Did KFC Make Enough Chinese Consumers Say Yum?

Yum Brands (NYSE:YUM), the owner of KFC, Pizza Hut, and Taco Bell, will report its third-quarter earnings after the market close on Tuesday, and investors will learn whether the company has managed to reverse its six-month trend of sales declines.

Shareholders will be especially interested to see how Yum restaurants have fared in China, as the Louisville, Kentucky-based company depends on the Asian country for almost half of its profits, despite its greater outlet presence in the U.S. Yum Brands has seen greater success in China thanks to consumers’ interest in its restaurants over McDonald’s (NYSE:MCD); however, a hurting Chinese economy and a food-safety scare have caused Yum’s business in China to slow, leading to sales declines for the company and increased investor concern.

According to The Wall Street Journal, Yum Brands has worked to resurrect success and revive its sales figures in China, but same-store sales in August were still down 10 percent. Despite the company’s iffy financial situation, its stock is still up a little more than 8 percent this year, and it’ll be interesting to see how its latest earnings affect that score.

Yum restaurants compete fiercely with McDonald’s in both America and China, but both companies especially clash in the latter market because they both have fewer outlets in the region and thus see more room for growth. Yum has managed to perform better than the Golden Arches in China thanks to increased consumer interest and customer satisfaction, but both companies are still hurting from the country’s recent drop in fast-food demand.

The Journal reports that China has just a third as many Yum restaurants as the U.S. does, and that is even after Yum’s compound annual growth rate there has been 17 percent, compared to zero percent at home. However, the country still contributes to the majority of Yum’s profits because each restaurant in China facilitates a greater financial impact for the Kentucky-based company: Restaurants there contribute more to Yum’s bottom line than those in the United States do. While Yum’s operating profit from China was $222 million for the first half of 2013, its U.S. operating profit was $338 million.

Yum doesn’t only have hurting China sales to worry about — declining U.S. consumer spending on fast food is also a reason for concern, and that is a reality both Yum and McDonald’s face. According to the Journal, McDonald’s U.S. sales rose just 0.2 percent in August, and investors are hoping that the same won’t ring true for Yum.

We’ll have to wait until after the bell on Tuesday to learn the company’s fortunes, but analysts at Citigroup (NYSE:C) forecast that sales will have declined by “a few hundred” basis points in the most recent quarter.

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