Yum China (YUMC) Q1 2026 Earnings Transcript

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Wednesday, April 29, 2026 at 7 a.m. ET

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​Image source: The Motley Fool.Wednesday, April 29, 2026 at 7 a.m. ETNeed a quote from a Motley Fool analyst? Email pr@fool.comContinue reading 

Image source: The Motley Fool.

Wednesday, April 29, 2026 at 7 a.m. ET

Call participants

• Chief Executive Officer — Joey Wat
• Chief Financial Officer — Adrian Ding
• Chief Communications Officer — Florence Lip

Takeaways

• Revenue — Grew 10% in reporting currency, supported by favorable foreign exchange effects.
• Operating Profit — Increased 12% in reporting currency, or 6% excluding foreign exchange benefit, marking an eighth consecutive quarter of year-over-year operating profit growth.
• Net Income — Reached $309 million, unchanged year over year; excluding Meituan investment impact, net income grew 4%.
• Diluted EPS — $0.87, an increase of 7% year over year and 11% excluding Meituan investment.
• System Sales — Rose 4% excluding foreign exchange, with slight positive growth in same-store sales, rounded to flat.
• Store Expansion — 636 net new stores, representing more than one-third of full-year target and placing the company ahead of schedule.
• KFC Brand Performance — System sales grew 5%, same-store sales increased 1%, same-store transactions and ticket average declined 1%, with restaurant margins at 19.1%.
• Pizza Hut Brand Performance — System sales grew 4%, same-store sales were 99% of previous year’s level, same-store transactions grew 5%, ticket average declined 5%, and restaurant margin expanded 60 basis points to 15.0%.
• KCOFFEE Cafes — Expanded to over 2,600 locations, with sales more than doubling year over year and generating a mid-single-digit sales lift for parent KFC stores.
• KPRO Module — Reached 280 locations, with company now targeting 600 stores by year-end, increased from the original plan.
• WOW Store Model — Pizza Hut’s WOW store count doubled from a year ago to approximately 390, with nearly 80 new Gemini stores opened side-by-side with KFC in lower-tier cities, mostly franchise-operated.
• Franchise Growth — Franchisees contributed 42% of KFC and Pizza Hut net new stores; franchise portfolio surpassed 2,500 stores, up from around 1,800 a year earlier.
• Delivery Mix — Delivery sales mix rose from 42% to 54% year over year, with rider costs now comprising nearly 30% of total labor cost.
• Restaurant Margin — 18.2%, a decrease of 40 basis points year over year, primarily due to increased rider costs from higher delivery mix.
• Cost of Sales (COS) — 31.6%, up 40 basis points year over year due to value-oriented offerings and reduced commodity tailwinds; Pizza Hut COS projected at 33%-34% for full year.
• Cost of Labor (COL) — 26.7%, rising 100 basis points year over year, mainly from increased delivery mix; pressure expected to ease slightly in next quarter.
• Occupancy & Other (O&O) — 23.5%, down 100 basis points year over year as a result of improved rental terms and operational initiatives.
• Operating Profit Margin — 13.7%, up 20 basis points year over year, reflecting continued margin expansion for the eighth consecutive quarter.
• Capital Returns — $316 million returned to shareholders, split as $214 million in share repurchases and $102 million in dividends; full-year projection remains $1.5 billion.
• 2026 Full-Year Targets (Management-Guided) — Same-store sales index of 100–102, mid- to high single-digit system sales growth, high single-digit operating profit growth, double-digit EPS growth, slight improvement in restaurant and operating profit margins, and over 20,000 total stores by year-end.

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Risks

• Adrian Ding stated, “rider costs remain the biggest headwind,” with delivery mix rising and margin impact mitigated only partially by operational efficiency.
• Operating profit margin pressure continues due to growth in delivery, as reflected by the 40 basis point decrease in restaurant margin year over year.
• Cost of labor continues to rise, primarily due to increasing rider costs driven by higher delivery sales, with COL up 100 basis points from last year.
• Management noted, “The tailwind from favorable commodity prices is also less than before,” limiting benefit to cost of sales improvement versus prior periods.

Summary

Yum China (YUMC 0.75%) advanced its growth initiatives with significant top- and bottom-line increases, supported by accelerated store expansion and brand module innovation. Management raised location targets for both KCOFFEE and KPRO, underscoring sustained momentum in new business formats. Franchise expansion contributed materially to store growth, with a pronounced shift toward lower-tier cities and highway service stations. Delivery sales growth continues to transform channel mix, driving up rider and labor costs, which exert pressure on margins even as operational efficiencies offset some headwinds. Capital returns remain a priority, with share repurchases and dividends projected to represent roughly 9% of market cap for the year.

