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TheStreet Open House

Yum! Brands Looks Appetizing, Especially With a Hedge

Stocks in this article: YUM

NEW YORK (TheStreet) -- Yum! Brands (YUM) reported tepid sales for locations open at least a year in China, at 1%. The gains it did receive were from vigorous marketing and promotions. Absent promotions, sales declined. China accounts for about half the revenue and 17% of profits.

Overall revenue declined 8%, disappointing; however, analysts expected worse. That's why the stock is holding up so well. Excluding special items, the restaurant chain served 56 cents a share profit. Profit was down from 67 cents for the same period last year.

The size of China's market and potential market can cloud investors' eyes if not careful. The country is full of booby traps and landmines awaiting domestic and foreign corporations alike. It's not easy to sidestep every possible problem when Chinese suppliers are notorious for cutting corners, and little regulatory oversight doesn't help matters.

The food industry faces a particularly tough dilemma of pursuing revenue and profit increases in a rapidly growing economy while simultaneously monitoring an ever-expanding full supply chain. For Yum! Brands, parent of KFC, Pizza Hut, and Taco Bell, China is a love-hate relationship.

I've eaten at KFC and Pizza Hut in China. Like its North American restaurants, they serve primarily a younger clientele. Unlike KFC and Pizza Hut near my home, in China -- at least when I was there -- they served a much more affluent Chinese customer. I haven't eaten at a Taco Bell in China.

Wealthy customers, in my opinion, are more likely to consider food quality issues. Based on isolated supply quality control issues, it shouldn't be surprising to experience some softening in sales. With that said, as China expands and the food chain becomes more reliable (for the entire country) investors should anticipate greater sales and margins.

YUM EPS Diluted (Quarterly) Chart

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