Yum China Holdings, Inc. (YUMC) Q3 2026 Earnings Call Transcript

Director, Investor Relations of Yum China. Please go ahead, ma'am.

Thank you, Operator. Hello, everyone, and welcome to Yum China's third quarter 2026 earnings conference call. With me on the call are our CEO, Ms. Joey Watt, and our CFO, Mr. Adrian Ding. Before we begin, please note that our remarks and investor materials contain forward-looking statements. These are subject to future events and uncertainties, and actual results may differ materially. Please refer to the cautionary statement in our earnings release and the risk factors in our SEC filing. We'll also discuss non-gap measures. The comparable gap measures and reconciliations are in our earnings release on ir.yumchina.com. You can also find the webcast Replay and the presentation there. Please note that all year-over-year growth rates exclude the impact of foreign currency unless otherwise mentioned. With that, I'll turn the call over to Joey Watt, CEO of Yum China.

Joey? Hello, everyone, and thank you for joining us. In Quarter 3, we continued to grow sales and profit year-over-year. In reporting currency, Currently, revenue grew 8%, operating profit grew 13%, and diluted EPS grew 20%, partially supported by favorable foreign exchange impact. Excluding foreign exchange impact, system sales grew 3% year-over-year in Q3 and continued to outperform the catering industry. Core operating profit grew 6% year-over-year. We also achieved our 10th consecutive quarter of system sales, operating profit, and OP margin growth. Importantly, we have delivered double-digit diluted EPS growth year-to-date and in each of the past three years, excluding the Meituan In Q3, same-door sales reached 97% of the prior year's level, primarily reflecting tough lapping from last year's delivery platform subsidies and the impact of extreme weather this August. With our due focus on innovation and operational efficiency, restaurant and OP margins improved 50 and 40 bits year over year, respectively. This margin expansion demonstrates the resilience of our business and the discipline execution of our teams in mitigating the self-deleveraging impact. It was also partially supported by license fee savings following the Pizza Hut brand acquisition in mainland China. We delivered Our 15th consecutive quarter of positive same-store transaction growth, a key element of our growth strategy. Our breakthrough side-by-side modules are helping us capture new occasions and drive incremental sales and profits. We also continue to build our brand and attract more customers to our stores through compelling in-store offers and experience, As well as greater takeaway convenience. Sign-in and takeaway performance improved sequentially, bucking the previous trend. Active members grew 6% year-over-year to $278 million, and our goal is to engage them across even more occasions. We also continue to accelerate Thank you. Thank you. Thank you. was 19,989, keeping us on track to surpass 20,000 stores this year. Thanks to our team's strong execution and innovation, we delivered solid operational efficiency, which was particularly important this quarter. We proactively review our store portfolio to reduce rent and lowered delivery rider costs on a per order basis. We also improved supply chain efficiency through manual innovation together with dynamic promotions. This allows us to offer great value for money to consumers. To ease the burden of our frontline teams, we have been automating and digitizing certain tasks and shifting some to our operations support center. By combining frontline operational experience with AI-enabled intelligence, the center supports inventory replenishment, staff scheduling, as well as recruiting, training, and online customer service for our restaurant teams. All of these efforts have contributed to our margin expansion and will continue to support our growth going forward. Our innovative side-by-side modules have become meaningful contributors to incremental sales and profits. Their store economics have also improved. K Coffee Cafe exceeds 4,000 locations. The Apple Sparkling Americano sold more than 1 million cups per week during the peak summer season. Non-coffee drinks more than We have been tripled year-over-year in Quarter 3 with the addition of the popular mango pomelo sago, yanzhi ganlu, and sparkling tea. K-Pro surpassed 700 locations. We expanded the menu to broaden its appeal, developing sandwiches as another sales growth pillar alongside energy boats. We also introduced high-protein smoothies, which have been particularly popular with certain consumer segments and have generated strong repeat purchases. K-Pro is now in around 250 cities, demonstrating solid potential for further growth. Pizza Hut's Burger Bar reached More than 300 locations in 50 cities, contributing double-digit incremental sales and meaningful profit to parent stores. Overall, Pizza Hut's burger category captured new customers, especially young people and solo diners, with sales growing in the high double-digit percentage year-over-year in quarter three. As side-by-side modules help us capture new occasions, our hero products anchor our strong fundamentals, inspiring innovations to drive sales and social buzz. In August, KFC launched the intriguing Oreo original recipe chicken burger, a new twist on last year's original recipe chicken burger, with cocoa bun and creamy Oreo blend sauce. Trust me, it does taste pretty good. On its first day, we sold more than 1.5 million burgers, roughly three times the launch day sales of the original recipe chicken burger last year. At Pizza Hut, pizza is our hero category, accounting for over 40% of sales. We sold 17% more pizza year-over-year in the first nine months. In August, we launched the exciting handheld pizza, SoulWall Pizza, targeting solo diners and on-the-go occasions. Made with our latest low-sugar multigrain cut and available with a variety of toppings, it offers a high-protein option under 500 calories. The handheld pizza drove strong repeat purchases and attracted younger customers, helping us tap into the emerging light meal market. Let me now turn the call over to Adrian. Adrian?

