Yum! Brands and the U.S.-China Earnings Balance

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Based on its latest earnings, Yum! Brands Inc. (NYSE: YUM) did well in the United States and China, its big growth markets. Or, China is a problem because growth has slowed there. The Yum! Brands results provide another example of why Wall St. has such difficulty dissecting how much China, the U.S. or Europe will or will not hurt corporate earnings.

Yum! Brands issues what may be the most unnecessarily complex financial statements of any large company in America. Buried in the data were numbers that showed that U.S. sales were up 1% and China’s up 22%, but margins in China did not improve while operating profit in the region was up 24% to $374 million. Additionally:

China Division system sales increased 22%, prior to foreign currency translation. Same-store sales increased 6%, overlapping strong prior year same-store sales growth of 19%.

Maybe sales are good, or same-store sales are slowing, or 6% same-store sales are impressive. In China, the hot market for firms like Yum! Brands and McDonald’s Corp. (NYSE: MCD), 6% does not appear to be a very good number. But Yum! Brands did open 192 new “units,” which are stores. So same-store sales data may not mean much.

China is not the only international part of Yum! Brands’ operation. It has another overseas unit that posted operating income of $173 million for the quarter. That is not insignificant compared to China, but Yum! Brands appears to want investors to focus on the People’s Republic.

Furthermore, profits at the company’s U.S. operations rose 13% to $162 million. The growth rate is substantial when the relatively huge expansion of the fast-food chain in China is taken into account, compared to more modest growth in America.

Observing all of these numbers, a reporter at MarketWatch wrote:

After struggling domestically last year, Yum is recently showing signs of a comeback in the oversaturated, depressed U.S. marketplace.

The same author made comments that appeared to show concern about China’s slowing growth rate.

A review of Yum! Brands’ data on its operating margins and other economic data out of the United States and the People’s Republic make understanding the company’s results even more difficult. Growth in China is rapid, but slowing, much as gross domestic product there is. That seems to be good, but the potential slowing is bad. U.S. sales were lackluster in the company’s past quarter, but Wall St. seemed impressed that Yum! Brands was growing in its home market at all. Maybe the U.S. economy is better than expected, a sentiment reflected in how well American GDP is performing compared to the rest of the world.

The Yum! Brands numbers are a sign the China may be a good market, unless growth is slowing, and the U.S. is a good market, or perhaps a better one, if growth is slow but steady. The confusion is nearly as much as the interpretation of world growth by nation and in general.

Douglas A. McIntyre