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Yum!'s China Woes Continue

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Louisville, Kentucky-based famous restaurateur Yum! Brands Inc. (YUM - Free Report) yet again witnessed a decline in its China Division’s comparable sales (comps) for the month of October 2013. China’s comps have dropped 5% in October as a result of a 7% fall in the same at KFC brand. However, the rate of decline moderated from the 11% shortfall reported in September.

On the other hand, Yum!’s Pizza Hut Casual Dining registered 10% growth in China in October, better than the September comps growth of 6%.

In Dec 2012, Yum! Brands faced an allegation regarding the quality of chicken supplied to its KFC units in China. Although food safety regulators in Shanghai cleared Yum! Brands, the incident shattered consumer confidence about the quality of food offered by this U.S. restaurateur leading to a steep fall in its sales results in China. The outbreak of avian flu in China in April further added to the company’s woes and marred China Division sales performance.

China, which once played a pivotal role in Yum! Brands’ growth story over the past few years, began to witness lackluster sales performance since fourth-quarter 2012 due to the above setbacks.

The company posted an 11% decline in third-quarter comps, reported on Oct 8, 2013, for its China Division which was much lower than a 6% rise in comps in the year-ago quarter. Quarterly fall in comps was caused by a 14% drop in the same at KFC owing to the continued unfavorable impact of the poultry supply issue, partially offset by a 5% rise in comps at Pizza Hut Casual Dining.

Poor sales performance at KFC China in September compelled YUM! Brands to state that the China comps will continue to be down in the fourth quarter. However, management expects its business to improve from 2014 onwards driven by its new sales-driven initiatives.

Our Take

Even though the Zacks Rank #4 (Sell) company has undertaken quality assurance measures, marketing campaigns 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. A lower earnings outlook for 2013 remains an overhang.

Another restaurateur McDonald's Corp. (MCD - Free Report) recently reported soft comps for the month of October. Global comps were up 0.5% in October versus negative comps of 1.8% in the comparable year-ago period.

Some other players in the restaurant industry which look attractive at present include Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) and Bob Evans Farms, Inc. . Both the companies hold a Zacks Rank #2 (Buy).

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