• Guidance for same-store sales, system growth, operating profit, and margin improvement was maintained, with an explicit commitment to balancing topline expansion with disciplined margin protection.
• Pricing environment is described by management as “becoming a bit more favorable,” and several competitors are now also taking price, reflecting improved sector sentiment per company commentary.
• The company signaled sustained emphasis on food innovation and operational agility as critical strategic levers, citing ongoing side-by-side module rollouts and menu refreshes.
• Adrian Ding highlighted, “From 2027, we plan to return approximately 100% of our annual free cash flow after subsidiaries dividend payments to noncontrolling interest,” with expected average returns of $900 million to $1 billion plus in 2027 and 2028.

Industry glossary

• KCOFFEE Cafe: In-store coffee module at KFC units, offering specialty coffee and generating incremental sales.
• KPRO: KFC sub-brand focused on “live meal” and light casual dining concepts, targeting higher-income urban consumers.
• WOW Store Model: Simplified, lower-capital Pizza Hut store format, tailored for expansion into new city tiers, often operated by franchisees.
• Gemini Store: Co-located KFC and Pizza Hut WOW stores, typically serving growing highway and on-the-road demand.
• TA: Ticket Average; average sales per transaction, a key restaurant metric.
• COL: Cost of Labor, including labor and rider delivery costs.
• O&O: Occupancy and Other; includes rent, depreciation, and additional store-operating costs.
• COS: Cost of Sales; direct food and packaging costs.

Full Conference Call Transcript

Joey Wat: Hello, everyone, and thank you for joining us. Once again, we delivered solid results in a dynamic environment, reflecting the successful execution of our RGM 3.0 strategy, which balances resilience, growth and moat. In quarter 1, revenue grew 10% and operating profit increased 12% in reporting currency, supported by a positive foreign exchange impact. We opened 636 net new stores, more than 1/3 of our full year target and ahead of schedule. Even as we accelerated store expansion to capture market opportunities, we maintained a dual focus on same-store sales growth and system sales growth. Same-store sales growth was slightly positive, though rounded to 0. Same-store transaction grew for the 13th consecutive quarter.

Excluding foreign exchange impact, system sales grew 4%, operating profit increased 6% and operating profit margin expanded 20 basis points year-over-year. This marks the eighth consecutive quarter in which we delivered growth across all 3 metrics at the same time. By brand, KFC remained resilient. Same-store sales grew 1%, the fourth consecutive quarter of growth. System sales increased by 5% and restaurant margins remained very healthy at 19.1%. Pizza Hut continued to grow in scale and profitability, delivering 18% operating profit growth on top of 27% growth in quarter 1 last year, both in reporting currency. Same-store transactions grew for the 13th consecutive quarter, while restaurant margins improved 60 basis points year-over-year to 15%.

I would like to say a big thank you to our team for delivering solid results in this fast-changing environment. We maintain a strong focus on innovation and operational efficiency. Let me share a few updates on our key initiatives, and then I will hand it over to Adrian to go through our results in more detail. It always begins with good food and great value. During Chinese New Year, we offered a wide range of options to cater to both group gatherings and solo diners. At KFC, in addition to our signature Golden Bucket, we launched classic limited time offers LTOs such as Shrimp Burger, beef wrap and Win Bucket to drive additional traffic.

Building on last year’s hugely successful LTO campaign, Crackling Golden Chicken Wings became the first new permanent product we introduced during CNY to our menu. KFC’s innovative side-by-side modules are scaling rapidly, delivering meaningful incremental sales and profit. KCOFFEE Cafes are now in over 2,600 locations and KPRO in more than 280 locations. KCOFFEE Cafe generated around mid-single-digit sales uplift and KPRO around 20% to their parent KFC stores in quarter 1. Our consumer insights help us identify consumer needs and our front-end segmentation and back-end consolidation approach help us meet these needs effectively by sharing resources with the parent stores. These modules cross-sell existing members and require far lower investment and operating costs, making them attractive business models.

