Investors lovin' it as McDonald's Japan moves past food scandals

[TOKYO] More than 18 months after McDonald's Japan shares hit a three-year low, memories of food scandals have faded for investors relishing the company's resurgence.

The stock of McDonald's Holdings Co (Japan) has surged to the highest since an initial public offering in 2001, outpacing gains in its US-based parent, as a turnaround takes hold that has lifted profits beyond levels seen before the company's two-year crisis. Analysts expect the fast-food operator will keep up that momentum when it reports results Wednesday.

The McDonald's Corp unit has found a recipe for success, posting 20 straight months of same-store sales gains, as it focuses on closing unprofitable stores and revamping existing ones. It is drawing in more customers with popular items such as Hawaiian "loco moco" burgers and advertising tie-ins including Pokemon-themed McFlurrys.

"They had lost the confidence of customers, but managed to appeal to them again," said Seiichiro Samejima, a Tokyo-based analyst at Ichiyoshi Research Institute. He said changes such as prominently displaying details about food items, more modern storefronts and smarter advertising all contributed to the comeback.

The outlook was much bleaker two years ago. After a string of food-safety incidents, the Japanese company's stock took another hit when its Oak Brook, Illinois-based parent said in late 2015 that it was considering selling its stake. But as the company started to post profit gains, McDonald's reversed itself.

"We're confident that we have the right capabilities and customer-focused plans to grow our business in Japan," McDonald's Corp chief financial officer Kevin Ozan said on an earnings call in April.

McDonald's Corp is reorganising its operations globally, and Tuesday completed a deal to sell a controlling stake in its China and Hong Kong operations.

Much of the turnaround in Japan has been orchestrated under the leadership of CEO Sarah Casanova, who took the helm of the company in 2014 after a previous stint as the head of marketing in Japan.

In May, McDonald's Japan raised its forecast for annual operating income by 67 per cent to 15 billion yen (S$184.45 million), after first-quarter sales jumped nearly 17 per cent to 61 billion yen.

Although spending-per-customer fell in July, McDonald's Japan locations managed to attract enough of an increase in customers to make up for the decline, keeping alive the string of same-store sales gains.

Being more engaged with consumers, such as using social media to ask customers to name a burger or to vote on their favorite one, also helped with sales, Ichiyoshi Research's Samejima said.

Shares of McDonald's Japan fell 0.7 per cent to 4,585 yen on Tuesday, after closing at the highest level since July 2001 on Aug. 3. The stock is up 50 per cent for the year, far outstripping a 27 per cent gain for McDonald's Corp., though the parent reached an all-time high last month. Japan's benchmark Topix index has climbed less than 8 per cent in 2017.

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