Yum China Q1 2026 Earnings Report

Yum China EPS Results

• Actual EPS: $0.87
• Consensus EPS: $0.87
• Beat/Miss: Met Expectations
• One Year Ago EPS: $0.77

Yum China Revenue Results

• Actual Revenue: $3.27 billion
• Expected Revenue: $3.21 billion
• Beat/Miss: Beat by +$58.32 million
• YoY Revenue Growth: +9.70%

Yum China Announcement Details

• Quarter: Q1 2026
• Date: 4/29/2026
• Time: Before Market Opens
• Conference Call Date: Wednesday, April 29, 2026
• Conference Call Time: 7:00AM ET

Yum China (NYSE:YUMC) Holdings, Inc. (NYSE:YUMC) is a restaurant company that operates and franchises brands across mainland China. It is the exclusive operator of KFC and Pizza Hut in China and also operates Taco Bell restaurants in the market.

The company’s broader portfolio includes Chinese restaurant concepts such as Huang Ji Huang and Little Sheep, as well as coffee and beverage brands including Lavasa and COFFii & JOY. Its restaurants offer a range of quick-service meals, casual dining options, beverages and related food products through dine-in, takeaway, delivery and digital ordering channels.

Yum China became an independent, publicly traded company in 2016 following its separation from Yum! Brands. In addition to operating restaurants, the company manages digital loyalty programs and an integrated supply-chain and restaurant-support infrastructure serving its operations throughout China. Joey Wat serves as chief executive officer.

Yum China Q1 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Delivered a solid Q1 with revenue up 10% (reporting), system sales +4% ex-FX, operating profit of $447M (record) and OP margin expansion of ~20 bps; Pizza Hut delivered double-digit OP growth and restaurant margin improved to 15%.
• Positive Sentiment: Accelerated expansion with 636 net new stores in Q1 (over one-third of the full-year target), on track for >1,900 net new stores in 2026 and to surpass 20,000 total stores, with franchisees contributing 42% of openings.
• Negative Sentiment: Rising delivery mix (from 42% to 54%) has pushed rider costs to nearly 30% of labor and pressured restaurant margins (restaurant margin down ~40 bps), a persistent near-term headwind though management expects easing into H2.
• Positive Sentiment: Module and format rollouts are scaling: KCOFFEE exceeded 2,600 locations (sales more than doubled YoY; target 5,000 by end‑2027) and KPRO reached 280 stores with the target raised to 600, each driving meaningful incremental sales and margin uplift.
• Positive Sentiment: Strong shareholder returns — returned $316M in Q1 and guiding to $1.5B of total capital returns in 2026 (≈$1.1B buybacks and $400M dividends), plus a plan to return ~100% of free cash flow from 2027 onward.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Yum China first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session you would need to press star one and one on your telephone. You will then hear an automated message announcing your hand is raised. Please be advised today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Senior IR Director, Florence Lip. Please go ahead.

[Florence Lip, Senior Investor Relations Director at Yum China]

Thank you, operator. Hello, everyone, and welcome to Yum China's first quarter 2026 earnings conference call. With me on the call are our CEO, Ms. Joey Wat, and our CFO, Mr. Adrian Ding. Before we begin, I'll remind everyone that our remarks and investment materials contain forward-looking statements. These are subject to future events and uncertainties, and actual results may differ materially. Please refer these forward-looking statements together with the cautionary statement in our earnings release and the risk factors included in our SEC filing. We'll also be talking about non-GAAP financial measures. We encourage you to review the comparable GAAP measures along with the reconciliation of non-GAAP and GAAP measures provided in our earnings release, which is available on our Investor Relations website at ir.yumchina.com. You can also find both the webcast replay and our PowerPoint presentation on our IR website.

[Florence Lip, Senior Investor Relations Director at Yum China]

Please note that all year-over-year growth rates discussed today exclude the impact of foreign currency, unless we mention otherwise. With that, I'll now turn the call over to Joey Wat, CEO of Yum China. Joey?

[Joey Wat, CEO at Yum China]

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 one, 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 one-third 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 zero. 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.

[Joey Wat, CEO at Yum China]

This marks the eighth consecutive quarter in which we delivered growth across all three 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 one 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 dual focus on innovation and operational efficiency.

[Joey Wat, CEO at Yum China]

Let me share a few updates on our key initiatives, 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 Buckets, we launched classic Limited-Time Offers, LTOs, such as shrimp burger, beef wrap, and wing bucket to drive additional traffic. Building on last year's hugely successful LTO campaign, Crackling Golden Chicken Wings [Non-English content] 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.

