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Yum! Brands Feeling Fluish in China: Is It Time to Sell?

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Shares of Yum! Brands  (NYSE: YUM  ) tumbled nearly 3% in pre-market trading this morning after an SEC filing showed same-store sales fell around 13 percent for its China division, including a 16% drop in comparable sales for its KFC locations.

So what's the culprit this time?

In the filing, the company stated:

Within the past week, publicity associated with Avian flu in China has had a significant, negative impact on KFC sales. Historically in these situations, we have educated consumers that properly cooked chicken is perfectly safe to eat, and we will continue to do so. We do not anticipate providing any further updates regarding China Division same-store sales until our scheduled first-quarter earnings release on April 23, 2013.

Image source: Wikimedia Commons 

This isn't the first time ...
To be sure, Yum! Brands is no stranger to doing damage control; just last month, the company issued an apology after pulling a variety of ground "beef" products from its three British outlets when they were found to contain horse meat. While the product posed no particular health risks, and Yum! stressed that no other locations were affected, many folks weren't too keen on the idea of eating their beloved equine friends.

The food industry in China, however, has proven an even more difficult beast to tackle, and KFC sales are still reeling from the aftermath of buying tainted chicken from Chinese supplier New Hope Liuhe, which was dosing the birds with dangerously high levels of antibiotics and hormones.

Curiously enough, global fast-food giant McDonald's (NYSE: MCD  ) was also using New Hope Liuhe as a chicken supplier at the time, and both Yum and Mickey D's wasted no time stopping orders from the company when the investigation came to light. However, consumers remained queasy, even after Chinese municipal governments promised to introduce strict food safety laws to prevent any similar situation from recurring.

As a result, Yum's massive presence in China caused it to take a much more significant hit than McDonald's, when Chinese consumer confidence hit the fan. Remember, while Yum boasted nearly 6,000 locations in China by the end of 2012, McDonald's was still hoping to grow its number of units to just 2,000 by the end of 2013.

This, too, shall pass
Even so, I tend to agree with Yum! Brands' management when they insist the weakness in China will prove temporary. Perhaps that's why its shares are trading up slightly this morning in spite of the pre-market weakness.

In the end, dealing with sketchy suppliers is, unfortunately, par for the course for any company in the food business; so remember, these concerns aren't necessarily Yum! Brands' fault. What's more, the company knows a thing or two about weathering these sorts of storms, and is intelligently doing everything in its power to show its food is worth consumers' money.

When this inevitably blows over, and considering Yum! Brands will almost triple its number of locations in China to around 14,000 eventually, it's a safe bet that patient long-term investors will be happy that they held on.

More expert advice from The Motley Fool
McDonald's turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.

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Related Tickers

9/30/2016 4:01 PM
YUM $90.81 Up +1.00 +1.11%
Yum! Brands CAPS Rating: ****
MCD $115.36 Up +0.57 +0.50%
McDonald's CAPS Rating: ***