Does Yum! Brands Have a New Chinese Problem?

Just when it seemed Yum! Brands  (NYSE: YUM  ) was again getting its ducks in a row in China as its KFC division posted its first month of higher same-store sales, the restaurant operator's Pizza Hut chain goes and burns it once more like too-hot cheese sticking to the roof of its mouth.

Following a give-away-the-store promotion the chicken joint held in November to lure customers back in, December same-store sales jumped 5%, suggesting the promotion was successful. Particularly since it said sales had fallen off again after the promotion stopped, it seems to have reminded Chinese consumers why they used to flock to KFC in the first place.

Each month since Yum!'s Chinese chicken debacle began, following revelations suppliers were giving birds unapproved levels of antibiotics along with a drug used to treat Parkinson's disease that's banned for use in food, the restaurateur has presented in excruciating detail the loss of its customer base. Although this latest report will be the last in the year-long exercise of monthly same-store sales notices, Yum! will continue to update investors quarterly, though this last missive indicates the worst of its China woes might be over at last.

It couldn't have come at a more opportune time for Yum!, because it derives just more than half its revenue and 44% of its pre-tax operating profits from China. If it can recover just as McDonald's is seeing its own sales there falter, it might be able to carve out more share for itself in the market or at least hold off the inroads competitors might make. Burger King Worldwide has plans to open as many as 1,000 restaurants in China over the next few years.

Yet the food chain in China remains suspect, and even Wal-Mart was forced to initiate a donkey meat recall there because it was found to contain fox meat instead. But with the Chinese economy slowing precipitously and expected to slow even further in 2014, retail chains may experience a shrinking pie from which they'll be trying to grab a slice.

Which puts the performance of Yum!'s Pizza Hut business into perspective and raises some concern. While it has reported lumpy comps for the chain all year long, they've at least always been growing. In December, however, they suddenly took a turn for the worse, falling 3% when analysts had anticipated a near-6% increase.

Fortunately for Yum!, the KFC concept is dominant, with around 4,400 restaurants compared to about 1,100 for Pizza Hut. While any decline will certainly hurt, the impact will be less if for no other reason than the relatively limited footprint it has there.

Overall, December same-store sales were up 2% in China because KFC turned it around, albeit at a slower pace than what analysts expected. It still plans on opening about 700 new stores there this year, which suggests it hasn't changed its view that its troubles were anything but short-lived.

While I agree we shouldn't discount its recovery, I think there may be macroeconomic trends that will shape its future, and if the Pizza Hut results are any indication, there could still be trouble on the horizon. One month doesn't make a trend, which means we shouldn't read too much into the KFC numbers, either. But with its stock nearly 25% higher than the lows it hit this past year, Yum! Brands' future might not be so yummy at all.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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8/28/2015 4:06 PM
YUM $81.82 Down -0.45 -0.55%
Yum! Brands CAPS Rating: ****