Adrian will provide more updates on these 2 modules later in the call. At Pizza Hut, alongside our classic Super Supreme campaign for Chinese New Year, we collaborated with popular IPs like [ Gunder ] and Butterbear and launched our Signature All-You-Can-Eat campaign. In quarter 1, Pizza Hut accelerated expansion with 207 net new stores. That’s nearly half of last year’s full year net new openings. Over 100 new stores used the WOW format, most of them in new cities. Its lower CapEx model and simpler operations supported by franchisee model opened up opportunities in lower-tier cities.

We also continued to fine-tune the WOW model and enhance the menu, adding signature items from Pizza Hut’s main menu while keeping its most popular value items to strengthen both relevance and appeal. Let me now turn the call over to Adrian. Adrian?

Adrian Ding: Thank you, Joey. Let me update key highlights by brand, starting with KFC. In quarter 1, KFC system sales grew 5%. Same-store sales increased 1%, marking its fourth consecutive quarter of growth. Same-store transactions also grew 1%, while ticket average was down 1%. The rapid growth of smaller orders was largely offset by the increased delivery mix, which carries a relatively higher ticket average. KFC’s breakthrough side-by-side modules continue their strong momentum and drive incremental sales and profit to their parent stores. We added around 400 KCOFFEE Cafes in quarter 1, bringing the total to over 2,600 locations across all city tiers. With broader coverage and rising daily cups sold per store, KCOFFEE Cafe sales more than doubled year-over-year.

We expect KCOFFEE Cafe to keep growing rapidly to unlock further potential and reach 5,000 locations by year-end 2027, 2 years ahead of our original target shared at our last year’s Investor Day. KPRO also gained momentum, reaching 280 locations, up from 200 at the end of 2025. While primarily focused on Tier 1, Tier 2 cities, we’re expanding into select Tier 3 cities as well, especially in Eastern and Southern China, where the demand for live meals is stronger. KPRO is performing well and showing margin improvement, driven by agile module iteration, including menu innovation and reduced investment requirements.

With that, we’re raising our KPRO target to 600 locations by year-end, an increase of 200 compared to our plan shared earlier this year. Now moving on to Pizza Hut. In quarter 1, system sales grew 4% year-over-year and same-store sales were 99% of the prior year period’s level. This year’s CNY took place considerably later than usual. Pizza Hut as a casual dining concept saw a modest impact as dining and gathering patterns shifted around the Chinese New Year holiday. In March, we brought back our popular All-You-Can-Eat campaign for a limited time. Now in its fifth year, this campaign has become a signature, attracting consumers to try new dishes, effectively driving traffic and broadening appeal.

Same-store transactions grew 5% in quarter 1, marking its 13th consecutive quarter of growth. Ticket average was down 5% year-over-year, in line with our mass market strategy and driven mainly by better value for money offerings. Pizza Hut TA is moving closer to our long-term target range of CNY 60 to CNY 70 as shared at last year’s Investor Day. Even with the lower TA, Pizza Hut restaurant margin expanded by 60 basis points year-over-year to 15.0%. OP margin also increased by 100 basis points. Efficiency continued to improve at Pizza Hut as we streamlined store operations, centralized processes and advanced automation, supported by our strong food innovation, supply chain and digital capabilities. Now moving on to store opening.

We accelerated store openings in quarter 1 to record levels for Yum China, KFC and Pizza Hut. With 636 net new stores in the quarter, we’re on track to open more than 1,900 net new stores for the full year and to surpass 20,000 total stores in 2026. Franchisees contributed 42% of KFC and Pizza Hut’s net new stores in quarter 1, helping us capture incremental opportunities in lower-tier cities, remote areas and strategic locations. Our franchise portfolio exceeded 2,500 stores at the end of the quarter 1, up from around 1,800 a year ago. We expect to continue driving store network growth with capital efficiency and improving our ROIC over time.

Our flexible store models continue to support franchise growth. Pizza Hut’s WOW store model is making good progress. Store count doubled year-over-year to around 390. In quarter 1, restaurant margins of new equity WOW stores were already in line with the Pizza Hut’s main model. In addition to standard WOW stores, we’re also opening WOW stores side-by-side with KFC, which we refer to as the Gemini model. Nearly 80 WOW openings in quarter 1 were Gemini stores, mostly in new lower-tier cities and operated by franchisees. With rising car ownership and the expansion of highway network, we’re leveraging franchisees resources to tap into the growing on-the-road demand.