Thank you, Joey. Let me update key financial highlights by brand, starting with KFC. In quarter three, KFC opened over 500 annual stores and exceeded 14,000 total stores. System sales grew 3% year-over-year, and operating profit grew 4% year-over-year. Same-store sales index was 97% of the prior year's level. Same-store transactions grew 3% year-over-year. Ticket average was down 5% to 36 yuan. The rapid growth of incremental smaller orders from new customer segments and locations, such as K-Coffee and K-Pro, was partially offset by the increased delivery mix, which carries a relatively higher ticket average. This offset was less than in the first half due to slower year-over-year delivery mix growth. KFC's Restaurant margin improved by 10 basis points year-over-year, as efficiency gains more than offset sales deleveraging. This, once again, demonstrates our resilience and strong execution. Moving on to Pizza Hut. In Quarter 3, Pizza Hut added nearly 209 new stores, with total stores surpassing 4,700 across 1,300 cities. System sales grew 1% year-over-year. Operating profit grew 21% year-over-year, partially supported by Pizza Hut's license fee savings previously payable to young brands. Same-store sales index was 97% of the priorist level, with transactions up 5% year-over-year, the 15th consecutive quarter Ticket average was down 8% year-over-year, to 65 yuan, in line with our math market strategy, primarily driven by value for money offerings and incremental smaller orders such as those from solo diners. Pizza Hut's restaurant margin improved by 190 basis points, or up 30 basis points year-over-year, excluding the license fee savings. Streamlined operations and automation more than offset higher cost of sales. Let me now go through our Q3 P&L. System sales grew 3% year-over-year, mainly driven by store growth. Same-store sales index was 97% of the prior year's level, against a tough comparison from last year's delivery platform subsidies. Having accounted for the later start of the July was broadly in line with our expectations. August was more challenging than expected. More frequent average weather impacted consumption, particularly in East China, one of our strongest markets. Delivery subsidies also scaled back faster than expected. We stepped up our efforts, and the sales index sequentially improved in September. Our restaurant margin was 17.8%. Cost of sales was 31.5%, up 20 basis points year-over-year. Occupancy and other improvements more than offset higher cost of sales and labor. Cost of sales was 31.5%, up 20 basis points year-over-year, mainly from better value for money offerings and investment in our new modules, including K-Coffee Cafe, K-Pro, and Burger Bar. Cost of labor was 26.5%, up 30 basis points year-over-year. Rider costs remained a headwind, although the impact moderated from first half to 30 basis points this quarter. We kept non-rider costs relatively stable, with efficiency gains offsetting wage inflation and sales deleveraging. Occupancy and other was 24.2%, down 100 basis points. Held by these renegotiations, more favorable rent in lower tier cities, and other efficiency initiatives. Pizza Hut license fee savings also contributed 30 basis points of year-over-year improvement. OP margin was 13.0%, up 40 basis points year-over-year. Operating profit was was $451 million, growing 6% year-over-year. Net income was $311 million, up 3% year-over-year, or flat, excluding the Meituan investment. Our Meituan investment had a positive impact of $1 million in Q3 compared to a negative impact of $8 million in Q3 last year. As a reminder, we recognize $16 million less in interest income in Q3 this year, Due to a lower cash balance, resulting from the cash we returned to shareholders, lower interest rates, and more interest expense to fund the Pizza Hut deal, diluted EPS was $0.91, up 12% year-over-year, or 8% excluding the Meituan investment, following the completion of the Pizza Hut brand acquisition. Pizza Hut was no longer subject to license fees, resulting in around 30 basis points benefit to both restaurant and OP margins in Q3. Net of interest in financing expenses and taxes. The acquisition was secretive to diluted EPS by around 2 cents in Q3. Let's turn to store openings. In the first nine months, we opened a record of 1,888 net new stores. We're entering new cities and adding store density in existing cities to better service the customers. With our dual focus on system sales growth and same-store sales growth, over half of our new stores were opening new cities, strategic locations, or trade zones with no dining or delivery coverage. With nearly 20,000 stores spanning Tier 1 to Tier 7 cities, a tiered market playbook is essential. We developed store formats for lower-tier cities, including KFC Small Town, Pizza Hut Wow, and the KFC and Pizza Hut Gemini formats. These formats accounted for more than half of the new stores opening lower-tier cities this year. We also introduced a tailored menu at KFC for select low-tier cities to better match consumer needs in these markets. It is a simplified menu featuring our signature products alongside specially designed items to deliver excellent value for money. Food is mostly made to order to fit that lifestyle in smaller cities. Our new stores remain healthy with a payback period of around two to three years. With a lower store opening hurdle and more flexible store formats with better suited menus, we see significant opportunities across city tiers. Accordingly, we're raising this year's menu store target from 1,900 to over 2,400. With more than 20,500 stores expected by year end, we're moving closer to our goal of 30,000 stores by 2030. Now, moving on to our 2026 outlook, let me start with sales. We're working hard to deliver a sequential improvement in same-store sales index in quarter four despite its higher base. While we continue to face tough comparisons from last year's delivery subsidies, we exited quarter three with better momentum in September, and October was broadly in line with our expectations. In November, the autumn school break is slightly more broad-based than last year, which could provide some tailwind. Overall, we're confident in delivering our 16th consecutive quarter of positive same-store transaction growth. Moving on to margins. Before considering the impact of the Pizza Hut deal, we expect OP margin to be relatively stable year-over-year for Yum China in quarter four. We expect rider cost pressure to moderate, and our efficiency and cost initiatives to support margins, including rent, labor productivity, and capex. As a reminder, quarter four is seasonally lower in sales and profit, so sales volatility could have a more potent profitability impact. The Pizza Hut deal will have a full quarter The Pizza Hut deal is expected to be accreted to Q4 diluted EPS. Looking ahead to 2027, we are confident in delivering both sales and profit in line with the three-year growth algorithm outlined at our investor day last year. As we continue to accelerate store openings, we're targeting 0% to 2% same-store sales growth on a full-year basis, in line with our investor date target. We'll provide more details on 2027 when we report our quarter-four earnings in February. In terms of capital return to shareholders, we plan to return $1.5 billion to shareholders in 2026, around 10% of our market cap. In the first nine months, we returned $1,080,000,000, including $778,000,000 of buybacks and $302,000,000 of dividends. In quarter four, share repurchases will be around $315,000,000, or about 20% above the average quarterly run rate in the first nine months. From 2027, we remain committed to returning around 100% of our annual free cash flow after subsidiary's dividend payment to non-controlling interests. This is expected to be about $900 million to $1 billion-plus on average in 2027 and 2028, and exceed $1 billion from 2028 onwards. Our capital return program reflects the confidence in the long-term earnings power of our business. With that, let me hand it back to Joey for future growth drivers and closing remarks.

