communities wrestle to contain and reverse the spread of deadly coronavirus, Yum China has implemented various preventative measures across its restaurants and other workplaces to help protect employees and patrons.

“We will continue to monitor this fluid situation and respond accordingly,” said Wat. “Despite this challenge and disruption to our business, we remain confident in the long-term market potential in China. We are differentiated by our world-class development, operations and innovation capabilities, which drove our success in the past and will help sustain our growth for years to come.”

CFO Andy Yeung added, “Our solid profit growth and healthy balance sheet enabled us to return $442 million to shareholders in 2019 through dividends and share repurchases. Looking ahead, while it is difficult to fully ascertain the expected impact of the coronavirus outbreak at this time, we can reasonably expect it to materially affect our 2020 sales and profits. Commodity and wage inflation are also expected to remain challenging, especially in the first half. Despite the headwinds, we are committed to grow in China and intend to step up our investment in digital, supply chain and emerging brands to support that growth.”