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Yum Says China Sales Mending Despite Missing Q2 Forecast

Yum Brands (YUM) said late Wednesday that its China business is "recovering as expected" and still sees China same-store sales turning positive in the fourth quarter, as the fast food restaurant giant topped second-quarter earnings estimates.

The operator of Taco Bell, KFC and Pizza Hut restaurants said earnings fell 16% vs. a year earlier to 56 cents per share. Analysts polled by Thompson Reuters expected 54 cents in the quarter ended June 15. Revenue fell 8.5% to $2.9 billion, just below analyst estimates of $2.93 billion.

It was the second straight quarter of declining profit and sales.

But investors were somewhat encouraged. Yum shares edged higher in after-hours trading on the stock market today, essentially erasing a 0.9% drop to 72.36 during the regular session. The stock is trading near its best levels since the end of November, when China woes hit.

Same-store sales in its struggling China division fell 20% during the quarter on a 29% drop in April and a 19% drop in May. But the company said June comparable sales only fell 10%.

"The extensive media surrounding Avian flu in China has subsided and same-store sales at KFC are clearly improving," CEO David Novak said in a statement.

Problems in China are a huge concern for Yum Brands because it receives half its revenue from the 5,300 restaurants in the country. McDonald's (MCD) also has extensive operations in China, but health scares have had less impact on the burger giant. Starbucks (SBUX) sales are booming there as it rapidly expands its footprint in the country.

Yum struggled with a health scare at its chicken farms in China at the end of last year after food safety investigators found elevated levels of an antiviral medication in some chicken samples. Authorities shut down two farms that supplied Yum's KFC restaurants in the country.

But just when the food scare was dying down, concerns in March arose up over a new strand of bird flu that killed nine people in China. Yum informed consumers that cooked chicken is safe to eat but warned investors that the scare would have "significant, negative impact on KFC sales.

The company is on track to report positive same-store sales in China by September according to Peter Saleh, director and senior restaurant analyst for Telsey Advisory Group. But same-store sales aren't the only number to watch.

"In relation to that is how well the margins will hold up once the sales turn positive," he said.

U.S. same-store sales grew 1%, which was slightly disappointing to Saleh. The company is trying to push that number higher by revamping its menu items at home.

KFC added boneless chicken pieces to its menu and last month announced it will test a "Power Protein" menu in Dayton, Ohio on July 25. The menu is targeted at its main audience, young men, and will feature burritos and bowls with double helpings of chicken or steak.

Yum still expects a mid-single digit decline in full-year EPS, predicting 2014 as a "strong bounce-back year" according to Novak.