Thank you, Adrian. As we expect sales growth to pick up over time, let me walk you through our key growth drivers. In quarter four, we will continue our side-by-side model rollout and hero product innovation, which have proven effectively. We are also focusing on bringing customers back into stores. First, our side-by-side modules tap into large, fast-growing categories, such as light mules and burgers, where our trusted brand, national store network, and supply chain give us a natural advantage. K-Coffee Cafe is well on track to exceed 5,000 locations by the end of 2027. K-Pro is set to surpass 850 locations by year-end. We plan to reach 1,500 locations by 2027. We aspire to be a market leader in China's promising and underserved light meal market. Burger Bar is set to exceed 500 locations by year-end, doubling to 1,000 by 2027. This helped us build awareness of Pizza Hut's burger category while driving incremental traffic and sales, targeting over 1 billion RMB in total burger sales at all Pizza Hut stores and the burger bar this year. This is around 5-6% of Pizza Hut sales. Second, our hero product platforms, Chicken Wings, Zinger, Original Recipe Chicken, Whole Chicken, Egg Tarts, and their extensions represent close to 30 billion RMB or 40% of KFC annual sales. They provide a strong foundation for efficient product innovation. Every quarter, we launch something new and exciting, driving repeat purchases and attracting new customers. Third is to drive buy-in and take-away. Our nearly 20,000 stores across China give us a strong platform. We are enhancing in-store offers, the dining experience and convenience to attract customers to our stores. Building Depending on our strong brand equity, we are also strengthening brand loyalty. Here are some examples. At KFC, car-side pickup has expanded to over 9,000 stores, targeting over 10,000 stores by year-end. In addition to drive-through, options like door-side pickup and curb-side pickup significantly This is going to be improved customer convenience and investment efficiency. So far, over 12 million members have used these services in 2026 with strong repeat purchases. We target this business to reach 1 billion RMB in sales this year. At Pizza Hut, the late September autumn menu upgraded over 20 items. In addition to beef and chicken fajita, we add pork, shrimp, and dew protein options. The new menu also includes global flavors such as soboki, a Korean-style rice cake dish with melted cheese and grilled pork. These items suit Dying and bring new customers into stores. Taken together, we are building brands designed to deliver sustainable growth, not just for quarter four. Now, a few words about the strategic benefits of owning the Pizza Hut brand in mainland China. In addition to increasing net new openings to 800 stores annually in 2027 and 2028, brand ownership also allows us to move more quickly on growth opportunities such as Burger Bar. Additionally, we are tapping into incremental opportunities such as the retail business with greater flexibility. We see potential to broaden both categories and distribution channels. Beyond our existing pasta and steak offerings, we are also exploring new product categories. Distribution will extend beyond e-commerce and our own restaurants to offline channels, including modern trade. Overall, owning the brand gives us greater flexibility and agility in unlocking Pizza Hut's long-term growth potential in mainland China. To wrap up, while the market remains dynamic in the near term, our fundamentals are strong and we are confident in our long-term growth. We estimate return on equity of around 19% this year. This is clear evidence that our growth is capital efficient. On a three-year basis, we remain committed to the growth algorithm aligned at our investor day. We are laser-focused on execution. Put simply, execution is growth. Now, let me pass it back to Florence.

