QSR Q2 review: Westlife outperforms Jubilant, but stares at slowing demand

The second-quarter earnings of Domino’s franchisee Jubilant FoodWorks Ltd (JFL) and McDonald’s franchisee Westlife Foodworld (WFL) show how slowing consumer demand impacted two of the biggest quick service restaurant (QSR) stocks in the Indian listed universe.

On a year-on-year basis, Westlife in Q2FY24 posted higher revenue growth than Jubilant, backed by a rise in retail store sales, and a lower drop in EBITDA. But sustained pressure on revenue and profits in QSR majors could mean further earnings cut, impacting the performance of discretionary consumption-linked stocks that have hitherto enjoyed higher valuation. Here is a lowdown.

The pizza pie chart

Jubilant FoodWorks, the m-cap leader (Rs 32,600 crore) of QSR stocks, holds the exclusive master franchise rights from Domino’s Pizza to develop and operate the brand in India, Sri Lanka, Bangladesh and Nepal. JFL operates 1,961 Domino’s stores. It also has exclusive rights to Popeyes (fried chicken) restaurants in India, Bangladesh, Nepal and Bhutan; and Dunkin’ (coffee, doughnut) restaurants in India. It currently operates 22 Popeyes outlets and 21 Dunkin’ restaurants.

Jubilant’s consolidated net sales grew 4.9 per cent YoY in Q2. But weak like-for-like or LFL growth (down 1.3 per cent YoY) for Domino’s Pizza India and lack of operating leverage led to a 11 per cent drop in overall EBITDA (20.3 per cent margin vs 24 per cent year ago) and 26 per cent decline in PAT (7.1 per cent margin vs 10.1 per cent year ago). The Q2 numbers could have been worse if not for improvements in gross margin (76.4 per cent) after four successive quarterly drops, as cost controls (over raw material and beverage) and softening inflation helped.

JFL’s growth has slowed each successive quarter as LFL growth has turned negative for the third straight quarter. Average daily sales for non-split (mature) restaurants for the Domino’s brand has inched up sequentially to Rs 81,658 but remains lower YoY (effect of extended Shravan period); this may change in Q3, backed by Cricket World Cup and festive season. The Domino’s India network added 50 new stores and entered three new cities during the quarter. It is on track to opening 200-225 new Domino’s stores in FY24. The medium-term target is 3,000 Domino’s stores.

Also read

The season for heartwarmingly soppy festival ads

Indian Hotels Company net profit rises 37% in Q2

Retailers report 9% growth in September, stay bullish on festival season: RAI

Channel mix remains about 65:35 (delivery and dine-in). Delivery channel revenue growth was order-led but dine-in revenues have dropped because of a decline in ticket and orders. The management says this is due to temporary closure of stores undergoing re-imaging — 33 stores (bottom decile outlets) have been re-imaged until H1 FY24; the company is on track to re-image 100-plus stores in FY24.

Weak demand, incremental competition in pizza QSR, and rising inflation have posed short-term challenges for JFL. Bloomberg consensus estimates bake in a 11.2 per cent overall growth in revenue (adjusted) for FY24, backed by 76 per cent gross margin. Thus, analysts now project JFL profit (adjusted) growth by around 8 per cent YoY in FY24, after a 16 per cent decline in FY23. The growth comes after the downward earnings revisions in the past two quarters. The JFL stock, which has lost nearly 7 per cent in the last five days, trades 81 times FY24 estimated adjusted EPS of Rs 6.1.

The burger flip

Westlife Foodworld, the third largest QSR player (Rs 12,600 crore m-cap), operates the McDonald’s chain of restaurants in West and South India, having a master franchisee relationship with McDonald’s Corporation USA. It has 370 restaurants.

Continuing its growth lead over Jubilant, Westlife clocked 7.4 per cent revenue rise in Q2, helped by increased guest counts, Shravan special menu in key markets, decent growth in dine-in/delivery sales. Revenue per store is Rs 1.65 crore in this quarter, down from Rs 1.69 crore in Q2FY23, with a decline in the dine-in and convenience channel on a per store basis.

Unlike the negative LFL growth for Jubilant, Westlife posted about 1 per cent same-store sales growth (SSSG). However the SSSG is the slowest in 10 quarters, indicative of the slowdown in consumer demand. Gross margin stood at 70.1 per cent, up 90 basis points YoY, aided by better mix and cost-saving initiatives. Input costs remain broadly stable. The company added nine restaurants this quarter aims to open 40-45 restaurants by FY27.

Compared to the 11 per cent decline in JFL’s EBITDA, Westlife reported 1 per cent drop. Operating EBITDA margin at 16.2 per cent was lower on account of higher general and administrative (G&A) costs. The management expects softening milk/cheese and chicken inflation. The company effected a price hike (5 per cent) in April 2023, which may help in EBITDA margin expansion to 18 per cent if input prices decline. PAT declined 29 per cent YoY, with PAT margin at 3.6 per cent vs 5.5 per cent YoY.

The QSR industry has been facing several challenges due to higher inflation and subdued demand. Westlife’s multi-category (burger, chicken, breakfast, and coffee, among others) strategy places it on a better keel than JFL. But continued weakness in consumer eating-out trends in Q2 has meant lower-than-expected revenue/earnings in the first half. This has led to earnings revision for FY24 and FY25.

Bloomberg consensus estimates now project a 14 per cent overall growth in revenue (adjusted) for FY24. Gross margins are pegged at 70-plus per cent while EBITDA margin is at 17 per cent for the full-year. Analysts project WFL profit (adjusted) to grow by around 20 per cent YoY in FY24, after swinging to profit in FY23 versus loss in FY22. The WFL stock, which has lost nearly 13 per cent in the last five days, trades 93 times FY24 estimated adjusted EPS of Rs 8.72.

All eyes are now on another QSR major, Devyani International’s earnings release, slated for November 7-8. The extent of Q2 consumer demand slowdown can be gauged further from Devyani, the largest franchisee for Yum Brands (KFC and Pizza Hut) in India.

COMMENT NOW