We have already signed franchise agreements with more than a dozen provincial and municipal highway operators, [indiscernible] to open stores at their highway service stations. In just over a year, we added nearly 100 stores and are accelerating the pace this year. We’re also meeting new customer needs through innovative solutions. Traditionally, drive-thrus require dedicated car lanes. We expand on this by offering car side pickup at locations without such length but with pullover areas, where our crew brings orders straight to consumers’ cars. This approach significantly reduces capital expenditure requirements and give us the greater flexibility in driving takeaway sales.

Today, more than 7,000 KFC stores offer either the traditional drive-thru or car side pickup services, up from around 2,000 a year ago. While still early in building awareness and habits, in quarter 1, nearly 1/3 of drive-thru customers made repeat purchases, showing strong potential and stickiness. We’re partnering with multiple car companies, including BYD, to enable in-car ordering and select stores will have fast charging stations in store nearby to offer even greater convenience. Let me now go through our Q1 P&L. System sales grew 4% year-over-year. Same-store sales grew slightly year-over-year, but rounded down to 100% of prior year levels. Our performance in January and February was broadly in line with our expectations.

March came in slightly softer than expected as it fell between the Chinese New Year holidays and the additional spring break in several provinces and compared against last year’s strong IP campaigns. Our restaurant margin was 18.2%, 40 basis points lower year-over-year. The decrease was primarily due to increased rider cost from higher delivery mix, partially offset by improved operational efficiency. Cost of sales was 31.6%, 40 basis points higher year-over-year, mainly due to strong value for money offerings. The tailwind from favorable commodity prices is also less than before. Cost of labor was 26.7%, 100 basis points higher year-over-year.

Rider costs increased year-over-year, driven by the strong growth in delivery sales mix, which went up from 42% last year to 54% this year. Rider costs now account for close to 30% of our cost of labor. The margin impact was 190 basis points, and we mitigate around half of that through enhanced store operations. Occupancy and other was 23.5%, 100 basis points lower year-over-year, mainly due to better rent and other initiatives to improve operational efficiency. Our OP margin was 13.7%, 20 basis points higher year-over-year, achieving the eighth consecutive quarter of OP margin expansion. Savings in G&A expenses helped improve OP margins. Operating profit was $447 million, a first quarter record, growing 6% year-over-year.

Net income was $309 million, flat year-over-year. Excluding our investment in Meituan, net income grew 4% year-over-year. Our investment in Meituan had a negative impact of $9 million in quarter 1 compared to a positive impact of $2 million in quarter 1 last year. As a reminder, we recognized $10 million less in interest income in quarter 1 this year due to a lower cash balance resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was $0.87, 7% higher year-over-year or up 11% year-over-year, excluding our investment in Meituan. Now moving on to our 2026 outlook, starting with the second quarter.

On sales, we are working hard to deliver positive same-store sales growth and the 14th consecutive quarter of positive same-store transaction growth. March, sitting between Chinese New Year and the extra school spring break in April was slightly softer. However, April benefited from the additional traffic. Taken together, March and April were broadly in line with our expectations, giving us confidence that same-store sales growth will sequentially improve for Yum China, KFC and Pizza Hut in quarter 2. On margins, rider costs remain the biggest headwind. Although delivery platform subsidies have moderated slightly, we expect delivery sales to continue growing, which means rider cost pressure will persist.

That said, the tough year-over-year comparison we faced in quarter 1 restaurant margin will ease slightly in quarter 2. At this point in time, we expect the situation in the Middle East to have limited impact on the cost of sales this year. We have already secured the majority of this year’s procurement contracts. We’ll continue to monitor the situation closely and manage our procurement and logistics nimbly. We’ll maintain our dual focus on driving same-store sales growth and system sales growth while keeping our operations efficient. All in all, we strive to maintain OP margin roughly in line with the prior year period in quarter 2.

As for second half, we expect sequential improvement in year-over-year margin comparisons versus the first half. With higher delivery sales mix last year, the incremental rider cost pressure should moderate. Our initiatives to optimize operational efficiency and store costs, including rent, labor productivity, capital expenditure are also expected to support margin expansion. We are confident in meeting the full year targets for 2026, which are consistent with the ranges we shared at our Investor Day last year and in February. These include 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, a slight improvement in restaurant margin and OP margin for Yum China.

