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Yum!'s Comeback in China in Sight

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The clouds over Yum! Brands Inc. (YUM - Free Report) owing to its chicken supply issues in KFC China seem to be dispersing as the Kentucky-based company recently reported a surprising 2% rise in February same-store sales (comps) in China.

KFC registered flat February comps while Pizza Hut Casual Dining registered 13% growth in comps. The shift in the timing of the week-long Chinese New Year celebrations from January to February this year helped drive sales in the month. The shift had a positive mid-teen impact on February comps growth for both KFC and Pizza Hut Casual Dining, overshadowing an equivalent loss to January sales.

Notably, in Dec 2012, Yum! Brands faced an allegation regarding the quality of chicken supplied to its KFC unit in China. Although food safety regulators in Shanghai cleared Yum!, the incident shattered consumer confidence about the quality of food offered by this U.S. restaurateur leading to a steep fall in the company’s sales during the last two weeks of December. Management rolled out a new brand quality campaign and aggressive marketing initiatives to counter the bad publicity.

Comps in China plunged 20% in the first two months of 2013 with KFC same-store sales falling 24% and Pizza Hut Casual Dining sales dipping 2%. This was however better than management’s expectation of a 25% decline.

In concurrence with its fourth-quarter earnings, Yum! Brands said that its KFC division is not expected to record positive same store sales before the fourth quarter of 2013. Further, to add to the woes, a tough year-over-year comparison and a sluggish retail environment in China due to overall economic slowdown are likely to affect growth momentum.

Yum! Brands currently carries a Zacks Rank #5 (Strong Sell). Some restaurateurs that are worth a look at the current level include Chuy's Holdings Inc. (CHUY - Free Report) , Cracker Barrel Old Country Store Inc. (CBRL - Free Report) and Burger King Worldwide Inc. ( , all with a Zacks Rank #2 (Buy).

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