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China Weakness Continues at Yum! in Aug

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Louisville, Ky.-based restaurateur Yum! Brands Inc.’s (YUM - Free Report) powerhouse China Division’s comparable sales (comps) declined again for the month of August. Comps at YUM! dipped 10% due to a 12% fall in the same at its  KFC brand. However, the rate of decline moderated from the 13% shortfall reported in July.

Yum!’s Pizza Hut Casual Dining registered 5% growth in China in August, better than the July comps growth of 3%.

Moreover, the company estimated that the third-quarter 2013 China comps dipped 11% owing to a 14% fall in KFC, partially offset by a 4% growth at Pizza Hut. The third quarter, results of which are expected to be released on Oct 8, includes the months of June, July and August.

In Dec 2012, the company’s China division – the largest contributor to YUM!’s revenue stream – encountered an allegation regarding the quality of chicken supplied to its KFC restaurants. The negative publicity resulting from this accusation continues to hurt the company’s sales results in China. In addition, the outbreak of avian flu in China in early April also dented China Division’s performance.

China, which holds the key to YUM!’s overseas expansion plans and has played a pivotal role in Yum!’s solid performance over the last few years, began to post negative comps results since fourth-quarter 2012 due to the above setbacks.

Though the Zacks Rank #3 (Hold) company is witnessing weak sales results for the past few quarters, it is trying hard to recover its business and is expecting to record positive same-store sales in the fourth quarter of 2013.

Although the company’s China Division is reeling under pressure, we believe the scenario is gradually improving. Moreover, Yum! has a proven business model, which has survived similar setbacks in the past. However, it will take some time to reach the pre-issues level.

Some other restaurateurs which look attractive at the current level include Burger King Worldwide, Inc. , CEC Entertainment Inc. and AFC Enterprises Inc. . All these stocks carry a Zacks Rank #2 (Buy).

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