Yum China Holdings Q3 2026 Earnings Call Transcript

Yum China Holdings (NYSE:YUMC) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Yum China Holdings reported a strong third quarter 2026 with revenue growth of 8%, operating profit up 13%, and diluted EPS increasing by 20%, partially aided by favorable foreign exchange impacts.

The company achieved its 15th consecutive quarter of positive same-store transaction growth, improved restaurant and operating margins, and delivered a record of nearly 700 net new store openings.

Strategic initiatives include the expansion of side-by-side modules and hero product innovation, focusing on capturing new customer segments and improving operational efficiency through automation and digitization.

Yum China Holdings raised its net new store opening target for 2026 from 1,900 to over 2,400, with a strategic focus on entering new cities and increasing store density in existing areas.

The acquisition of the Pizza Hut brand in mainland China has resulted in significant cost savings and enabled faster strategic execution, contributing positively to margins and future growth potential.

The company expects continued sales growth and margin stability in 2026 and projects a 0 to 2% same-store sales growth for 2027, with plans to return $1.5 billion to shareholders in 2026.

Full Transcript

OPERATOR

Thank you for standing by. Welcome to Yum China Holdings third 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 will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.

Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Florence Lib, Senior Director, Investor Relations of Yum China Holdings. Please go ahead, ma’am.

Florence Lib (Senior Director, Investor Relations)

Thank you, operator. Hello everyone, and welcome to Yum China Holdings’ third 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, 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-GAAP measures. The comparable GAAP 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 Wat, CEO of Yum China Holdings.

Joey Wat (Chief Executive Officer)

Hello everyone and thank you for joining us. In quarter three, we continued to grow sales and profit year over year. In reporting currency, 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 quarter three 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 investment in quarter three, same-store 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 dual focus on innovation and operational efficiency, restaurant and OP margins improved 50 and 40 bps year over year respectively. This margin expansion demonstrates the resilience of our business and the disciplined execution of our teams in mitigating the sales 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 profit. We also continue to build our brand and attract more customers to our stores through compelling in-store offers and experiences as well as greater takeaway convenience. Dine-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 new store openings, adding close to 700 net new stores in quarter three, a new quarterly record. Total store count 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 reviewed our store portfolio to reduce rent and lowered delivery rider costs on a per-order basis. We also improved supply chain efficiency through menu 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 profit. Their store economics have also improved. K Coffee Cafes exceeded 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 tripled year over year in quarter three with the addition of the popular Mango Pomelo Sago (Yangzhi Ganlu) and sparkling tea. KPRO surpassed 700 locations.

We expanded the menu to broaden its appeal, developing sandwiches as another sales growth pillar alongside energy bowls. We also introduced high-protein smoothies, which have been particularly popular with certain consumer segments and have generated strong repeat purchases. KPRO 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-blended 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, So World Pizza, targeting solo diners and on-the-go occasions. Made with our latest low-sugar multigrain crust and available with a variety of toppings, it offers a high-protein option under 500 calories. The handheld pizza draws 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 Ding (Chief Financial Officer)

Thank you, Joey. Let me update key financial highlights by brand. Starting with KFC, in quarter three, KFC opened over 500 new 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 KPRO 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 three, Pizza Hut added nearly 200 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 Yum! Brands. Same-store sales index was 97% of the prior year’s level, with transactions up 5% year over year, the 15th consecutive quarter of growth. Ticket average was down 8% year over year to 65 yuan, in line with our mass-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 quarter three P&L. System sales grew 3% year over year, mainly driven by store growth. Same-store sales index was 97% of the prior-year level against a tough comparison from last year’s delivery platform subsidies. Having accounted for the later start of the summer holiday, July was broadly in line with our expectations. August was more challenging than expected. More frequent adverse 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%, up 50 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, KPRO 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 year over year, helped by lease 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 $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 quarter three compared to a negative impact of $8 million in quarter three last year.

As a reminder, we recognized $16 million less in interest income in quarter three 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 quarter three. Net of interest and financing expenses and taxes, the acquisition was accretive to diluted EPS by around $0.02 in quarter three. 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 will open in new cities, strategic locations or trade zones with no dine-in 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 opened in lower-tier cities this year.

