Yum Falls Hard As Global Growth Stocks Suffer Chinese Slowdown

A KFC store in Shenzen - Photo credit: Wikipedia

Shares in Yum! Brands fell hard on Friday as investors digest the marked slowdown of the Chinese economy.? The catalyst for Yum?s nose-diving stock action was a monthly report by McDonald?s, where the Golden Arches disclosed sales fell in Asia, in part due to lagging demand in China.? The slowdown, though, is very real, having already expressed itself in Yum?s latest earnings report, as well as in Starbucks?, another company with substantial exposure to China.

While it may appear facetious to question the strength of China?s economy because it will grow only 8% this year (according to the IMF), that slowdown is having a very real impact on companies operating in the world?s second largest economy.

Yum Brands, which derives 40% of its operating profits from China, fell as much as 6.4% in New York on Friday in the aftermath of a sales update from McDonald?s that showed same-store sales for the Golden Arches didn?t just slow in its Asia-Pacific segment in May, they outright declined 1.7% after rising 4.3% a year ago.

The most recent earnings reports from Yum indicate it is also experiencing a similar slowdown. In the fourth quarter of 2011, Yum?s China division posted 21% same-store sales growth, but in the first three months of 2012, same-store sales only grew 14%.

The phenomenon isn?t isolated, though.? Starbucks, another company that has thrived in China, is experiencing a similar trend.? Over the last two quarters, year-over-year same-store sales growth in its China/Asia-Pacific region slowed from 20% in fiscal Q1 to 18% in Q2. ?While the decline is small, it does suggest demand is cooling.

That dynamic extends well beyond consumer discretionary stocks as companies across industries deal with the threat of slower global growth and see it reflected in their share price. Caterpillar, who?s CEO?acknowledged?the slowdown in China, saw its stock surge ?30% through late February to $116.95, but has since surrendered all of that gain and more, trading at $86.47 on Friday, down 4.7% on the year.? Nike, meanwhile is seeing pressure on its margins as Europe and China slow and its inventories become bloated.

With growth stories like Yum and Starbucks failing to maintain their gains, investors could be looking to keep their money at home.? One alternative is to invest in companies with a heavy U.S. exposure, even though the global slowdown appears to be hitting hard in the U.S., as the latest jobs report proved.

Dunkin? Brands, for example, is pushing West in the U.S., growing its brands beyond the North East.? With 95% of their stores East of the Mississippi, Dunkin? has a huge domestic growth opportunity.? The stock performance validates that thesis: while both Starbucks and Yum have fallen hard in May, Dunkin? took off, and is now up more than 30% for the year.

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