[Joey Wat, CEO at Yum China]

KCOFFEE cafes generate around mid-single-digit sales uplift and KPRO around 20% to their parent KFC stores in quarter one. 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 two modules later in the call. At Pizza Hut, alongside our classic Super Supreme campaign for Chinese New Year, we collaborated with popular IPs like Gundam and Butter Bear and launched our signature All-You-Can-Eat campaign. In quarter one, Pizza Hut accelerated expansion with 207 net new stores. That's nearly half of last year's full-year net new openings.

[Joey Wat, CEO at Yum China]

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, open 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, CFO at Yum China]

Thank you, Joey. Let me update key highlights by brand. Starting with KFC. In quarter one, 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 one, bringing the total to over 2,600 locations across all city tiers. With broader coverage and rising daily cups sold per store, KCOFFEE cafes sales more than doubled year-over-year.

[Adrian Ding, CFO at Yum China]

We expect KCOFFEE cafes to keep growing rapidly to unlock further potential and reach 5,000 locations by year-end 2027, two 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 or Southern China, where the demand for light 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. Moving on to Pizza Hut.

[Adrian Ding, CFO at Yum China]

In quarter one, 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 one, 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.

[Adrian Ding, CFO at Yum China]

Pizza Hut's TA is moving closer to our long-term target range of CNY 60 million-CNY 70 million, 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. Moving on to store opening. We accelerated store openings in quarter one 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.

[Adrian Ding, CFO at Yum China]

Franchisees contributed 42% of KFC and Pizza Hut's net new stores in quarter one, 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 one, 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 counts doubled year-over-year to around 390. In quarter one, 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.

[Adrian Ding, CFO at Yum China]

Nearly 80 Pizza Hut WOW openings in quarter one were Gemini stores, mostly in new lower-tier cities and operated by franchisees. With rising car ownership and the expansion of highway networks, we're leveraging franchisees' resources to tap into the growing on-the-road demand. We have already signed franchise agreements with more than 12 provincial and municipal highway operators, 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-throughs require dedicated car lanes. We expand on this by offering car-side pickup at locations without such lanes, but with pull-over areas, where our crew brings orders straight to consumers' cars. This approach significantly reduces CapEx requirements and gives us the greater flexibility in driving takeaway sales.

[Adrian Ding, CFO at Yum China]

Today, more than 7,000 KFC stores offer either the traditional drive-through or car-side pickup services, up from around 2,000 a year ago. While still early in building awareness and habits, in quarter one, nearly one-third of drive-through 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, rounded down to 100% of prior year levels. Our performance in January and February was broadly in line with our expectations.

[Adrian Ding, CFO at Yum China]

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 costs 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.

[Adrian Ding, CFO at Yum China]

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.

[Adrian Ding, CFO at Yum China]

Our investment in Meituan had a negative impact of $9 million in quarter one compared to positive impact of $2 million in quarter one last year. As a reminder, we recognized $10 million less in interest income in quarter one 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.

[Adrian Ding, CFO at Yum China]

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 two. 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 face in quarter one restaurant margin will ease slightly in quarter two. 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.

[Adrian Ding, CFO at Yum China]

All in all, we strive to maintain OP margin roughly in line with the prior year period in quarter two. 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%-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.

[Adrian Ding, CFO at Yum China]

Additionally, we remain on track to reach 20,000 stores by year-end. In terms of capital returns to shareholders, in quarter one, 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 subsidiary dividend payments to non-controlling interest.

[Adrian Ding, CFO at Yum China]

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

[Joey Wat, CEO at Yum China]

Thanks, Adrian. Let's take a moment to highlight our key growth drivers in quarter two and beyond. At KFC, our six 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, to the permanent menu after a successful LTO in quarter four 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.

[Joey Wat, CEO at Yum China]

In our latest spring menu launched last week, we introduced over 30 new dishes, about one third 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. 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. [Non-English content]. This bun weighs more than half a pound.

[Joey Wat, CEO at Yum China]

It's inspired by a popular Sichuan dish and is the winner of our internal nationwide food ideation competition. Pizza Hut offers Roman-style spicy pasta with sausage. [Non-English content]. 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'll continue to drive profitable growth and create sustainable value for our shareholders. Now let me pass it back to Florence.

[Florence Lip, Senior Investor Relations Director at Yum China]

Thanks, Joey. Now we will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A.

[Operator]

Thank you. If you would like to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please stand by while we compile the Q&A roster. Thank you. We will take our first question. This is from Michelle Cheng from Goldman Sachs. Please go ahead.

