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The weaker sales trend continues for Yum! Brands Inc. (YUM - Analyst Report), as the company again witnessed a downward movement in its China Division’s comparable-store sales (comps) for the month of April.

YUM! suffered a 29% decline in its April comps in China as a result of a 36% fall in comps at its KFC brand, partially offset by a 5% increase in comps at Pizza Hut Casual Dining. However, the decline did not come as a surprise. Management had earlier anticipated the April comps for the China Division to be negative.

Although Yum! has declared that it has and always will take the necessary precautions to ensure the safety of its products, adverse publicity arising from the recent outbreak of the H7N9 Avian flu affected KFC’s performance in the region.

After contributing immensely to Yum!’s growth story in the past few years, the China division began to falter since fourth-quarter 2012 , mainly due to the allegations regarding the quality of chicken supplied to KFC. During the first quarter of 2013, YUM!’s comps plunged 20% in China with a 24% decline in KFC and a 2% decline at Pizza Hut Casual Dining.

At the current levels, YUM! is not quite sure about the time needed to recover sales at KFC China. However, the management expects the China division to record positive comps in the fourth quarter of 2013.

Our Take

China holds the key to the company’s overseas expansion plans and has played a pivotal role in Yum!’s solid performance over the last few years. Hence, the current turmoil in KFC China may be detrimental to the company’s overall business in the near term.

Although the company is trying to overcome this adversity through an aggressive quality assurance, marketing campaign and various promotional offers, it will take some time to completely recover. Further, all these initiatives will likely result in incremental expenses that will weigh on the bottom line.

Another restaurateur McDonald’s Corp.’s (MCD - Analyst Report) comps also decreased 2.9% in the Asia-Pacific, Middle East and Africa (APMEA), hurt by the outbreak of avian flu in China and continued sluggish performance in Japan.

YUM! currently retains a Zacks Rank #3 (Hold). Other players in the same industry, which look attractive at current levels, include Bloomin' Brands, Inc. (BLMN - Snapshot Report) and CEC Entertainment Inc. both carrying a Zacks Rank #1 (Strong Buy).

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