Yum China Q4 Earnings: The Margin Beat vs. Sales Slowdown Trade

The immediate event is set. Yum China will report its unaudited fourth quarter and fiscal 2025 financial results on Wednesday, February 4, 2026, before the U.S. market opens. This is the catalyst that will test the stock's valuation.

The core trade setup is clear. The market will scrutinize whether the company's demonstrated ability to expand margins can justify its premium valuation, especially if the data shows a sales slowdown. There is a potential for a mispricing if the market overreacts to weaker top-line growth, overlooking the underlying profitability story.

The critical expectations are specific and mixed. For the quarter, analysts forecast quarterly earnings of $0.30 per share, representing a year-over-year increase of 20%. However, the consensus estimate has been revised 3.5% lower over the last 30 days, signaling some analyst caution. The revenue forecast is for $2.67 billion, up 7% year-over-year.

The most watchable metric, however, is same-store sales. Analysts predict a sharp reversal, with same-store sales, excluding F/X - Total coming in at -0.6%. That compares to a growth rate of 4% last year. This potential slowdown in comparable sales is the primary pressure point for the stock.

On the expansion front, store count is expected to hit 16,359, a significant increase from 14,644 last year. This aggressive growth, particularly for KFC, is a key driver of future sales but also a near-term cost. The market will need to weigh this growth against the reported sales pressure.

The Tension: Margin Expansion vs. Sales Slump

The core trade hinges on a fundamental conflict. Yum China has shown it can expand margins even when sales growth falters. The benchmark is its fourth quarter of 2024, where operating profit grew 36% year-over-year and the operating margin expanded by 140 basis points. This was achieved despite same-store sales just 1% above the prior year. The engine was operational efficiency, with restaurant margins improving by 160 basis points.

The problem is that this efficiency story is now running up against a sales slowdown. In the third quarter of 2025, the company reported same-store sales growth slowed to just 1% year-over-year. That's a significant deceleration from the 4% transaction growth that powered the margin expansion in the final quarter of the prior year. The market is now asking whether margin beats can fully offset these sales misses.

The dilution effect from aggressive expansion makes this tension worse. The company opened 536 net new stores in the third quarter, bringing its total to 17,514. While this fuels long-term growth, it spreads the company's resources and marketing spend thinner, diluting the impact of any strength in existing locations. The same-store sales index, which measures performance at established stores, is the metric that matters for this trade, and it's showing clear pressure.

The setup is a classic growth-versus-efficiency tug-of-war. The stock's premium valuation likely assumes that margin expansion can continue to drive earnings, even if sales growth moderates. But if the sales slowdown persists, it could signal that the company's growth engine is stalling, making it harder for operational gains to carry the stock higher. The February 4 earnings report will show which force is winning.

Valuation and Trade Setup

The immediate risk/reward hinges on the market's reaction to the reconciliation of margin growth with sales growth. Yum China trades at a premium valuation, with a trailing P/E of 19.05 and expected earnings growth of 14.17% next year. This creates a classic growth-at-a-reasonable-price tension. The stock's premium assumes that operational efficiency can continue to drive earnings, even if sales growth moderates. But if the February 4 report shows the sales slowdown accelerating, that premium may not be sustainable.

The primary catalyst is the market's reaction to the reconciliation of margin growth with sales growth. A miss on the key same-store sales metric could trigger a re-rating, even if the company beats on earnings per share. The evidence shows analysts are already cautious, with the quarterly EPS estimate revised 3.5% lower over the last 30 days. This suggests the market is braced for some pressure. The setup is for a potential mispricing: the stock could fall on sales disappointment, overlooking the underlying profitability story.

What to watch for post-report is management's guidance for 2026. The consensus expects a total of 16,359 restaurants, a massive expansion from last year's 14,644. Guidance on the pace of store openings will signal management's confidence in the growth engine. More broadly, the dividend declaration will also be a key signal of financial strength and commitment to returning cash to shareholders. These forward-looking items will help determine if the premium valuation is justified by the path ahead.

The bottom line is that the February 4 report is a test of the stock's fundamental story. The earlier tension between margin expansion and sales slump remains. If sales slow further, it could undermine the entire case for the premium valuation, regardless of quarterly margin beats. The trade is now about whether the growth engine is still firing.