Additionally, we remain on track to reach 20,000 stores by year-end. In terms of capital returns to shareholders, in quarter 1, we returned $316 million with $214 million in share repurchases and $102 million in quarterly cash dividends. We’re on track to return $1.5 billion to shareholders for the full year 2026, around 9% of our current market cap. Of the $1.5 billion, we expect around $400 million to be distributed as dividends and $1.1 billion to be allocated to share repurchases through a mix of systematic and discretionary buybacks. From 2027, we plan to return approximately 100% of our annual free cash flow after subsidiaries dividend payments to noncontrolling interest.

This is expected to be an average of $900 million to $1 billion plus in 2027 and 2028 and exceed $1 billion in 2028 and onwards. With that, let me hand it back to Joey for her closing remarks.

Joey Wat: Thanks, Adrian. Let’s take a moment to highlight our key growth drivers in quarter 2 and beyond. At KFC, our 6 hero products provide a solid foundation, accounting for around 30% of sales and are purchased by about 80% of our active members. We keep innovating to drive repeat purchases. Whole chicken introduced in 2021 is a great option for at-home consumption and has gained popularity quickly. Sales nearly tripled since 2022, surpassing CNY 2 billion in 2025. In April, we add aromatic paper wrapped roasted chicken, [indiscernible] to the permanent menu after a successful LTO in quarter 4 last year.

This new offering is incredibly juicy and its simple cooking process ensures that add variety does not increase kitchen complexity. Pizza Hut also continued to innovate to meet evolving consumer needs. In our latest spring menu launched last week, we introduced over 30 new dishes, about 1/3 of our entire menu. With this menu revamp, we add new platforms tailored for dine-in sharing and enriched our protein offerings. For example, beef and chicken fajita and shakshuka, a poached egg in spiced tomato sauce. In May, we are excited to upgrade our hand-tossed pizza with multigrain crust and colorful protein and vegetable toppings, [Foreign Language] pizza.

These innovations not only taste great, but are fun and highly Instagram worthy, enhancing the casual dining experience. Beyond serving our existing customers better, we are broadening our addressable market by identifying underserved customers. For example, we now have offerings for customers on tighter budgets. Through highly selective delivery channels, we offer hearty meals at very affordable prices. KFC’s Chinese buns stuffed with Mala Chicken [Foreign Language]. This bun weighs more than half a pound is inspired by a popular Sichuan dish and is the winner of our internal nationwide food ideation competition. And Pizza Hut offers Roman-style Spicy pasta with sausage, [Foreign Language] both food gains instant popularity.

Since our Investor Day in November last year, we continue to be encouraged by the early signs of improving consumer sentiment and more rational competition among delivery platforms. These are positive developments that we believe will benefit our industry over the mid- to long term. We are well positioned for this, supported by our strong brand equity, food that customers love and a solid set of growth initiatives. We are confident in achieving our 2026 full year targets and we will continue to drive profitable growth and create sustainable value for our shareholders. Now let me pass it back to Florence.

Florence Lip: Thanks, Joey. Now we will open the call for questions. [Operator Instructions] Operator, please start the Q&A.

Operator: [Operator Instructions] We will take our first question. This is from Michelle Cheng from Goldman Sachs.

Michelle Cheng: I would like to explore the delivery business a little bit more. Joey and Adrian, you earlier mentioned a bit on this delivery impact. But can you still elaborate a little bit more for the past few quarters, given still more promotional environment, the positive impact from same-store sales growth versus the negative impact from the competition and the margins? And do we see any like changes in the trend in the past 1 to 2 months? And looking ahead, as what we expected, the subsidies will be more normalized? And how should we think about the financial impact? And what will be our strategies especially driving more takeaway and the in-store consumption?

Joey Wat: Thank you, Michelle. I would like to make a few points about your question on the delivery topic. We see early signs of more rational delivery perform competition recently for sure, and we welcome the development and believe that it will benefit our industry over time. And specifically, the reduction in subsidies right now is more pronounced for smaller orders, but only a slight decrease in QSR. So we see platforms increasingly focusing on higher TA orders, which is good for our business relative to the drink business, I suppose. We have been very consistent in the past last year and now that we always maintain a disciplined approach. We balance sales growth, margin protection and brand integrity.

So I believe that we are well positioned for the rationalization of the delivery subsidies. And going forward, other than — in addition to the disciplined approach, we always look at our operational growth, supported by strong brand equity, food innovation, great value and many other levers. And in my prepared remarks, I talked about the Pizza Hut new food like fajita and shakshuka, the KFC, the KCOFFEE, KPRO growth mentioned by Adrian and also the car-side pickup. So all these are our focus, and we continue to maintain a disciplined approach. Thank you, Michelle.

