How To Talk To Wall Street: Like 2 Year-Olds

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 The folks at Yum! Brands [Yes!  That’s! the! name! of! the! company!] havebeen knocking the cover off the ball for so long they ought to be excused forwhiffing once in a while, as happened this week when poultry supply miscues inChina caught up with the company’s wildly successful Chinese KFC restaurantbusiness—a business that happens to drive half the company’s total profits—causing a 25% drop in comp store sales. Now we have no doubt those Chinese KFCs willrecover.  Neither does the company.  But to hammer that message into the brains ofWall Street’s Finest, the company used a technique that gets a little tiresome,especially when one is subjected to it for an entire earnings call: theytreated Wall Street’s Finest like 2 year-olds. How? Well, by EMPHASIZING every other WORD in the PREPARED SCRIPT,particularly ADJECTIVES like STRONG and GROWING, not to mention GREAT, whichwas used nine times in various forms during the call, including three times inthree consecutive sentences: “From day one, we have always had a strategyto earn our right to own. And where we want to put Company equity is where wehave great returns. We continue to have greatreturns in China and three-year cash-on-cash returns even in tier 1 cities, 3to 4 years now. So across the board, we have outstanding returns in China. Wehave great operating capability and we expect to bepredominantly, predominantly equity in China.”—David Novak, Yum! Brands CEO. Such browbeating works, of course.  (Only 3 of the 29 analysts following thecompany downgraded the stock subsequent to the earnings miss and guide-down,while one upgraded the stock.)  Readers who think the title of this piece anexaggeration would do well to listen to a replay of the Yum! earnings call forthemselves—or, better yet, listen to the Spectrum Brands call held earlier thisevening. Spectrum, purveyor of Rayovac batteries,Remington shaving gear and other second-tier brands, was recently given the bigboo-yah by a member of the Barron’s Roundtable, mainly for a seeminglywell-timed acquisition of hardware and home improvement products from StanleyBlack & Decker—products that should get a lift from the housing boom nowunderway in America. You would think Spectrum, with a friendlyBarron’s mention and a big acquisition under its belt would be content withsticking to the hard, cold facts of the business…but no, the CEO and then the CFO read from their scriptlike, well, like they were reading to 2 year-olds. The laugh-out-loud part came when the CFO—whoemployed a lot of non-GAAP numbers—bragged about the gross margin afterstripping out the newly acquired business by emphasizing an extrafifty-basis-points in the adjusted, theoretical, yadda-yadda number as if it represented the discovery of the Higgs boson:  “I am pleased to note that the gross profit margin in thefirst quarter of fiscal 2013 was 34% for Spectrum Brands legacy business, andwas actually 34.5% on a constant currency basis.”—Tony Genito, SpectrumBrands CFO. No doubt Wall Street’s Finest will dutifullyreport on the thirty-four-point-FIVE percent theoretical gross margin with greatenthusiasm, and plug it into the models on which their lives seem to depend. We prefer Tesla’s quarterly earnings (or lackthereof, if you have a cynical view of that company’s business model) calls, inwhich founder Elon Musk limits his script to this:  “Allright, I think we can go right into questions. So, let’s go ahead and startaddressing the questions.” Maybe Wall Street’s Finest couldn’t handlethat.  But we’d like to think they could.
Jeff MatthewsAuthor “Warren Buffett’s Successor: Who It Is And Why It Matters”(eBooks on Investing, 2013)    $2.99Kindle Version at Amazon.com
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