The adverse publicity associated with the improper food handling practices by its former supplier, Shanghai Husi – a division of OSI Group LLC – has hit McDonald's Corp. (MCD) hard. Concerns grew when media reports revealed that McDonald’s Holdings Co (Japan) Ltd. – where McDonald's Corp. holds a 49.9% stake – apprehends net loss of ¥17 billion ($157 million) contrary to the earlier forecast of ¥6 billion net profit in fiscal 2014, ending December. This guidance also compares unfavorably with ¥5.14 billion profits earned by the subsidiary in 2013.
In late July this year, the supplier was reportedly found using meat stored in an unhygienic manner as well as mixing fresh and expired meat. Following this, McDonald’s Japan had straight away stopped selling China made chicken products and withdrew its financial guidance for 2014 owing to uncertainties associated with the costs of addressing the food-safety issues.
Despite such a drastic measure, consumer confidence was affected which got reflected in the 25.1% comps decline in August and 16.6% in September. Fast-food chains like Yum! Brands, Inc. (YUM) also faced the brunt of the scandal.
Reportedly, McDonald’s Japan apprehends a ¥45 billion decline in sales owing to the meat handling disparagement, thus reducing its current profit by ¥11.6 billion. Apart from this, the negative publicity has also compelled McDonald’s Japan to offer financial support to franchisees for initiating measures to improve quality management and information disclosure. These measures will likely dent profits by another ¥10.4 billion.
Amid the already sluggish U.S. comps and a restricted consumer spending environment, this bad press has spelt doom for McDonald’s. However, McDonald’s Japan also attempted to restore customer confidence by disclosing information on countries where its food is processed and its supplies come from.
McDonald’s currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector include Chipotle Mexican Grill, Inc. (CMG) and Jack in the Box Inc. (JACK). Both these stocks sport a Zacks Rank #1 (Strong Buy).
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