China's Got to Eat

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.