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YUM needs its Holy Grail, China, to save the day in Q1, which could be a challenge.  YUM is facing difficult comparisons and although economic news out of China has improved on a sequential basis in March, overall trends in Q1 were less than favorable.

In 4Q08, we learned that same-store sales trends in China slowed considerably in December as YUM had reported that quarter-to-date comparable sales were up 4% through November 30, but closed out the quarter only up 1% (a timing shift in December hurt by 1%). YUM was lapping a difficult 17% comparison in the fourth quarter but this slowdown was worse than expectations.   Also, EBIT margins declined in China in 4Q08 (down 190 basis points) as a result of continued commodity and labor inflation.

Looking to 1Q09, I expect YUM to face similar challenges as YOY commodity pressures will be more severe in 1Q09 and the company is lapping 12% same-store sales growth and 33% operating profit growth.

And the news from China is not all that good.  The slide in December retail sales trends looks to have continued into January and February, but March suggests some consumer resilience.    

YUM – CHINA, NOT WITHOUT ISSUES - China Retail Sales

The Chinese Government is doing what they can to get consumers to spend again.  As you can see from the chart below, credit is flowing rapidly in China creating positive momentum.  Yesterday, China reported an 11.2% year-over-year increase in urban disposable income for 1Q09 (the rural population realized 8.6% cash income growth in the same period) and the CPI declined by 1.2% Y/Y for March – the second sequential negative growth month.  YUM needs government stimulus to motivate Chinese shoppers to increase their willingness to spend for the balance of 2009 in order to hit its 15%-20% operating profit growth goal in China.

YUM – CHINA, NOT WITHOUT ISSUES - China Liquidity