[Michelle Cheng, Analyst at Goldman Sachs]

Hi, Joey, Adrian, Florence. Thanks for taking my question. I would like to explore the delivery business a little bit more. Joey, Adrian, you earlier mentioned a bit on this delivery impact. Can you still elaborate a little bit more for the past few quarters, given still more promotional environment, the positive impact on same-store sales growth versus the negative impact from the competition and the margins? Do we see any, like, changes in the trend the past one to two months? Looking ahead, if as what we expected, the subsidies will be more normalized. How should we think about the financial impact, and what will be our strategies in especially driving more takeaway and the in-store consumption?

[Michelle Cheng, Analyst at Goldman Sachs]

Thank you.

[Joey Wat, CEO at Yum China]

Thank you, Michelle. I would like to make few points about your question on the delivery topic. We see early sign of more rational delivery platform competition recently, for sure. We welcome the development and believe that it will benefit our industry over time. Specifically, the reduction in subsidies right now is more pronounced for smaller orders, but only a slight decrease in QSR. We see platforms increasingly focusing on higher TA orders, which is good for our business, relative to the delivery 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. I believe that we are well-positioned for the rationalization of the delivery subsidies.

[Joey Wat, CEO at Yum China]

You know, going forward, 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. In my, you know, prepared remarks, I talk about the Pizza Hut's new food like fajita, shakshuka, the KFC, the KCOFFEE, KPRO growth mentioned by Adrian. And also [audio distortion] all these are our focus and we continue to maintain a discipline approach [audio distortion]

[Adrian Ding, CFO at Yum China]

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, you know, we have been very disciplined in taking the delivery subsidy, you know, ever since a few quarters ago. We believe we are among one of the better companies positioned in the industry to, you know, to kind of enjoy the more rationalization of the delivery environment. I guess as a little conclusion, we reiterate our annual guidance on top line for 100% to 102% on comp sales, which is something that we're pretty confident to achieve.

[Adrian Ding, CFO at Yum China]

Specific to quarter two, as I mentioned in the prepared remarks, we do expect a sequential improvement in our comp sales in Yum China, KFC and Pizza Hut. 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. 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.

[Adrian Ding, CFO at Yum China]

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. 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 slowed down delivery sales growth will translate to a more moderate decline TA for Pizza Hut. Lastly, on the margin front, as we mentioned in the prepared remark, in the second half, given the delivery mix is already a bit higher in the base, so the rider cost pressure will moderate. Hopefully, together with our other efficiency initiatives, that will help better support our margin in the second half.

[Adrian Ding, CFO at Yum China]

In terms of the second quarter, the pressure is slightly less compared to quarter one. 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, Analyst at Goldman Sachs]

Thank you, Joey. Thank you, Adrian. Very clear.

[Operator]

Thank you. The next question comes from Chen Luo from Bank of America. Please go ahead.

[Chen Luo, Analyst at Bank of America]

Hi, Joey and Adrian. Congrats on the results despite a very fluid environment. In fact, the recent sell-off of share price has actually baked in very bare expectations, but after seeing the result, I feel really relieved. My question is actually on our OP margin guidance. I remember previously we targeted a largely stable OP margin in Q1, but the actual result saw 30 OP margin expansion. Just now we confirmed that in second half, we may see easing rider cost pressure given a more normalized base for the delivery sales mix. 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. Thank you.

[Adrian Ding, CFO at Yum China]

Thank you, Luo Chen. Take the question on margin. I think our margin guidance share in early February was a slight increase in our operating profit margin for the group for the full year. I understand that in the market, different people interpret slight increase a bit differently, right? What is slight. Indeed, sorry, in the quarter four 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 one. It turned out to be a 20 to 30 basis points expansion on OP. It's still, I guess, broadly in line.

[Adrian Ding, CFO at Yum China]

You know, as a matter of fact, second half, indeed, the rider costs pressure will moderate, right? The delivery mix is higher in the base. Specifically on the three 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, you know, put together and refresh your model for the coming three quarters in the year. For COS, we expect the COS to be broadly stable for the group. As you noticed that, the KFC COS in quarter one is generally stable, right? The Pizza Hut, there is an increase in COS. There are a few reasons.

[Adrian Ding, CFO at Yum China]

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 lot of new menu items which we are still in the process of optimizing the cost. Thirdly is, because of the higher delivery mix, which results in a higher package cost for Pizza Hut, which is actually a bit more specific to Pizza Hut because, for KFC, the package cost similar before, between dine-in and delivery. With that, the COS for Pizza Hut will be between 33%-34% for the full year, which is a bit higher than last year. However, we still guide a margin expansion for Pizza Hut on restaurant margin, OP margin front, given the tailwind on O&O.