Thanks, Joey. Now we'll open the call for questions. To give more people For a chance to ask questions, please limit it to one question at a time. Operator, please start the Q&A.

Thank you. To ask a question now, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. A moment for our first question. And our first question comes from the line of Michelle Ching from Goldman Sachs. Please ask your question. Michelle, your line is open.

Hey, Joy, Agent. Congrats again for the consistent profit growth, margin expansion, and market share. Again, as we know, the environment is very challenging. And also, thank you, Agent, for talking about the same-store sales thoughts. But still want to explore the exact relationship But among these same-store sales, store expansion and margin a bit more. So given these volatile consumption sentiment and also the very fluid weather condition, so how do we see or how confident do we see the same-store sales growth? And especially we see we continue to accelerate the store expansion. So do we really see some dilution on the same-store sales? But on the flip side, we actually continue to see the margin expansion. So, at the end, should we just not look at same-store sales volatility in the near term, but we still have decent room for these cost optimizations to drive profit growth? So, as a result, the priority is actually profit growth, and no matter same-store sales is fully in the short term, we're still confident to see the profit growth. So, just want to understand the relationship between these three factors.

Thank you, Michelle. Yeah, I think there are three points here. The same-store sales growth, store expansion, and then the consumer sentiment. And I'll leave the profit question to Adrian. Same-store sales first. As we mentioned in the prepared remark, Michelle, we faced tough lapping from delivery platform subsidies last year and more frequent adverse weather in August this year. With that said, even with the same-store sales pressure, we did deliver solid sales and profit growth. So system sales, operating profit, OP margin all grew year-over-year for 10th concept quarter. And of course, for shareholders, our year-to-date dilute EPS growth is double-digit, following double-digit EPS growth each year in the past three years. So it has been a long-term commitment. And on top of that, the same store transaction growth, which is the absolute key in our business, grew for 15 consecutive quarters. It's a very, very important element, if not the most important element of our growth strategy. We continue to build our brand and attract more customers back to our store through compelling install-only offers and experience, and, of course, the bigger takeaway convenience. So, therefore, buy-in and takeaway performance improve sequentially, bugging the previous trend. We will continue to drive that change over time. One last bit about the SSG is, as someone clever say, sales is a vanity, profit is sanity. And we, of course, want a bit of both. But if we must do the trade-off, we tend to focus on the profit slightly more. With that said, we are still working very hard to deliver a Sequential improvement in the same store sales index in quarter four, despite its high base, and remain confident in delivering the three-year growth algorithm in 2027, as mentioned by Adrian in the prepare remark. Now, come to the store opening. We are both entering new cities and adding store density in existing cities to better serve customers. We have due focus on system sales and same-store sales growth. Over half of our new store openings were open in new cities, new strategic locations, or trade zones with no dining or delivery coverage to mitigate the cannibalization. However, naturally, there's some sales transfer that may impact the same-store sales growth, but it's important to recognize that we are driving incremental sales and profitable growth while protecting the margin. Point three, about the consumer sentiment, we continue to see improving trends and believe that some volatility along the way is normal. The sequential improvement in September retail sales compared with August is encouraging. As I mentioned in my prepared remark, the certain consumer occasions have been growing very nicely and rapidly, like light meals and burgers. Consumers are willing to spend when offer innovative product and experience with strong value for money. We also continue to see significant opportunities from the ongoing chainification. The chain restaurant penetration in China is still relatively low, but has grown from 20% to 30%, but it's still low compared to 60% in other mature markets. Last but not the least, we continue to see some stabilization in pricing trends, with more players becoming more rational on this kind and even taking price, reflecting a more supportive consumer environment. Adrian.