We also introduced a tailored menu at KFC for select lower-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 the 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 net new 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 benefit in quarter four. It is expected to contribute around 50 to 60 basis points of incremental restaurant and OP margin to Yum China. The Pizza Hut deal is expected to be accretive to quarter four 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 day target.

We will 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 $118 million, including $778 million of buybacks and $302 million of dividends. In quarter four, share repurchases will be around $315 million, 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 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.

Joey Wat (Chief Executive Officer)

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 module rollout and hero product innovation, which have proven effective. 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 meals 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. KPro is set to surpass 850 locations by year end with plans 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 helps 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% to 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 dine-in and takeaway. 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 on our strong brand equity, we are also strengthening brand loyalty. Here are some examples. At KFC, Carside Pickup has expanded to over 9,000 stores, targeting over 10,000 stores by year end. In addition to drive-thru, options like door-side pickup and curbside pickup significantly improve 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 dill protein options. The new menu also includes global flavors such as Tteokbokki, a Korean-style rice cake dish with melted cheese and grilled pork. These items suit dining in 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 outlined at our Investor Day. We are laser focused on execution. Put simply, execution is growth. Now let me pass it back to Florence.

Florence Lib (Senior Director, Investor Relations)

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

OPERATOR

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 Cheng from Goldman Sachs. Please ask your question. Michelle, your line is open.

Michelle Cheng (Analyst)

Hey Joey, Adrian, congrats again for the consistent profit growth, market expansion and market share gain. As we know the environment is very challenging and also thank you, Adrian. You talked about same-store sales, but I still want to explore the exact relationship among same-store sales, store expansion and margin a bit more. So given the volatile consumption sentiment and also the very fluid weather condition, how confident are we on same-store sales growth?

And especially as we continue to accelerate store expansion, do we really see some dilution on same-store sales? But on the flip side we actually continue to see 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 cost optimizations to drive profit growth? So as a result, is the priority actually profit growth, and no matter if same-store sales are growing in the short term, we’re still confident to see profit growth?

I just want to understand the relationship between these three factors. Thank you.

Joey Wat (Chief Executive Officer)

Thank you, Michelle. 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 remarks, 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.

System sales, operating profit, OP margin all grew year over year for 10 consecutive quarters. And of course for shareholders, our year-to-date diluted 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 stores through compelling in-store-only offers and experience, and of course the greater takeaway convenience. So therefore dine-in and takeaway performance improved sequentially, bucking the previous trend. We will continue to drive that change over time. One last bit about the SSG is, as someone clever said, sales is 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 prepared remarks. 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 dual focus on system sales and same-store sales growth. Over half of our new store openings were 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 remarks, certain consumer occasions have been growing very nicely and rapidly, like meals and burgers. Consumers are willing to spend when offered 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 discounts and even taking price, reflecting a more supportive consumer environment. Adrian.

Adrian Ding (Chief Financial Officer)

Thank you, Joey. Michelle, I guess to the final part of your question on margin, you’re kind of right that our margin performance has been very resilient despite some challenges on comp sales, and indeed a lot of credit to the team on the strong execution. As Joey mentioned in the prepared remarks, execution is growth. Specifically on margin, I’ll briefly comment on quarter three and then address your question regarding the near-term outlook. On quarter three, obviously as you noted from our earnings release, O&O’s improvement more than offset some slight increase in COS and COL. And among the O&O line items, thanks to Project Sacred Cow that we mentioned previously in our earnings, rental has a good improvement and this quarter our rental got to approximately 8%. You know, we don’t normally externally disclose our exact rental per store, but this is a key milestone that reaches slightly below 8%, approximately 8%, for the first time ever since our listing back in 2016.

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 the 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 still quite confident to achieve 0% to 2% of comp sales in 2027 in line with our Investor Day guidance. And specific on margin, if you think about COS, COL and O&O—for all the three lines, I’ll provide a bit more color in February earnings—but I’ll just give a very high-level 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, if you think about the delivery sales mix, it will be broadly stable, similar to this quarter of 54% or only slightly up. So the overall pressure on rider will be moderate next year, compared to this year when we locked 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 A&P. 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 with 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 we feel 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.

Michelle Cheng (Analyst)

Thank you, Joey. Adrian, very, very clear.

OPERATOR

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.