[Adrian Ding, CFO at Yum China]

That's on COS for the group, KFC and Pizza Hut. For COL, I think it's, we face consistent headwind on COL because of the delivery mix increase. We give pretty specific figure on what is the COL pressure due to the increase in delivery mix for the quarter. I'm sure you can have a recently a good modeling on the COL for the remainder of the year, depending on your specific assumption on the delivery mix. 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 do...

[Adrian Ding, CFO at Yum China]

Although there's, you know, initial signs of a good turn of the property market or, you know, initial sign of stabilization in property market. Still on commercial real estate, it's quite favorable to the merchant as of right now. We would like to leverage up the opportunity to further optimize our rental. You see a little bit of that benefit in quarter one. Hopefully, that will come in the coming quarters as well. Our lower capital expenditure, which results in a better depreciation, that will benefit O&O as well, together with other initiatives, including AMP, et cetera. Overall, the annual guidance on margin, which is a slight increase in OP margin for the group is unchanged.

[Adrian Ding, CFO at Yum China]

Hopefully we are able, and we are competent to be able to deliver that.

[Joey Wat, CEO at Yum China]

I just want to add one comment, about Pizza Hut margin, which was very nice for the quarter one this year. It's actually, I think one of the highest since the turnaround initiatives in 2018. We've been very consistent with our direction of Pizza Hut turnaround. Sales first, profit later. Now is later. Later is now for Pizza Hut.

[Chen Luo, Analyst at Bank of America]

Yeah. That remark is really impressive. You remember, during the Investor Day, we mentioned a three-year target of a 14.5% OP margin, restaurant margin for Pizza Hut. Based on the current run rate, thinks that we should actually achieve that target earlier than expected.

[Joey Wat, CEO at Yum China]

Slightly. Slightly. The inflection point was 2024 indeed, because 2024 we feel like sales was in good position. We start to really press accelerator on the margin side, and we are happy to see what we are seeing. Yeah. Thank you, Chen Luo.

[Chen Luo, Analyst at Bank of America]

Okay. Thank you. Congrats.

[Adrian Ding, CFO at Yum China]

Thank you.

[Operator]

Thank you. Our next question is from Lillian Lou, Morgan Stanley. Please go ahead.

[Lillian Lou, Analyst at Morgan Stanley]

Hello, Joey and Adrian. Thanks for taking my question. My question is actually on the underlying demand trend and related to that, the pricing momentum as well. 'Cause I think in the release, one important statement was, you are still very excited, encouraged by the underlying improvement of consumer sentiment. With a more than 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? What's the dynamic of the demand and also competition right now? Also on the like-for-like basis, are we seeing chance for some improvement on pricing in terms of the whole industry and also for ourselves?

[Lillian Lou, Analyst at Morgan Stanley]

Thanks.

[Joey Wat, CEO at Yum China]

I'll make two quick comments on that and then maybe Adrian has a bit more color to add. We have shared our view on the improving consumer sentiment since Investor Day last November. We certainly have observed some stabilization of pricing trends. Not only we took the pricing, but we also see more players taking pricing. That might be a sign that shows or reflects a more supportive consumer environment. Right now, the more rational competition among delivery platforms 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. Without that, pricing is a bit too sort of too lonely to be there.

[Joey Wat, CEO at Yum China]

You know, during the after the Chinese New Year, we are seeing really good performance in breakfast. Breakfast is extremely competitive in terms of pricing. If you have not tried our [Non-English content], the hot dry noodle, they are selling really well right now. Right now is time because it might go out of stock pretty soon. Then Pizza Hut, we launched the 30 new dishes, the new platform live fajita, which is the fantastic value for money and really fun way to eat a steak. Think about Chinese. We sold almost 40 million steak last year in Pizza Hut, it's more fun to eat the steak in fajita with the sauce and wrap.

[Joey Wat, CEO at Yum China]

All these are happening at the same time together with pricing. It cannot go alone.

[Adrian Ding, CFO at Yum China]

Yeah.

[Joey Wat, CEO at Yum China]

Yeah.

[Adrian Ding, CFO at Yum China]

One little note to add, which is, well, as Joey mentioned, right, the pricing environment is becoming a bit more favorable, and we're encouraged. Continue to be encouraged by the improving consumer sentiment. When that translate to TA, obviously, you know, Pizza Hut TA is, you know, 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 do expect KFC TA to decrease. You know, as actually, I think I mentioned in multiple of the investors calls as well that even in the inflation, in the very inflationary environment, with the speed of our innovation right now, the TA may still decrease.

