Investors found unappetizing tidings on the menu after Yum! Brands (NYSE: YUM) reported its second-quarter results.
Net income decreased 5.6%, to $286 million, although Yum!'s press release emphasized that earnings would have increased 17% after backing out special items. Last year's earnings included a one-time gain of $68 million.
Yum! Brands' revenue increased 4%, to $2.57 billion. Same-store sales were neutral to pretty good. Its U.S. and international segments showed 0% and 1% comps growth, while the mighty China division provided a 4% boost in same-store sales. Fortunately for Yum!, the company behind KFC, Pizza Hut, Taco Bell, and Long John Silver's, it has a vibrant Chinese division to make up for U.S. malaise.
However, several elements of Yum!'s report made investors choke. The company's full-year outlook was disappointing, predicting 2010 earnings of as much as $2.43 per share, instead of the $2.48 per share analysts expected.
Yum! Brands' impressively large presence in China -- which contributed 33% of the company's quarterly operating profit -- attracts many investors to its shares despite the many stock choices in the quick-serve market, such as McDonald's (NYSE: MCD), Chipotle (NYSE: CMG), Burger King (NYSE: BKC), and Wendy's/Arby's (NYSE: WEN). But the Chinese factor can complicate things, too.
First off, Yum! is paying increasing salaries in China, where labor costs are rising in response to labor unrest in many parts of the country. Higher wages will certainly pinch Yum!'s profits, as could the "commodity inflation" lurking on the horizon.
It's great that Yum! is doing well in China. But if you're not a fan of wrangling with currency translation, the riskiness of a strong emphasis on international markets -- with their different regulatory and cultural elements, and the confusing press releases those convolutions prompt -- then investing in Yum! Brands might not be for you. The company's certainly not high on my personal watch list.
Given some of the pressures that may drag down Yum! Brands in the remainder of the year, I think a wait-and-see approach may be for the best overall -- even for investors who love translating currencies and deciphering byzantine earnings reports.
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