Here's Why Investors Should Retain Yum China Stock for Now

Shares of Yum China Holdings, Inc. YUMC have gained 10.8% in the past three months compared with the industry’s 3.6% rise. The company is benefiting from unit expansion, menu innovation and digitalization efforts. Also, the focus on the acceleration of franchise development to unlock additional opportunities bodes well. However, an uncertain macro environment is a concern.

Let us discuss the factors that highlight why investors should retain the stock for now.

Factors Driving Growth for Yum China Stock

Yum China is dedicated to relentless unit growth of its restaurants to drive incremental sales. During the fourth quarter of 2024, the company opened 534 net new stores, taking the total store count to 16,395. KFC and Pizza Hut have shown strong new-store performance, with quick payback periods of two to three years. The company reported improvement in store economics backed by better operational efficiency and reduced new store capital expenditure.

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Yum China remains optimistic about China’s long-term growth potential, leveraging expanded pricing options, an optimized delivery model and innovative business approaches to widen its market reach. The company is targeting underserved areas across China, enhancing accessibility with customized store formats. Expanding its franchise presence, Yum China is focusing on remote and lower-tier cities, aiming to grow the franchise proportion of net new stores to 40-50% for KFC and 20-30% for Pizza Hut in the coming years. This approach enables the company to capture a broader customer base and deepen its footprint in emerging markets.

Menu innovation has been another critical factor in Yum China’s success. The company regularly introduces new and upgraded menu items to keep customers engaged. KFC’s focus on product innovation, such as its Original Recipe Chicken and Juicy Whole Chicken, has driven strong demand. Pizza Hut has also rolled out creative offerings like Pizza Dough Burgers and pistachio-stuffed crust pizza, appealing to evolving consumer preferences. This ability to balance affordability with innovation has allowed Yum China to maintain transaction growth while broadening its customer base.

Yum China has doubled down on digitization, leveraging technology and Gen-AI to enhance customer experience and drive growth. In 2024, digital sales totaled $9.6 billion, with digital ordering accounting for approximately 90% of total Yum China sales. The company’s focus on value-for-money and innovative new products, automation and AI accompanied by favorable pricing and lower delivery fees boded well. Given the brand’s strong market presence, the company is optimistic and anticipates the momentum to continue in the upcoming periods.

Concerns for YUMC Stock

Yum China is facing the structurally high cost of labor and rentals. Apart from wage inflation, the company is bearing additional costs stemming from promotion, packaging upgrades, menu innovation and technological novelty. In the fourth quarter of 2024, total costs and expenses increased to $2.44 billion compared with $2.38 billion reported in the prior-year comparable period. For 2025, the company remains cautious of the uncertain macro environment and expenses regarding wage inflation. Our model predicts company restaurant expenses in 2025 to rise 5.4% year over year to $9.5 billion.

YUMC’s Zacks Rank and Stocks to Consider

Yum China currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the Zacks Retail-Wholesale sector are BJ's Restaurants, Inc. BJRI, Brinker International, Inc. EAT and Sprouts Farmers Market, Inc. SFM.

BJ's Restaurants currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The company delivered a trailing four-quarter negative earnings surprise of 84.7%, on average. The stock has gained 11.8% in the past six months. The Zacks Consensus Estimate for BJ's Restaurants’ 2025 sales and earnings per share (EPS) indicates growth of 3.3% and 17.7%, respectively, from the year-ago period’s levels.

Brinker currently sports a Zacks Rank of 1. The company delivered a trailing four-quarter earnings surprise of 24.7%, on average. The stock has surged 101.9% in the past six months.

The Zacks Consensus Estimate for Brinker’s fiscal 2025 sales and EPS indicates a rise of 18.7% and 102.4%, respectively, from the year-ago period’s levels.

Sprouts Farmers currently carries a Zacks Rank of 2 (Buy). The company delivered a trailing four-quarter earnings surprise of 15.1%, on average. The stock has gained 34.9% in the past six months.

The Zacks Consensus Estimate for Sprouts Farmers’ 2025 sales and EPS indicates a rise of 11.9% and 24.3%, respectively, from the year-ago period’s levels.

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This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research