Adrian Ding: Yes. And in addition to that, I guess, as to a second part of the question regarding financial impact of the more rationalization of delivery subsidy, as Joey mentioned, we have been very disciplined in taking the delivery subsidy ever since a few quarters ago, and we believe we are among one of the better companies positioned in the industry to kind of enjoy the more rationalization of the delivery environment. So I guess as a little conclusion, we reiterate our annual guidance on top line for 100 to 102 on comp sales, which is something we’re pretty confident to achieve.

And specific to quarter 2, as I mentioned in the prepared remarks, we do expect a sequential improvement in our comp sales in Yum China, KFC and Pizza Hut. And more specifically on top line, right, delivery sales growth, we still believe it’s a long-term trend, although the subsidy is more rationalized, but still it is growing on delivery mix. So we still face some rider cost pressure and the delivery sales mix will increase at least in the near future. In terms of TA, KFC’s delivery orders generally have a higher TA. So a slower growth in delivery will translate into a slight decrease in TA from the growth in smaller orders.

And looking forward, consistent to what we shared in February earnings, we expect KFC TA to either slightly decrease or stay generally stable for the full year. And for Pizza Hut, the delivery TA, which is a bit opposite to KFC, the delivery TA for Pizza Hut is lower than dine-in. So slow down delivery sales growth will translate to a more moderate decline in TA for Pizza Hut. And lastly, on the margin front, as we mentioned in the prepared remarks, in the second half, given the delivery mix is already a bit higher in the base, so the rider cost pressure will moderate.

So hopefully, together with our other efficiency initiatives that will help better support our margin in the second half. And in terms of the second quarter, the pressure is slightly less compared to quarter 1. And as always, we use a balanced approach to drive sales at the same time to protect our margin and price integrity. Thank you, Michelle.

Michelle Cheng: Very clear.

Operator: And the next question comes from Chen Luo from Bank of America.

Chen Luo: Congrats on the results despite a very fluid environment. In fact, the recent selloff of share price has actually baked in very bad expectation, but I’ve seen the result, I feel really relieved. So my question is actually on our OP margin guidance. I remember previously, we target a largely stable OP margin in Q1, but the actual results saw like 30 bps OP margin expansion. And just now we confirm that in second half, we may see easing rider cost pressure given a more normalized base for the delivery sales mix.

And this, together with a lot of cost-saving initiatives, is it fair to say that compared with our previous guidance of flat to slightly upward trend of OP margins, there actually could be upside risks to our full year margin guidance? That’s my question.

Adrian Ding: Thank you, Luo Chen. I’ll take the question on margin. I think our margin guidance shared in early February was a slight increase in our operating profit margin for the group for the full year. And I understand that in the market, different people interpret slight increase a bit differently, right, what is slight. And indeed, in our quarter 1 earnings — sorry, in the quarter 4 earnings in early February, we mentioned that OP margin for the group will be generally stable or broadly in line with the same period last year for quarter 1. It turned out to be a 20, 30 basis points expansion on OP. So it’s still, I guess, broadly in line.

And as a matter of fact, second half, indeed, the rider cost pressure will moderate, right, because the delivery mix is higher in the base. And — but specifically on the 3 key line items, I guess, after I share some more color, it will be helpful for you guys and for the other investors to help put together and refresh our model for the coming 3 quarters and the year for COS. We expect COS to be broadly stable for the group. And as you noticed that the KFC COS in quarter 1 is generally stable, right? And the Pizza Hut, there is an increase in COS. There are a few reasons.

One is the All-You-Can-Eat campaign, which is definitely great value for money. Second is, as we mentioned last quarter, we have the new — a lot of new menu items, which we are still in the process of optimizing the cost. And thirdly, it’s because of the higher delivery mix, which results in a higher package cost for Pizza, which is actually a bit more specific to Pizza because for KFC, the package cost similar between dining and delivery. So with that, the COS for Pizza Hut will be between 33% and 34% for the full year, which is a bit higher than last year.

However, we still guide margin expansion for Pizza Hut on restaurant margin, OP margin front given the tailwind on O&O. So that’s on COS for the group KFC and Pizza. For COL, I think it’s — we face consistent headwind on COL because of the delivery mix increase. And we give pretty specific figure on what is the COL pressure due to the increase in delivery mix for the quarter. And I’m sure you can have a reasonably good modeling on the COL for the remainder of the year, depending on your specific assumption on the delivery mix. So that’s on COL. We face headwind that will be worse on COL.