Chen Luo (Analyst)

Hey Joey and Adrian, congratulations again on the stellar earnings. Of course I hate to ask this question because we always regard Yum China Holdings as a steady compounder driven by a very good expansion as well as margin management. But it seems that the market currently cares all about just SSG. So as Q3 is already behind us, now all the eyes are on Q4. Just now in the opening remark Adrian mentioned that October SSG was broadly in line with management expectation.

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 expectation, directly 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 autumn school break last year, whereas this year there were more regions adopting this break.

So I’m very confused if November really having a tough comp or because of more holidays this year, actually November should be okay. Any color will be helpful. Thank you.

Adrian Ding (Chief Financial Officer)

Thank you, Luo Chen. Well, indeed I understand that the market actually cares a lot about this. 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 is sanity. Right. And so obviously in normal times we will get both, but in special situations, for instance quarter three when we faced 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 double-digit EPS growth in each of the previous three years as well as year to date also demonstrates the track record there. And to answer your question on comp sales for quarter four in October, as I mentioned in the prepared remark, it’s broadly in line with our internal expectation. If we were to provide a little bit more color, I would say 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. So there’s a sequential improvement there and October as a whole is in line, so there is no surprises, no negative surprise, no positive surprise, it’s broadly in line.

November, we’re only on the second day of November and I guess the good thing is the autumn school break is a bit more broad-based this year in November compared to last year, which may provide some tailwind, but the headwind is obviously 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 further down the road in 2027, I think we are quite confident to achieve 0 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, Luo Chen.

Chen Luo (Analyst)

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

Adrian Ding (Chief Financial Officer)

Thank you.

OPERATOR

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

Lillian Lu (Analyst)

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 volatility, but based on this year so far, in particular third quarter, I think Pizza Hut system sales has been slower than KFC and would like to understand whether it’s just a one-off, in particular because of weather, because of some short-term volatilities, or how do we see Pizza Hut again as a driver for the whole group?

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 rate, just a small follow-up check. Thank you.

Adrian Ding (Chief Financial Officer)

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 remarks, 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. We didn’t explicitly guide in this earnings on a full year comp sales for 2026, but we did guide on 2027 outlook and also we reiterated our guidance for the three-year growth goal.

On a three-year basis, we’re still quite confident to achieve our guidance that we shared in Investor Day on Pizza Hut’s growth. I mean as you correctly pointed out in your term, there is some dynamic situation. Also we are indeed working on the various strategic levers on improving the Pizza Hut’s growth. But if you looked a bit further down the road, we are confident that Pizza Hut will deliver very solid growth. I think we gave some figures back to our investor day. Specifically we guided the 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 store 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 will 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 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, you know, 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 2027, 2028. Hopefully if you have an assumption on comp sales for each of the next two years that will give you 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.

Joey Wat (Chief Executive Officer)

Lillian, just few more comment on the Pizza Hut growth. First of all, we are truly excited to buy back the brand because it does give us both short term and long term strategic implication 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 date 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 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 particularly one-person pizza, the smaller one, it increased by 40%. I mean in this market 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 pizza business.

And then the third, wow, Pizarroval is still going very nicely and the store count double 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 enter 350 new cities this year, which is fantastic breakthrough and milestone for Pizza Hut. So all these are something that we are quite excited about.

And then not to mention buying back the brand allows 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 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, try new things much, much faster.

So quite excited about Pizza Hut growth prosper in the short term and the long term too. Thank you Lillian.

Lillian Lu (Analyst)

Thanks a lot Joey and Adrian.

OPERATOR

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

Ann Ling (Analyst)

Yeah, thank you very much management team. Just a quick one, just want to check regarding last year 4Q. How much of the 3% same store is coming out from the delivery subsidy? How much has come out from the autumn, like you know, spring, the autumn break. So just wanted to check, like you know, 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 do you expect that you will also be 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, industry growth. Thanks.

Adrian Ding (Chief Financial Officer)

Yup, thank you, Ann. 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. 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 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 comp 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 and A, Joey 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. If I remember correctly, it’s around 60% for beverage chainification rate. So that’s why you see lots of new players and existing players are actually in the catering space and opening stores in very fast fashion. And so the market is large enough to accommodate a lot of successful players. And if anything, if you are thinking about the consumer sentiment, 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 past year, I think arguably most people would believe that the whole consumption sentiment is more rational. 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 unlivable 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 a store opening strategy in our prepared remark as well as earlier on the Q and A as well.

