Yum Brands (YUM): Chinese Diners Saving More

Lost in Intel-palooza today is the earnings report of Yum Brands (YUM). This report was interesting on many levels - first, the stock is down despite doing everything all the other companies we are "green shooting" are doing - beating estimates, cutting expenses, and relying on Asian growth as a savior. Only in this case the stock is down... which shows again why I don't understand those who play the "earnings game" other than having the "gamblers" gene embedded in their soul. You never know the market reaction.

Even more interesting is this tasty morsel (pun intended) about how the Chinese appear to be cutting back on dining, even as their government created a stimulus firmly targeted at more internal consumption. It's a strange data point considering car sales in China are through the roof, and Intel cited Chinese consumers buying computers - yet they are pulling back on foodstuffs? Weird.

I just thought I'd pass it along - an interesting anecdote when almost every bull thesis in the world relies in some part on "China saving us". Back to Intel-palooza.

Via CBSMarketwatch

• Yum Brands Inc., the owner of Taco Bell and KFC, reported a sharply higher quarterly profit on Tuesday, fueled by higher margins, lower expenses, one-time gains and international growth.
• After the close Yum Brands said that it earned $303 million, or 63 cents a share, in the second quarter, up from $224 million, or 45 cents a share, in the year-ago period. Excluding one-time items, the company said it would have earned 50 cents a share.
• Total revenue dipped 7% to $2.48 billion, as lower franchise income and same-store sales slippage in key markets weighed down the top line. Taking out the effect of foreign currency fluctuation, Yum said that worldwide system sales declined 4%. The average estimate of analysts polled by FactSet Research had been for Louisville, Ky.-based Yum to earn 43 cents a share on revenue of $2.49 billion.

Thus far, everything looks solid; a beat by 7 cents.

• Looking ahead, the company said it still expects to earn $2.10 a share vs. a current Wall Street view of $2.12.

Slight miss versus analyst expectations for the year, despite the 7 cent beat.

Looking more in depth

• Yum said U.S. same-store sales fell 1%, largely due to an 8% decline at Pizza Hut that was partly offset by growth at Taco Bell and KFC.
  
• Same-store sales in the China division were down 4% but higher margins and currency-exchange rates helped profitability in that market.
  
• Yum International saw same-store sales rise 1% while the unit opened 193 new restaurants in more than 50 countries.
• In the U.S. "there is no question that the consumer is under pressure making it difficult to drive sales growth," said David Novak, chief executive, in the earnings report.
  
• He added that Pizza Hut is the company's "biggest challenge in the U.S. as it competes in a more discretionary, higher guest-check, dinner category."

So it appears the forecast is hurting the stock today

• Yum Brands Inc (NYSE:YUM - News), parent of the Taco Bell, Pizza Hut and KFC chains, cut its full-year forecast for sales on weakness in its two biggest markets, the United States and China, and its shares fell 3.9 percent.
• ... it now expects 2009 same-stores sales in mainland China to be "about flat" versus up 5 percent. Louisville, Kentucky-based Yum gets more than half of its operating profit from China and other overseas businesses and investors expect most of Yum's future growth to come from those markets.

The Reuters story has the best take on the China angle.

• Chinese economic growth is outpacing much of the world, yet diners there have not been immune to the global downturn that has stung factories and resulted in fewer job opportunities for young people.
• "Their savings rates continue to rise, so they're being conservative with their spending right now," Carucci said.
• New restaurants will continue to drive Yum's growth in China, where the company plans to add at least 475 units this year.
• Chief Executive David Novak said the company also is making an aggressive breakfast push in China, where fast-food breakfast is still something of a novelty.

I say this half tongue in cheek but the creep of American culture into China is probably our best hope to keep them from catching us! Forget about studying for that engineering degree - go get yourself a McBreakfast!

• Roughly 75 percent of the company's restaurants are in cities in China's coastal areas, but executives said Yum is focusing more on central and western China going forward.
• Standard & Poor's Equity Research analyst Mark Basham maintained his "strong sell" rating on Yum, saying in a client note: "China same store sales falling 4 percent despite large stimulus spending is troubling."

Eastern coastal cities are where most of the wealth and industry has been. Now as labor becomes too expensive on the coasts (in a relative sense) the next wave of outsource will be to inner areas of China where there is even cheaper labor to exploit - sort of like building on the coasts 15 years ago. Then once inner China becomes too expensive, off to the next locale like Vietnam will the factories and multinationals go. Prosperity indeed.

No position