O&O, we do face tailwind on O&O due to our efficiency initiatives. On one hand, we will have hopefully better rental because currently, we still — although there’s initial signs of a good turn of the property market or initial sign of stabilization in property market, but still on commercial real estate, it’s quite favorable to the merchant as of right now. And we would like to leverage the opportunity to further optimize our rental. So you see a little bit of that benefit in quarter 1. Hopefully, that will come in, in the coming quarters as well.

And our lower capital expenditure, which results in a better depreciation that will benefit O&O as well together with other initiatives, including A&P, et cetera. So overall, the annual guidance on margin, which is a slight increase in OP margin for the group is unchanged. Hopefully, we are able and we are confident to be able to deliver that.

Joey Wat: I just want to add one comment. about Pizza Hut margin, which was very nice for the quarter 1 this year. It’s actually, I think, one of the highest since the turnaround initiatives since 2018. We’ll be very consistent with our direction of Pizza Hut turnaround, sales first, profit later. Now it is later, later is now for Pizza Hut.

Chen Luo: Yes. So that remark is really impressive. I think remember, during the Investor Day, we mentioned a 3-year target of 14.5% OP margin — restaurant margin for Pizza Hut. Based on the current run rate, things that we should actually achieve that target earlier than expected.

Joey Wat: Slightly, slightly. The inflection point was 2024 indeed because 2024, we feel like sales will take a good position, then we start to really press the accelerator on the margin side, and we are happy to see what we are seeing. Thank you.

Chen Luo: Congrats.

Adrian Ding: Thank you.

Operator: Our next question is from Lillian Lou, Morgan Stanley.

Lillian Lou: My question is actually on the underlying demand trend and related to that, the pricing momentum as well because I think in the release, one important statement was you are still very excited — encouraged by the underlying improvement of consumer sentiment. With more moderated subsidy, do we see the — within merchants, is the competition also getting mild or actually everybody trying to rush up the traffic without as much subsidy from platforms. So what’s the dynamic of the demand and also competition right now? And also on a like-for-like basis, are we seeing chance for some improvement on pricing in terms of the whole industry and also for ourselves?

Joey Wat: I’ll make 2 quick comments on that, and maybe Adrian has a bit more color to add. We have shared our view on the improving consumer sentiment since Investor Day last November, and we certainly have observed some stabilization of pricing trend. Not only we took the pricing, but we also see more players taking pricing. So that might be a sign that shows or reflects a more supportive consumer environment. And right now, the more rational competition among delivery platform is happening. So we believe that’s constructive for the mid and long term as well. But other than pricing, what we still fundamentally believe is still great food and great value.

So without that pricing is a bit too sort of too lonely to be there. So come during the — after the Chinese New Year now, we are seeing really good performance in breakfast. Breakfast is extremely competitive in terms of pricing. But if you have not tried our Wuhan Re Gan Mian, the hot dry noodle, they are selling really well right now. Right now, it’s time because it might go out of stock pretty soon. And then Pizza Hut, we launched the 30 new dishes, the new platform like fajita, which is a fantastic value for money and really fun way to eat.

Think about Chinese, we sold almost 40 million steaks last year in Pizza Hut, but it’s more fun to eat the steak in fajita with the sauce and wrap. So all these are happening at the same time together with pricing. It cannot go alone.

Adrian Ding: Yes. I guess just one little note to add, which is as Joey mentioned, the pricing environment is becoming a bit more favorable, and we’re encouraged — continue to be encouraged by the improving consumer sentiment. But when that translates to TA, obviously, Pizza Hut TA is — our strategy is to decrease the TA to be even more mass market friendly. For KFC, as we repeatedly mentioned in the recent earnings that for this year, we still expect KFC TA to decrease. Actually, I think we mentioned in multiple of the investors calls as well that even in the inflation — in a very inflationary environment with the speed of our innovation right now, the TA may still decrease.

That’s because of the mix, the blend, not necessarily because of pricing or discounting. So that’s something that I would like to caution, right? The higher growth in breakfast, as Joey mentioned, higher growth in KPRO, higher growth in KCOFFEE. Those are all lower TA compared to the broader KFC business. So the higher growth itself the mix itself will cause a slight decrease in TA. So this is very different from the U.S. market where the TA represents roughly the inflationary index. But in China here with the innovation, it’s a different story.

