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Why Yum! Brands' Weakness Is a Good Thing

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On Tuesday, shares of Yum! Brands (NYSE: YUM  ) closed down 2% after the company told investors July same-store sales fell by around 13% for its China division, including a 16% decline at KFC and 3% growth at the company's Pizza Hut locations in the region.

Unfortunately, this marks the first time in four months Yum!'s comparable-same store sales haven't improved over the previous month's number, and casts doubt on investors' hopes that the worst was over for Yum! in China, where it operates around 6,000 restaurants and collects a whopping 40% of its profit.

Move along, nothing to see here...
But were the numbers really that bad?

I don't think so.

Remember, while Yum!'s July number did represent a decline from June's 10% comparable-store sales fall, its China segment same-store sales fell a whopping 29% in April and 19% in May.

Curiously enough, though, in contrast to the company's bad comps over the previous three months, Yum! this time around didn't place blame on unmerited bad publicity associated with avian flu outbreaks in the region.

Instead, it said the culprit remained "residual effects of adverse publicity surrounding the December poultry supply incident."

For those of you who don't remember, that was when Chinese poultry supplier New Hope Liuhe was found to have provided chicken containing unacceptably high levels of antibiotics to its customers, which happened to previously include both Yum! Brands and fellow fast-food behemoth McDonald's (NYSE: MCD  ) .

And while McDonald's quickly issued a statement saying it had stopped taking deliveries from New Hope Liuhe on December 18, Yum! Brands said it had stopped taking orders altogether from New Hope Liuhe in August, 2012 -- a full four months before McDonald's decided to cut it off. 

What's more, Yum! had even ceased taking deliveries from another one of New Hope Liuhe's factories in 2011 after its own checks on samples from the supplier had found similar problems with the chicken.

Still, it doesn't help that Yum! Brands currently operates more than triple the 2,000 restaurants McDonald's aims to have in China by the end of 2013. With this in mind, I also suppose Yum!'s pain isn't all that surprising when we also remember that KFC happens to be a decidedly chicken-centric restaurant.

But at least we can be thankful this week's troubles weren't caused by some even newer poultry-related crisis.

Here's why this is great for you
Even better, despite the disappointing July number this week, Yum! maintained its previous assertion that same-store sales comparisons are expected to recover as the year wears on and held its stance that comps will be positive by the end of the fourth quarter.

And that, my fellow Fools, is exactly why I suggested buying shares of Yum! Brands last month in the first place. The current weakness, then, has merely given patient long-term investors another chance to open new positions at a lower cost basis.

Remember, Yum! isn't merely sitting on its hands elsewhere as it waits for China to recover. In the meantime, the company is also working hard to improve its already-strong operations everywhere else in the world, most notably including plans to threaten McDonald's long-standing early morning dominance by rolling out breakfast nationwide at all U.S. Taco Bell locations by the end of next year.

So when -- not if -- Yum! Brand's China division sales finally return to positive year-over-year comps, and as the company continues to feverishly build new units en route to its end-goal of 14,000 units in the country, I'm convinced it'll be off to the races for Yum! Brands shareholders.

Then again, while I firmly believe in Yum! Brands plans for global domination, it'd be naive to think it's the only company working toward that goal.

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Related Tickers

9/26/2016 1:36 PM
YUM $89.83 Down -0.81 -0.89%
Yum! Brands CAPS Rating: ****
MCD $116.43 Down -0.74 -0.63%
McDonald's CAPS Rating: ***