[Adrian Ding, CFO at Yum China]

That's because of the mix, the blend, not necessarily because of pricing or discounting. That's the 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. The higher growth itself, the mix itself will cause a slight decrease in TA. This is very different from the U.S. market where, you know, the TA represents roughly the inflationary index. In China here, with the innovation, it's a different story. Yeah. Thank you.

[Lillian Lou, Analyst at Morgan Stanley]

Yeah. Thanks, Joey and Adrian. That's very clear.

[Operator]

Thank you. Next question is from Sijie Lin from CICC. Please go ahead.

[Sijie Lin, Analyst at CICC]

Okay. Thank you, Joey and Adrian. 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. Could you please elaborate more behind this? And also, is there an estimate of roughly how many KFCs are suitable or have potential for opening KPRO next to them? Thank you.

[Joey Wat, CEO at Yum China]

Thank you, Sijie. We are very excited about KPRO as well, although the model, it actually took seven years to come to fruition. As we mentioned in the prepared remarks, we are accelerating the development of 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 [Non-English content], self-discipline. It's not [Non-English content], it's not self-torture.

[Joey Wat, CEO at Yum China]

The food is healthy, very reasonable calorie, but you're still full. You're not hungry. That's important. The drink mix is very encouraging as well. We are selling very well with the milk shake. You know, it's 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 compared to KPRO. Product-wise, very small menu, but, you know, obviously we are doing something right after learning for seven years. Tier 1, Tier 2 city are doing well, and we are also testing in Tier 3 cities, and we have some very exciting early result there. We'll continue that. The result is encouraging.

[Joey Wat, CEO at Yum China]

It's adding to about 20% of our sales uplift to the parent store, and the margin is good. Many, many good things. The best thing among all is it has incredibly good reputation on food safety. Other than the food tastes really good, the customer really got it. Our food safety is very trustworthy. They feel, they can feel comfortable about it. 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. This year for 2026, what's the size of business with 600 KPRO? Roughly could be up to CNY 1 billion sales, which is nice.

[Joey Wat, CEO at Yum China]

Even after the first quarter, we are adding, you know, two more store 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. It's exciting, and we are very grateful that our operation team really live up to the challenge, but we're open mind about the further growth pace. Thank you.

[Sijie Lin, Analyst at CICC]

Thank you, Joey. That's very encouraging. Thank you.

[Operator]

Thank you. The last question today comes from Yushen Wang from CLSA. Please go ahead.

[Yushen Wang, Analyst at CLSA]

Good evening, Joey, Adrian. I have a follow-up question on the COL. Adrian mentioned the pressure will be easing the second half because of the base. I'm just wondering, is that the case for quarter two as well? If we just have a longer horizon, the next year, or three year after. 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're trying to achieve when we set the stable restaurant margin target? The raw material price doesn't really affect how this trend is going. Thank you.

[Adrian Ding, CFO at Yum China]

Thank you, Yushen. In quarter two, as we mentioned in the prepared remark, the pressure on COL was slightly ease. You know, given there is only... For Yum China, given there's only one month of delivery subsidy, taking the delivery subsidy in the base, which is the month of June last year. But 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. That's why we say the pressure was slightly eased. Overall, I think our margin guidance in the prepared remark for quarter two was, we expect a broadly stable OP margin for the group year-over-year for quarter two.

[Adrian Ding, CFO at Yum China]

That's considering the different factors on COS, COL and O&O. 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. For Pizza Hut to have a margin expansion to exceeding 14.5% restaurant margin by 2028.

[Adrian Ding, CFO at Yum China]

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. Overall, for COL, in general, given the increase in delivery, with or without a delivery subsidy, you know, delivery mix will increase and the growth will be solid. COL, we will face pressure on the rider front, although the per ticket cost on rider may decrease. 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 two years. Yeah. Yushen, thank you.

[Yushen Wang, Analyst at CLSA]

Got it. That's it. Thank you, Adrian.

[Florence Lip, Senior Investor Relations Director at Yum China]

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

Participants

Executives

• Adrian Ding, CFO
• Florence Lip, Senior Investor Relations Director
• Joey Wat, CEO

Analysts

• Chen Luo, Analyst at Bank of America
• Lillian Lou, Analyst at Morgan Stanley
• Michelle Cheng, Analyst at Goldman Sachs
• Sijie Lin, Analyst at CICC
• Yushen Wang, Analyst at CLSA