Lillian Lou: That’s very clear.

Operator: Next question is from Sijie Lin from CICC.

Sijie Lin: Okay. So I have a small question on KPRO. We see that the KPRO has performed very well and achieved initial success and raised the expansion target. So could you please elaborate more behind this? And also, is there an estimate of roughly how many cafes are suitable or have potential for opening KPRO next to them?

Joey Wat: Thank you, Sijie. We are very excited about KPRO as well, although the model it actually took 7 years to come to fruition. And we — as we mentioned in the prepared remarks, we are accelerating the development at KPRO to about 600 stores. The menu, if you have tried those before, are completely different. There’s a very lovely sort of video on the social media. It’s not from our company, but I thought that the guy did a good job to talk about the KPRO story. The food is the Chinese style light meal. I like the quote there. It’s self discipline. It’s not new. It’s not self culture.

So the food is healthy, very reasonable carry, but you still full, you’re not hungry. That’s important. And then the drink mix is very encouraging as well. We are selling very well with [indiscernible] is 20% of the business. And this is much higher than the KFC business. With that said, we think the drink business within KFC has a lot more potential. But come back to KPRO. So the product-wise, very small menu, but obviously, we are doing something right after learning for 7 years. And then Tier 1, Tier 2 cities are doing well. And then we are also testing in Tier 3 cities, and we have some very exciting early results there. So we’ll continue that.

And the result is encouraging. It’s adding to about 20% of our sales uplift to the parent store and the margin is good. So many, many good things. But the best thing among all is it has incredibly good reputation on food safety other than the food taste really good. The customer really got it. Our food safety is very trustworthy. They feel — they can feel comfortable about it. And that really show our long-term strategic moat for Yum China, our credibility in food safety, and that’s something money cannot buy. It can only be done over 40 years’ hard work.

So this year, for 2026, what’s the size of business with 600 KPRO, roughly could be up to RMB 1 billion sales which is nice. So even after the first quarter, we are adding 2 more stores to our original plan. We accelerate the pace for the second half. We are open mind about it. It really depends on the testing of the Tier 3 cities. So it’s exciting. We are very grateful that our operation team really live up to the challenge, but we’re open mind about the further growth pace.

Operator: And the last question today comes from Ethan Wang from CLSA.

Yushen Wang: I have a follow-up question on the COL. So Adrian mentioned the pressure will be easing in the second half because of the base. I’m just wondering, is that the case for quarter 2 as well? And if we just have a longer horizon, the next year or 3 year after, should we always expect this COL growth to be moderate and which will be fully offset by the decrease in O&O. Is that what we are trying to achieve when we set the stable restaurant margin target, which means it doesn’t really affect how the raw material price doesn’t really affect how this trend is going?

Adrian Ding: Thank you, Ethan. So in quarter 2, as we mentioned in the prepared remarks, the pressure on COL was slightly eased given there is only — for Yum China, given there’s only 1 month of delivery subsidy — taking the delivery subsidy in the base, which is the month of June last year. And for the second half, it’s the full of the second half that the subsidy was in the base and the delivery mix was in the base. So that’s why we say the pressure was slightly eased. Overall, I think our margin guidance in the prepared remarks for quarter 2 was we expect a broadly stable OP margin for the group year-over-year for quarter 2.

That’s considering the different factors on COS, COL and O&O. So that’s on the short term. On second half, I think one of the previous response to Luo Chen actually provides quite a bit of details on the line-by-line breakdown. Your second part of the question on long-term margin. For long-term margin, at this point in time, we’re still quite confident in our guidance shared in the Investor Day in November last year, which is for KFC to have a relatively stable margin over the long run. And for Pizza Hut to have a margin expansion to exceeding 14.5% restaurant margin by 2028.

I think one of the analysts was making the comment that we might be able to achieve that slightly earlier, which at this point in time, we don’t have a revision in our guidance. But overall, for COL, in general, given the increase in delivery with or without the delivery subsidy, the delivery mix will increase and the growth will be solid. So COL, we will face pressure on the rider front, although the per ticket cost on rider may decrease. So we hopefully will be able to offset that pressure utilizing the O&O and a bit of COS as well over the mid- to long run in the next couple of years. Yes. Ethan, thank you.

Florence Lip: Thank you, Adrian. This concludes our Q&A session. Thank you for joining the call today.

Operator: Thank you. This concludes today’s conference call. Thank you for participating, and you may now disconnect.