Thank you, Joey. Michelle, I guess to the final part of a question on margin, you're kind of right that our margin performance has been very resilient, despite there are some challenges on competition. And indeed, a lot of credits to the team on the strong execution. As Joey mentioned in the prepared remark, execution is growth. Specifically on margin, I'll briefly comment on quarter three and then addressing your question regarding the near-term outlook. On quarter three, obviously, as you noted from our earning release, O&O's improvement more than offset, some slight increase in COS and COL. And among the O&O line items, obviously, thanks to Project Sacred Cow that we mentioned previously in our earnings, rental has a good improvement. And this quarter, our rent will get to approximately 8%. You know, we don't normally externally disclose our exact rental for store, but, you know, this is a key milestone, you know, that reaches slightly below 8%, approximately 8% for the first time, you know, ever since our listing back in 2016. A&P, there's slight improvement as well as percent of sales, given our efficiency improvement there. And also, there is some contribution by the Pizza Hut transaction. And as I mentioned in prepared remarks, that contribution is roughly 30 basis points of sales. So that's on quarter three. If you look at near term or speaking of 2027, as Joey pointed out, we're We're still quite confident to achieve 0% to 2% of comp sales in 2027, in line with our investor day guidance, and specific on margin, right? If you think about COS, COL, and O&O, for all the three lines, I'll provide a bit more color in February early, but I'll just give their high-level preview, kind of preview on these line items. For COS in 2027, we think it will be broadly stable for the group. Obviously, for Pizza Hut, it may slightly improve over the roughly 34% level for this year, as we previously guided. And for COL, you know, if you think about the delivery sales mix, it will be broadly stable, you know, similar to this quarter of 54% or only slightly up. So the overall pressure on rider will be moderate next year, right, compared to this year when we're not in last year. And lastly, when you think about O&O, the Project Sacred Cow impact on rental will be a structural impact that will still benefit next year as well. And we'll still enjoy some benefits on depreciation and probably a little bit on AMP. So, overall, let me get back to our investor day guidance. We think our restaurant margin for KFC will be broadly stable. That was consistent to what we guided back last year in our investor day. And for Pizza Hut, before considering the Pizza Hut transaction, the restaurant margin will slightly improve, hopefully next year. And then we're still quite committed to deliver a double-digit EPS growth. That was actually achieved in each of the previous three years as well as year-to-date. So we continue to commit to that next year as well. Michelle, thank you.

Thank you, Joy. Adrian, very, very clear.

Thank you. The next question comes from the line of Chen Luo from Bank of America. Please ask your question, Chen. Your line is open.

Hey, Joey and Adrian. Congrats again on the stellar earnings. Of course, I hate to ask this question because we always regard YAMC as a steady compounder, driven by a very good expansion as well as margin management. But it seems that the market currently care all about just SSG. So as Q3 is already behind us, so now all the eyes are on Q4. So just now in the opening remark, Adrian mentioned that October SSG was broadly in line with management expectations. I also highlight that in November this year, we are going to see more regions adopting the autumn school breaks. So can we share a bit more color on the Q4 SSG trend as well as our outlook? For example, October was pretty much in line with expectations. So with regard to expectations, basically referred to the 0 to 2% SSG that we guided historically. And also, we all know that based on channel checks, November comps were very difficult, but that was partly due to the first-time introduction of Alton school break last year, whereas this year, there were more regions adopting this break. So I'm very confused. Is November really having a tough comps or because of more holidays in more regions this year, actually November should be okay? Any color will be helpful, thank you. Thank you, Luo Chen.

Well, indeed, I understand that the market actually care a lot about the comp sales. And again, before I answer the question specifically on color on comp sales, I would like to reiterate that for us, as Joey mentioned in the previous Q&A, sales is vanity, profit, sanity, right? And so obviously, in normal times, we will get both. And, you know, in special situations, for instance, quarter three, when we face the extreme weather in August, in those kind of situations, if we have to choose one, we kind of choose profit. And hopefully that's also what our shareholders want. And the fact that we deliver a double-digit EPS growth in each of the previous three years, as well as year-to-date, also demonstrate the track record there. And to answer a question on comp sales for quarter four, in October, yeah, you know, as I mentioned in the prepared remark, it's broadly in line with our internal expectations. If, you know, we will have to provide some a little bit more color, I would say, you know, the Golden Week has a little sequential improvement over the mid-autumn festival, which is a few days before the Golden Week, if people still remember, right? So there's a sequential improvement there. And October as a whole is in line. So there is no, you know, no surprises, no negative surprise, no positive surprise is broadly in line. November, we're only on the second day of November, and I guess the good thing is, you know, the autumn school break is a bit more broad-based this year in November compared to last year, which could, which may provide some tailwind. But the headwind is obviously a quarter four of last year has an index of 103, which is meaningfully higher than the rest of the three quarters in the base last year. So, it's a tough lapping, but we are working hard to try to achieve a sequential improvement in our comp sales in quarter four, over quarter three. But I think if you were to look at, you know, further down the road in 2027, I think we are quite confident to achieve zero to 2% comp sales for full year 2027, which is actually only two months from now. Yeah, I know I didn't give overly concrete information on quarter four comp sales because it's still two full months to go, but hopefully that color may be potentially helpful.

Thank you, Lochen. That's already very helpful indeed. I know how difficult or fluid the situation is, and I really appreciate many efforts to share as much information as possible, and also hope that our operation can go from strength to strength. Thank you.

Thank you. And our next question comes from the line of Lillian Liu from Morgan Stanley. Please ask your question. Lillian, your line is open.