So that’s I guess the response to our question, Ann.

Joey Wat (Chief Executive Officer)

Just one more comment for your question. And last year with the platform subsidies, Yum China Holdings 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 subsidy and invest in the emerging business like the Lavazza and the smaller emerging business. And drinks for us for KFC is about mid-teens in terms of mix, and it’s about low teens for Pizza Hut in our mix.

And both drink business actually for quarter three grew quite nicely, actually had positive growth, because we have quite a few new drinks launched which were proven popular among customers. So I think that is the context I can share with you, Ann. Thank you.

OPERATOR

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

Christine Tung (Analyst)

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 cost. So basically your comments point to a steady cost of labor as percentage revenue in 2027. But having said that, we do notice that the Chinese government is putting into place a stricter 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 Citi BPS 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 its percentage dropped more than 200 bps on a yearly basis. So I just want to understand the Citi BPS margin expansion, how that compares with more than 200 bps of margin expansion savings in the cost of occupancy for Pizza Hut in the third quarter alone.

Thank you.

Adrian Ding (Chief Financial Officer)

Thank you, Christine. The final part of your question, I think the 30 basis points margin expansion is for the group, and then if you were to calculate the impact on Pizza Hut, I believe it will be around 170 or 160–170 basis points for Pizza Hut. So that kind of is the difference there. And the second part of your 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 the recent stricter compliance or requirements by the government on social benefit and Social Security has no impact on us because, as you and hopefully everyone else on the call know, we are super compliant in terms of the different regulations, and specifically on Social Security.

Our Social Security base for our full-time employee is calculated on the actual wage, which includes the base pay, the bonus, the overtime, etc., etc. It is not calculated on the minimum wage. Hopefully that’s kind of the core part of your second part of the question. The first part of your question is 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 costs 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, especially in the first half of last year, which is around 40% in the mix.

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 in rider pressure will last into quarter four and next year. Because next year, as we mentioned in the earlier part of the Q and 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 full year it will be only slightly increased or broadly stable. 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 efficiency to mitigate wage inflation is really the digitalization, the process optimization and centralization of many of the tasks, including recruitment, training, interviewing, inventory replenishment, labor scheduling, even some of the preparation work of the raw materials — we centralize some of those, right. So these are the measures as we mentioned in this earning and previously to drive our COL efficiency.

But overall COL would not decrease, just to be clear. It’s just the pressure will be much more moderate compared to previously.

Joey Wat (Chief Executive Officer)

Just one comment on the other side of the cost. 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 managers who run two to four stores with the help of the, you know, centralization, digitization, 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 to 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 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.

OPERATOR

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

Xiaomong

Okay, thanks for taking my question. I’m Xiaomong from CICC. Dear, congratulations on delivering resilient growth. 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 mature stores? That’s all.

Adrian Ding (Chief Financial Officer)

Thank you, Siyang. So indeed we raised our target from 19 to over 2,400 for the year, which represent 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 dining or delivery coverage. So those we call the Shuang Kongbai, 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 in the 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 expanding into lower-tier city in a fast fashion leveraging on our new store model like KFC Small Town, Pizza Hut, and KFC and Pizza Hut Gemini model. And we are conscious of achieving a balance of comp sales that is limiting the sales transfer, at the same time grow our top line as a whole and profitability as a whole.

And that’s why we give the color on over half of our new store open were in locations with limited or no sales transfer. Yeah. So that’s kind of how we look at it. And it’s exactly because of the ample white space that we see here in China that we believed 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.

Joey Wat (Chief Executive Officer)

For both KFC and Pizza Hut. We still have 1,500 cities that do not have our stores. Particularly for Pizza Hut, there are still 1,500-plus cities that have KFC but do not have Pizza Hut. It’s just very, very simple math there. And one last comment on our new store openings is above all the new store target of new store openings. We are very disciplined, very, very disciplined, that we want our new stores to deliver two to three years payback, and that’s the quality requirement before we talk about the numbers. Therefore, buying back the Pizza Hut brand helps Pizza Hut new store openings 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 are very suitable for entering the lower-tier city. It really helps. Thank you.

Florence Lib (Senior Director, Investor Relations)

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

OPERATOR

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect your lines.

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