Yum! Brands (NYSE:YUM) shares perked up 5% yesterday on heavy volume in the wake of the fast-food purveyor's most recent same-store restaurant sales release. The results for the most recent four weeks were indeed respectable, but investors may want to temper their enthusiasm. Going forward, Yum! will likely face more challenges in China, a region that has been the source of breakneck growth.
The Louisville, Ky.-based firm announced yesterday that same-store sales at its U.S.-based restaurants, which include KFC, Pizza Hut, and Taco Bell, rose 4% over the past four weeks versus the comparable period in 2004. Perhaps the most encouraging sign on the domestic front is the continuing turnaround in KFC restaurants. After playing the laggard for some time, it seems KFC is taking the lead -- U.S. same-store restaurant sales surged 7% in the latest reporting period after a respectable 4% gain in the four weeks before that.
In the international arena, Yum!'s sales climbed 6% in local currency year over year. However, these sales excluded results in the China division, which includes mainland China, Thailand, and Taiwan. China has been a major growth driver for the firm, but sales in the country in the latest period actually fell 5%. The slump stems from negative publicity the firm's KFC restaurants received in connection with the withdrawal of products found to be contaminated with a potentially harmful dye. Yum! is confident the setback is temporary, although it expects sales to be flat next month.
While the dye scare is not likely to spell the end of Yum!'s growth in China, the stumble could prove more costly than one might think. Yum! won't be able to rehabilitate its reputation overnight, and in the meantime, its rivals are likely to make inroads. McDonald's (NYSE:MCD), for example, has taken notice of Yum!'s success and is planning to open 100 restaurants a year in China in hopes of increasing its Chinese outlets from 660 currently to 1,000 by 2008. For Yum!, the days of its China bonanza may be coming to a close.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
