* Q2 EPS $0.67 vs Street view $0.70
* Higher costs weigh on profitability in China
* China same-restaurant sales top analysts' estimate
* Shares down almost 2 percent
July 18 KFC parent Yum Brands Inc
reported quarterly profit that missed Wall Street's view as
higher costs in China cut into margins in that country, its top
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
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
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 reduced its sales
outlook due in part to China's deceleration and the CEO of Dell
Inc 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