Wednesday, February 06, 2013

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


 The folks at Yum! Brands [Yes!  That’s! the! name! of! the! company!] have been knocking the cover off the ball for so long they ought to be excused for whiffing once in a while, as happened this week when poultry supply miscues in China caught up with the company’s wildly successful Chinese KFC restaurant business—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 will recover.  Neither does the company.  But to hammer that message into the brains of Wall 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: they treated 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, which was used nine times in various forms during the call, including three times in three consecutive sentences:
 “From day one, we have always had a strategy to earn our right to own. And where we want to put Company equity is where we have great returns. We continue to have great returns in China and three-year cash-on-cash returns even in tier 1 cities, 3 to 4 years now. So across the board, we have outstanding returns in China. We have great operating capability and we expect to be predominantly, predominantly equity in China.”—David Novak, Yum! Brands CEO.
 Such browbeating works, of course.  (Only 3 of the 29 analysts following the company downgraded the stock subsequent to the earnings miss and guide-down, while one upgraded the stock.)
  Readers who think the title of this piece an exaggeration would do well to listen to a replay of the Yum! earnings call for themselves—or, better yet, listen to the Spectrum Brands call held earlier this evening.
 Spectrum, purveyor of Rayovac batteries, Remington shaving gear and other second-tier brands, was recently given the big boo-yah by a member of the Barron’s Roundtable, mainly for a seemingly well-timed acquisition of hardware and home improvement products from Stanley Black & Decker—products that should get a lift from the housing boom now underway in America.
 You would think Spectrum, with a friendly Barron’s mention and a big acquisition under its belt would be content with sticking to the hard, cold facts of the business…but no, the CEO and then the CFO read from their script like, well, like they were reading to 2 year-olds.
 The laugh-out-loud part came when the CFO—who employed a lot of non-GAAP numbers—bragged about the gross margin after stripping out the newly acquired business by emphasizing an extra fifty-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 the first quarter of fiscal 2013 was 34% for Spectrum Brands legacy business, and was actually 34.5% on a constant currency basis.”—Tony Genito, Spectrum Brands CFO.
 No doubt Wall Street’s Finest will dutifully report on the thirty-four-point-FIVE percent theoretical gross margin with great enthusiasm, and plug it into the models on which their lives seem to depend.
 We prefer Tesla’s quarterly earnings (or lack thereof, if you have a cynical view of that company’s business model) calls, in which founder Elon Musk limits his script to this:
 “All right, I think we can go right into questions. So, let’s go ahead and start addressing the questions.”
 Maybe Wall Street’s Finest couldn’t handle that.  But we’d like to think they could.

Jeff Matthews
Author “Warren Buffett’s Successor: Who It Is And Why It Matters”
(eBooks on Investing, 2013)    $2.99 Kindle Version at Amazon.com

© 2012 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

6 comments:

Alex said...

Jeff,
I'm sure you realize the difference between 34% and 34.5% is half a POINT, not a half a basis point.

Jeff Matthews said...

It was late and i was writing fast. Thanks Alex.
JM

Anonymous said...

One of the measures of earnings quality I use on companies, is the length of time their remarks take on their quarterly calls. The shorter the better.

Dave - everywhere said...

I used to work for a guy who had a love affair with his caps key. Every communication to our group would start with "TEAM!" with other words in caps thoughout the memo.

It was motivating for about the first 10 minutes, then just plain annoying for the next 2 years.

Anonymous said...

HNZ - HJ Heinz upgraded to Neutral from Sell at Goldman (72.50 ), how's that for a great analyst?

MicroSourcing said...

There's too much advertising in that prepared script, it almost looks like a hard-sell approach.