McDonald's Says China Food Scandal Hurting Regional Results

McDonald's Corp said its business has been hurt by China's latest food scare that forced restaurants in the region to temporarily pull meat items from menus.

An undercover local Chinese TV report on July 20 showed workers at Shanghai Husi Food Co Ltd using expired meat and doctoring food production dates. Regulators immediately closed the factory, which is part of OSI Group LLC, a US food supplier and important McDonald's partner.

"While this matter will negatively impact results in the near term, we cannot reasonably estimate the impact on full year 2014 earnings at this time," according to a regulatory filing from McDonald's, which has just over 2,000 restaurants in China.

McDonald's warning on Monday came just days after rival Yum Brands Inc., which has about 6,400 restaurants in China and whose KFC is the biggest Western brand in the country, also said the scandal was driving China customers away.

McDonald's shares dropped 0.5 per cent to $93.86 at mid-afternoon on the New York Stock Exchange. Shares of McDonald's and Yum have fallen 5.2 per cent and 8.6 per cent, respectively, since the scandal broke on July 20.

McDonald's Holdings Co (Japan) Ltd on July 29 withdrew its full-year earnings forecast after the China meat scare caused sales to drop 15 to 20 per cent on a daily basis.

The company, which has more than 3,100 restaurants in Japan, previously had forecast an operating profit of 11.7 billion yen ($115 million) for 2014.

McDonald's affected markets account for about 10 per cent of its total revenue, the world's largest burger chain said in its filing on Monday. About 15 per cent of operating profit at McDonald's comes from its Asia/Pacific, Middle East and Africa unit that includes China and Japan, analysts said.

The warning from McDonald's prompted Janney Capital Markets analyst Mark Kalinowski to cut his earnings per share estimates for the fast-food chain by 3 cents to $1.55 for the third quarter and by 1 cent to $1.43 for the fourth quarter.

Yum on July 30 warned that the scandal had hurt sales badly at its KFC and Pizza Hut restaurants over the previous 10 days.

Yum got 35 per cent of its operating profit from China last year and is more exposed to the market than McDonald's.

Yum did not quantify the impact of the China scandal on its profits, but said that a sustained, significant sales impact would "have a material effect on full-year earnings per share."

The double whammy of a food safety scare and bird flu in China battered sales at McDonald's and Yum last year. Those sales had just stared to recover when the latest food scandal emerged.

Copyright : Thomson Reuters 2014