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China's Got to Eat

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Country Style Cooking Restaurant Chain (Nasdaq: CCSC  ) is growing, but it may not be enough.

China's rapidly expanding quick-service eatery posted uninspiring quarterly results last night. Revenue climbed a hearty 41%, to $34 million, but it's all downhill from there.

Outside of food costs, surprisingly, nearly every other line item outpaced CSC's top-line growth. Wages, rent, utilities, and SG&A expenses all ate away at margins. By the time we get to the tweaked bottom line, adjusted earnings declined 9%, to $0.08 a share.

Analysts were banking on a profit of $0.11 a share on $34.9 million in revenue.

The one thing working in CSC's favor right now is that investors had already turned their backs on the 140-unit chain that specializes in Sichuan-style comfort food.

CSC sizzled when it went public at $16.50 last September. The shares opened at $25 and traded as high as $36.45 a few weeks later. The stock has shed more than half of its highs, and is now even lower than its IPO price.

There's nothing wrong with the concept. Comps rose a robust 4.4% during its latest quarter. CSC opened nine net new restaurants, and it's still on track to open 65 to 75 this year.

China also isn't a problem. We've seen the dramatic impact that KFC's success in China has had on Yum! Brands (NYSE: YUM  ) . Yum! moved to acquire all of the Little Sheep hot-pot chain earlier this month.

I recommended CSC to Rule Breakers newsletter service subscribers a few months ago, admittedly at much higher price points. But the growth thesis remains intact. CSC appeals to me as a play on China's consumers that isn't going to face governmental crackdowns the way we've seen with some Internet companies. China has nothing to gain by holding CSC back, just as it has no reason to restrict job listings specialist 51job (Nasdaq: JOBS  ) , jewelry retailer LJ International (Nasdaq: JADE  ) , or pork producer Zhongpin (Nasdaq: HOGS  ) .

The problem right now with CSC is cost containment. If this is just a temporary spike or a knee-jerk loosening of its purse strings after the IPO, that's fine. However, if costs continue to outpace revenue growth over the next few quarters, the same management team that grew CSC to 140 restaurants may not be qualified to take the chain to the next level.

Are you buying into the Chinese consumer? What stocks are you buying? Share your thoughts in the comment box below.

The Motley Fool owns shares of Yum! Brands. Motley Fool newsletter services have recommended Country Style Cooking Restaurant Chain and 51job. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz believes in Chinese growth stocks and owns shares in Country Style Cooking.  He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2011, at 11:59 PM, limuzhi wrote:

    what you see in the cost overblown was due to high inflation - food, wage, rent, utility, etc... surging 36-60% YoY, and yet CPI is only 5.2%, this got to be freaking wrong.

    Btw, as a Chinese, I never heard of this "chain" till it went public.

    It is still KFC, Pizza Hut, and off course, MCD that attract traffic, not some KFC-knock-off.

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