Thanks a lot, Joey and Adrian. I have a question on Pizza Hut because on the investor day for the next three years or longer term, there should be better growth coming from Pizza Hut. I know there should be some short-term volatilities, but based on this year so far, in particular the quarter, I think Pizza Hut system sales have been slower than KFC, and I would like to understand whether it's just a one-off, in particular because of the weather, because of some short-term volatilities, or how do we see Pizza Hut, again, as a driver for the That's my main question. And just to double-check, given the comment on fourth quarter same-store sales, we don't have so-called guidance for 2026 same-store, right? Just a small follow-up check. Thank you.

Yeah, Lillian, let me address your question here. Your final part of the question on guidance for comp sales for full year, yes, given the fluid situation, Particularly around the lapping of delivery subsidy, and as I mentioned in prepared remark, the subsidy did scale back faster than expected in quarter three. And obviously, the August extreme weather didn't help. It's a peak month of the year as well. You know, we didn't explicitly guide in this earnings on a full year comp sales for 2026, but we did guide on 207 outlook. And also, we reiterated our guidance for the three-year growth algal, you know, on a three-year basis, we're still quite confident to achieve our guidance that we're sharing on yesterday. On Pizza Hut's growth, I mean, as you correctly pointed out, in your term, there is some dynamic situation, you know, also, you know, we are indeed working on the various strategic levers on improving the Pizza Hut's growth. But if you were to look at a bit more further down the road, we are confident that Pizza Hut will deliver very solid growth. I think we give some figures back our investor day. Specifically, we guided a restaurant margin of 14.5% before the Pizza Hut transaction by 2028. And if you were to include the impact of Pizza Hut transaction, hopefully the margin will exceed 17% by 2028. Obviously, we will invest a bit of the margin, saving from the 2.8% into new stores, because new stores in the first year, the margin is lower than the normal stores, because it takes around three years for the stores to mature. And we'll invest a bit of the margin on new modules, such as Pizza Burger Bar, although it's profit accretive, but it's slightly margin dilutive, as we pointed out previously. But overall, we are still confident to achieve a restaurant margin of approximately 17% or slightly higher by 2028. That will actually imply Pizza Hut will get to KFC's restaurant margin level in a bit more than a year's time. And also, in terms of the new store growth, we dialed up the annual open guidance from 600 to 800 stores each of 27, 28, and hopefully, if you have an assumption on comp sales for each of the next two years, that will give you a high-level, top-line growth figure. And then, with the margin expansion, you can get to a high-level, bottom-line growth figure. So, yeah, despite the short-term dynamic situation, we are confident about the mid- to long-term growth potential of Pizza Hut.

Lilian, just a few more comments on the Pizza Hut growth. First of all, we are truly excited to buy better brand because it does give us both short-term and long-term strategic implications in a very positive way. And I would just like to highlight a few key growth drivers. First of all, Pizza. We don't talk enough about it. I mean, pizza is 40% of our business, and year to day, we sold 180 million pizzas already, and the number is 17% up year over year. And that's the number of pizza. I mean, the sales number is slightly less because these are the incremental. A lot of it is incremental, like the smaller order, the smaller pizza, solo diner, but that's fantastic because this is 40% of our business. And in particular, the one-person pizza, the smaller one, it increased by 40%. I mean, in this market, like anything double-digit, not to mention 40%, is something that we are excited about. Secondly, the burger bar that we talked quite a bit, we expanded to 50 cities in just nine months, 300 locations, and we are targeting 500 by end of this year and 1,000 locations by 2027. And the investment is rather sensible and modest, really. But yet, it delivered double-digit sales uplift and incremental profit to the parent stores. That's something to be excited about for the PCI business. And then the third, the Wow, Pizza Wow, is still going very nicely, and the store count doubled year-over-year to 490 year-to-date, and we're going to do more by end of the year. And this is very effective to help us entering new cities. For many years, Pizza Hut business stuck at 900 cities. But now, with the new modules and more store formats, we entered 350 new cities this year, which is a fantastic breakthrough and milestone for Pizza Hut. So all these are something that we are quite excited about. And then not to mention, find better brands allow us to do something strategically much faster. For example, retail. I don't know whether some of you guys have tried already. It's just this week we start to sell frozen durian, which is just retail, like sold through retail. I tried it myself. It smells fantastic. It smells and tastes like durian ice cream, but it's real durian frozen. I mean, now we own the brand. We can make this kind of decision and try new things much, much faster. So I'm quite excited about Pizza Hut's growth prospect in the short and long term, too. Thank you, Lillian.

Thanks a lot, Jo, you and Adrian.

Thank you. And our next question comes from the line of Anne Ling from Jefferies. Please ask your question, Anne. Your line is open.

Yeah, thank you very much, management team. Just a quick one, you know, I just want to check regarding last year, 4Q, you know, how much of the 3% same store is coming out from the delivery subsidy and how much is coming out from the autumn, like, you know, spring, the autumn break? So I just wanted to check, like, you know, like, if we are trying to, like, the base impact. And regarding, like, you know, the 4Q outlook, it's like, you know, we're expecting a sequential improvement versus third quarter, right? So I do, like, you know, do you expect that, you know, you will also be, like, you know, at this point, able to gain some share from the peers? So some of the same sales is actually coming out from the peers rather than, like, you know, the industry growth.

