Don't Let Yum! Turn You Into a Chicken

 | Nov 30, 2012 | 11:15 AM EST  | Comments
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sbux

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coh

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cbrl

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mcd

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pnra

Did they turn on the Colonel in China? The shocking news of a decline in KFC sales in the People's Republic sent shockwaves through parent Yum! Brands (YUM), as well as the usual suspects that have great Chinese franchises, including Coach (COH), Starbucks (SBUX) and Nike (NKE).

The comparisons that Yum! was going against were staggeringly fabulous, virtually unbeatable, a 21% comp store rate, but that doesn't mean we can excuse a minus 4% number. Remember, as much as Yum! is based in the U.S. and has iconic names such as Pizza Hut and Taco Bell under its roof as well as KFC, China accounts for 44% of its sales, and we think of Yum! as a Chinese dog with an American tail.

So does this mean that China, which has been showing signs of life, is backsliding and that all of the big expansionist data we have been getting are false tells?

I am going to put it on the line: absolutely not. There are too many good things happening in China, including a series of bank reserve injections that have really boosted industrial growth.

As for the U.S. companies that are linked with China, it's been a real mixed picture of late. Nike, for example, has had a very nice run in the U.S., but China has been a big disappointment, including concerns of too much inventory. Coach continues to have a robust business in China and is expanding rather rapidly there. Its recent weakness comes from the U.S., not China.

Starbucks? I think China is the growth story there, with the biggest issue being the very high-quality problem of lines that are too long. I think we will hear amazing things about China when Howard Schultz has his analyst conference in New York on Dec. 5. In fact, I would use any weakness in Starbucks off of Yum! to buy Starbucks ahead of the meeting. With Europe under control, U.S. doing quite well, China expanding and India blooming, not to mention the splendid addition of Teavana to the family, Starbucks has a terrific story to tell.

I think Yum! may be a one-off situation. The business of fried chicken has just cooled there, and I can't draw any other conclusion. Plus, it is worth pointing out that the U.S. slowed a bit, too. It was, alas, a huge disappointment for a stock that had been on a tear of late.

All that said, Yum! is a remarkably run company. I would not be surprised if the stock hasn't overreacted to this news. My inclination would be to hold on to it if you own it. I believe you could get out at a higher price.

In general, it is worth pointing out, though, that the restaurant stocks have become quite inhospitable of late, with everyone from McDonald's (MCD) and Darden Restaurants (DRI) to Cracker Barrel (CBRL) and Chipotle Mexican Grill (CMG) disappointing the Street. Only Panera Bread (PNRA) remains solidly in the plus column.

My takeaway: Don't draw a conclusion that China is slipping back. We have way too much evidence to the contrary. Just conclude that something is awry right now in China for Yum! and that, not too long from now, Chairman and CEO David Novak will fix it, and, ultimately, there will be better times ahead.

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