Yum! Brands Is About to Turn the Corner in China

Forget the skeptics: KFC and Pizza Hut are still huge in China.

In fact, the chains' parent company, Yum! Brands (NYSE: YUM  ) , is aiming to make both chains' presence bigger than ever going forward, with plans to ultimately increase its restaurant count in the region from around 6,000 locations today to around 20,000 over the long term.

yum stock, KFC China

Image source: kfc.com.cn.

By comparison, McDonald's currently operates around 14,000 restaurants in the U.S. today, and hopes to have around 2,000 locations in China by the end of 2013.

But despite the fact that Yum!'s China Division opened 889 new restaurants and surpassed $1 billion in operating profit for the first time just last year, many investors can't help but wonder whether the chain has lost its luster after KFC's recent struggles in the region, which began with a now-concluded investigation into the company's poultry supply chain last December and were prolonged by an Avian flu outbreak earlier this year.

To be sure, on Friday, SEC filings showed Yum!'s China Division same-store sales had declined an estimated 10% in August, including a 12% decline at KFC and 5% growth at Pizza Hut.

Why, then, has Yum! stock managed to rise 8% so far this year, including a nearly 3% pop so far today as of this writing?

In short, August's same-store results are really much better than they first appear.

Data source: SEC Filings.

Remember, around this time last month, Yum! said July same-store sales fell 13%. Considering that represented the company's first sequential monthly decline since April, it's no surprise the announcement caused investors to fear the worst may not be over for Yum! in China.

The most recent 10% year-over-year decline, then, brings the company back to sequential monthly improvement and lends credence to management's repeated assertions that China same-store sales are continuing to improve. What's more, according to the most recent filing, Yum! still expects China same-store sales comparisons to turn positive over the previous year's numbers sometime in the fourth quarter.

Meanwhile, in spite of the current weakness, Yum! still managed to turn in worldwide system sales growth of 1% last quarter, thanks largely to 2% revenue growth from Yum!'s already substantial U.S. operations, and 6% overall growth from Yum! Restaurants International. At the same time, Yum! told investors that when all is said and done in 2013, they expect record new-unit openings for YRI and in India this year, and remain on track to open at least 700 new units in China.

In the end, I've said it before and I'll say it again: When China sales finally recover, it's safe to say patient investors who buy today will be handsomely rewarded over the long term when their company is once again firing on all cylinders.

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Read/Post Comments (4) | Recommend This Article (3)

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  • Report this Comment On September 09, 2013, at 10:08 PM, SurveyingChina wrote:

    Thanks to post, nice article!

  • Report this Comment On September 09, 2013, at 11:58 PM, stophypingstocks wrote:

    One thing for sure.......When analysts make up their own interpretation of the truth.....they own the stock and are losing money on a bad investment.....So while you and I have to sell......They just make up informaiton and put it in a pump article and hope people do not do research.....The truth is.....com sales continue to decline for YUM in China.....this is a stock that has been run up becasue of some pice in the sky belief that China will save their declining sales and margins....It is just not true.....comps were down again in August by 10 %......and the analysts that are of course paid by the hedge fund owners.....continue to pump a stock that is WAY overpriced....That is yUM. Should be in the 50's....

  • Report this Comment On September 10, 2013, at 4:45 AM, bourse wrote:

    OH yes, very good article!

    Unfortunately this stock never got really cheap in the last months.

  • Report this Comment On September 10, 2013, at 12:00 PM, TMFSymington wrote:

    @stophypingstocks, Did you read the article? I plainly stated I believe the 10% decline in comps is a good thing given Yum!'s comments that comps should turn positive by the end of this year.

    As an aside, while I did note YUM stock has risen around 8% so far this year, remember it has lagged the S&P 500's even better year-to-date return of 18% thanks largely to its struggles in China.

    And finally, you can rest assured we're not paid by anyone other than The Motley Fool, and our goal is to consistently provide objective, thoughtful analysis on the topics we cover -- with no outside influence.

    Fool on!

    Steve

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