Thank you, Anne. Well, I think this question is, you know, it's very hard to break down the impact of the delivery subsidy back in quarter four last year versus the school break in quarter four. But what I would say is, given it's the first time of a multi-provincial school break in quarter four last year, the impact was actually a little positive surprise to us, right, back in quarter four. And that's why when we reported our February earnings, we also mentioned kind of the same comment. And then hopefully the 3% positive comp sales was a little surprise to the market. But yeah, I didn't get the exact breakdown because it's hard to break down that way. And this year is the second time with the, you know, the ad hoc school break in November. It's slightly more broad-based compared to last year. And we look forward to seeing how the trading goes in November. And I would encourage people to also focus, equally importantly, October, November, and December, right? So December is important as well. We have lots of campaigns lining up in the coming two months. So yeah, I mean, at this point in time, what we can say is we're working very hard to try to achieve sequential improvement in sales in quarter four. And your second part of the question is whether we're taking, if I remember correctly, whether we're taking shares from competitors. I would say the market is large enough, right? And then I think in our previous earnings as well as earlier in the Q&A, Zhou Yi did comment on the fact that the chainification rate here in China is still quite low. I mean, for restaurant, it's 20%, 30%. For beverage, it's much higher, right? If I remember correctly, it's around 60% for beverage chainification rate. So that's why you'll see lots of new players and existing players are actually in the catering space and opening stores in a very fast fashion. And so the market is large enough to accommodate a lot of successful players. And if anything, if you're thinking about the consumer sentiment, right, as we mentioned earlier on the call, we think overall speaking, you know, the overall consumer is more open minded about, you know, the rational discounting, more rational discounting, as well as a little bit of pricing, right, that we all observed throughout the year. Although arguably week over week, month over month, there is some volatilities in the overall promotional environment, but if you compare this year over next year, sorry, this year over past year, I think arguably most people would believe that the whole consumption sentiment is more rational. And all I'm trying to say is that the market is still quite favorable for a chain restaurant like us. And also, it's not only favorable to us, it can accommodate and support multiple successful players in the space. And we look forward to growing our market share, continue building our brand in this part, in China. And we give quite a bit of color in terms of how we think about us for opening strategy in our preparatory market as well as earlier on the Q&A as well. So that's, I guess, the response to our question, Anne.

Just one more comment for your question, Anne. And last year, with the platform subsidies, Yum China in general, we are quite disciplined with our trading, particularly in food, because the cost of sales in food is quite high. So we are very disciplined. We do take some subsidies and invest in the emerging business, like the La Vassa, the smaller emerging business, and drinks. Drinks, for us, for KLC, is about mixed teams in terms of mix, and it's about low teams for Pizza Hut in our mix. And both drink business, actually, for quarter three, grow quite nicely. We actually have positive growth because we have quite a few new dreams launched, which were proven popular among customers. So I think that is the context I can share with you, Anne. Thank you. Thank you, Julie.

Thank you. And our next question comes from the line of Christine Peng from UBS. Please ask your question. Christine, your line is open.

Hi. Thanks for the comments given by the management so far. So I have a question specifically for Adrian in terms of your earlier comment about labor costs. So basically, your comments point to a steady cost of labor, a percentage revenue in 2027. But having said that, we do notice that the Chinese government is putting into place a strict enforcement of social insurance collection, especially in recent months, so I just want to understand what are the assumptions behind this cost of labor stable kind of trend you are foreseeing in 2027. Are there any specific measures you can share with investors? And one thing I also want to clarify with you is that you are mentioning the Pizza Hut China acquisition is bringing 30 BIPs margin expansion in the third quarter alone, but when I look at the details, the cost of occupancy and other revenue for Pizza Hut actually is a percentage drop more than 200 BIPs on a yearly basis. So I just want to understand the 30 BIPs margin expansion, you know, how that compares with the 200 BIPs of margin savings in the cost of occupancy for Pizza Hut in the third quarter alone. Thank you.

