Yum's profit disappoints, hurt by China costs

Wed Jul 18, 2012 9:02pm EDT

A sign shows Yum Brands Inc's support center at its corporate headquarters in Louisville, Kentucky January 18, 2011. REUTERS/John Sommers II

A sign shows Yum Brands Inc's support center at its corporate headquarters in Louisville, Kentucky January 18, 2011.

Credit: Reuters/John Sommers II

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(Reuters) - KFC parent Yum Brands Inc (YUM.N) reported quarterly profit that missed Wall Street's view as higher costs in China cut into margins in that country, its top market.

Food and wage costs rose in China while a move to 24-hour operations and delivery increased expenses. Yum also has been investing in training employees for new restaurants, which it is building at a rapid clip, Yum spokesman Jonathan Blum told Reuters.

Louisville, Kentucky-based Yum is the biggest Western restaurant operator in China, with more than 3,900 KFC shops and almost 700 Pizza Hut restaurants, and is widely viewed as a way for U.S. investors to bet on that country.

"The earnings miss is because China margins were a lot softer than people expected, but that's largely a function of them growing," Bernstein Research analyst Sara Senatore told Reuters.

She said those pressures should stabilize over time and that wage growth in China is decelerating.

"We expect this to be short-lived," Yum Chairman and Chief Executive David Novak said in a statement, referring to the China margin hit.

China has been the world's economic engine as many other countries have struggled to recover from the financial crisis, but it recently spooked investors with data showing that its growth had cooled to a three-year low.

A lengthening line of U.S. corporations in past weeks have warned that China's cooling growth is dampening prospects for revenue and profit growth at a time when economies in the United States and Europe are shaky.

Computer chip maker Intel Corp (INTC.O) reduced its sales outlook due in part to China's deceleration and the CEO of Dell Inc DELL.O said the personal computer maker had seen a business slowdown in China.

Worries about China have helped to send shares in Yum, which gets roughly 40 percent of its profit from China, down more than 10 percent from their all-time high of almost $75 in April.

The company has been raising prices in China to offset higher costs but that has not appeared to hurt demand as traffic rose 6 percent during the quarter.

The company's 10 percent gain in sales at established restaurants in China topped analysts' average call for a rise of 9.2 percent, according to Consensus Metrix.

Net income for the second quarter, ended on June 16, rose to $331 million, or 69 cents per share, compared with $316 million, or 65 cents per share, a year earlier.

Excluding a gain of 2 cents, the company earned 67 cents per share in the latest quarter, missing analysts' average estimate by 3 cents per share, according to Thomson Reuters I/B/E/S.

Yum said its worldwide restaurant margin fell 0.6 percentage point to 15.2 percent during the second quarter, including declines of 4.1 percentage points in China and 1.1 percentage points at its unit that includes other international markets such as Japan, Russia and France.

The restaurant margin increased 5.8 percentage points in the United States, where new menu items have boosted sales at Taco Bell, its Mexican-style fast-food chain that accounts for about 60 percent of domestic operating profit.

Shares in Yum fell 1.9 percent to $64.30 in extended trading on Wednesday.

(Reporting by Lisa Baertlein in Los Angeles; Editing by Phil Berlowitz and Edmund Klamann)

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