Thank you, Christine. The final part of our question, I think the 30 basis points of margin expansion is for the group. And then if you were to calculate the impact on Pizza Hut, I believe it will be around 160-170 basis points for Pizza Hut. So that kind of is the difference there. And the second part of the question, I guess I'm responding in reverse order. Please bear with me. The second part of your question is on the assumptions on COL. So, you know, the recent stricter compliance or requirements by the government on social benefit and social security has, you know, no impact on us because as you and hopefully everyone else on the call know that we are super compliant in terms of what are different regulations and specifically on social security. Right. Our social security base for our full time employee is calculated on the actual wage, which include the base pay, the bonus, the overtime, et cetera, et cetera. It's not calculated on the minimum wage. Right. So so hopefully that's kind of the core part of the second part of the question. And the first part of your question is on the COL outlook for next year. You mentioned broadly stable. I think, yeah, that's kind of what we meant. But more specifically, what we meant here is the pressure on COL and the pressure on rider cost will be much more moderate next year compared to this year, right? Because this year, we're having mid-50s delivery mix for the full year, lapping last year, you know, especially in the first half of last year, it's around 40% in the mix, right? So that's a significant pressure on the rider cost. But coming into quarter three, if you look at the rider cost, it's only 30 basis points of cost increase. So the pressure already meaningfully moderated compared to more than 150 basis points in the first half of the year. And then, so hopefully that moderation on rider pressure will last into quarter four and next year, because next year, as we mentioned in the earlier part of the Q&A, the delivery sales mix will be broadly stable compared to where we are right now. And if you use the broadly stable figure, the mid-50s percentage of delivery sales mix lapping this year, which is, let's say, 54%, I believe, for a full year, it will be only slightly increased or broadly stable, right? And then if you take into account the wage inflation and all that, the COL, hopefully the pressure will be much more moderate. And the key levers in driving COL efficiency to mitigate wage inflation is really the digitalization, the process optimization, and centralized of many of the tasks, including recruitment, training, interviewing, inventory replenishment, labor scheduling, and even some of the preparation work of the raw materials. We centralize some of those. So these are the measures, as we mentioned in this earlier and previously, to drive our COL efficiency. But overall, COL, that will not decrease, just to be clear. It's just the pressure will be much more moderate compared to previously.

Just one comment on the other side of the course. While we'll maintain the stable COL with all the factors Adrian talked about, I just want to highlight that our store managers really are the hero to help us manage the COL. Because right now, between KFC and Pizza Hut, somewhere between 70% to 80% of the stores are run by what we call mega RGM, mega store manager, who run two to four stores with the help of the, you know, centralization, digitalization, automation. The other side of the equation I want to emphasize is, one, these mega-RGM, their take-home pay has been increasing by mid-teens in the last two to three years, despite we keep the overall labor cost stable, and the turnover rate is somewhere between mid-single-digit For the mega RGM. So not only we kept the COL stable, but we are retaining the best store manager, and we continue to give them a very nice salary increase so that we have the best people to run our stores, which is the best way to protect the business in the short term and long term. Thank you.

Thank you.

In the interest of time, we will take our last question today from Siyang Wang of CICC. Please go ahead, Siyang. Your line is open.

Okay. Thanks for taking my question. I'm Siyang Wang from CICC. Congratulations on delivering resilient groups. My question is on new store openings. You have raised the year's net opening target to 2,400. What new market opportunities have led you to increase the target, and how do the sales and the profit of new stores compare with those of major stores? That's all. Thank you, Su-Yang.

So, indeed, we raised our target from 1,900 to over 2,400 for the year, which represents roughly 13% of the store base end of last year. And, you know, we do see vast opportunity, ample opportunity, and white space here in China. And as we mentioned in our prepared remarks, over half of our new store openings have been in lower-tier cities, strategic channels, and areas or trade zones with no existing die-in or delivery coverage, right? So those we call the shong kong bai, right, double white space. So that's actually incremental opportunity for us, and it's important for us to open store there quickly to better service our consumers there and build our brand equity because we firmly believe the strong brand equity and one of the leading brand equity here we enjoy at Western QSR space here in China is with the past four decades' hard work, building a lot of our stores in high-tier city followed by mid-tier city. And now, we are actually quite, you know, expanding into loyalty to a city in a fast fashion, leveraging on our new model like KFC Small Town, Pizza Hut Valve, and KFC and Pizza Hut Gemini model. And, you know, we are conscious of, you know, achieving a balance of comp sales, i.e. limiting the sales transfer, at the same time, grow our top line as a whole and profitability as a whole. And that's why, you know, we give the color on over half of our new store open. We're in locations with limited or no sales transfer. Yeah, so that's kind of how we look at it. And, you know, it's exactly because of the ample white space that we see here in China that we believe, you know, this step up pace of store opening is something that we'll continue to do over the next few years as well. And hopefully with that, coupled with the solid comp sales, we will be able to deliver our three-year guidance as shared on Investor Day for both the top-line and bottom-line last year in November.

For both KFC and Pizza Hut, we still have 1,000, 1,500 cities that does not have our stores, particularly for Pizza Hut. There's still 1,500 city plus that has KFC, does not have Pizza Hut. It's very, very simple math there. And one last comment of our new store opening is, above all the new store target or new store opening, we are very disciplined, very, very disciplined that we want our new store to deliver two to three years' payback. And that's the quality requirement before we talk about the numbers. Therefore, buying better Pizza Hut brand helps Pizza Hut new store opening because we don't have to pay 2.8% royalty anymore and expand the margin, allow more stores to meet our requirements, and we can up the target. And now we also have the modules that is very suitable for entering the lower-tier city. It really helps. Thank you.

Thank you, Joey, and thank you, Ajin, as well. This concludes our Q&A session. Thank you for joining the call today.

Thank you for your participation. In today's conference, this does conclude the program. You may now disconnect your lines.