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Same-store sales a disappointment

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’ financial performance has cooled, albeit marginally, compared to previous quarters, thanks to higher base effect and , putting pressure on consumers’ discretionary spending. Nevertheless, growth rates in the March quarter (Q4) are good on an absolute basis. The company is optimistic about the business prospects of Domino’s, as well as the recently launched Dunkin’ Donuts (first store in New Delhi).

But, same-store sales growth () targets have been scaled down significantly. Growth in profit is likely to lag the increase in sales, as spending on advertising and store expansion is expected to go up. In short, times are not going to be as jubilant for investors as in the past. The stock is expected to face pressure or remain range-bound, given stretched valuations and lower growth expectations.

Strong performance...
Sales growth of 45 per cent was robust in the March quarter, but the lowest in the past four quarters — down from near 60 per cent levels a year before. The increase was lower than analysts’ expectations of 48-50 per cent. Apart from the high base, slowing SSSG (significantly below analysts’ expectations in Q4 and lower than 31 per cent recorded in the nine months ended December 2011) is another reason for sales growth cooling.


 

ATTRACTIVE FARE
In Rs crore Q4’ FY12 FY12 FY13E
Net sales 283.0 1017.5 1448.0
Y-o-Y change (%) 45.9 50.0 42.3
Operating profit 52.3 190.0 272.3
Y-o-Y change (%) 57.1 58.7 43.3
Adjusted PAT 29.3 105.6 153.0
Y-o-Y change (%) 51.8 46.7 44.8
E: Estimates                                                     Source: Company, Analysts reports


Though the company has focussed on store expansions and new product innovations, price rise of around 12 per cent over the past few quarters (higher than the normal range) seems to have affected volumes. Says Ajay Kaul, chief executive officer, “We are seeing first signs of reduction in consumer offtake and frequency of consumption.” The company, however, benefitted from higher operating leverage, which led to an improvement in the operating profit margin. Net profit grew at a slightly lower rate due to more-than-doubling of taxation, higher depreciation on account of store expansions and expenses towards operationalisation of Dunkin’ Donuts.

...but, muted outlook
The company is optimistic about India and Indian consumers. After exceeding the target of 85 new stores in FY12 (added 87), it plans to add another 90 in FY13 (to the current total network of 465 stores). Besides, 10 stores of Dunkin’ Donuts and five to six in Sri Lanka are also planned. But the company expects SSSG of 18-20 per cent in FY13, much lower than the 30 per cent reported in FY12. Says Kaul, “It is difficult to keep reporting 30 per cent SSSG as our base is getting larger and larger.” While the lower growth guidance is a disappointment, it is not a big surprise. Manish Sarawagi, analyst, Edelweiss Securities in his preview note had said maintaining 30 per cent SSSG could be a challenge, especially with no major price increases coming in the background of moderating food inflation.

The other issue is profitability. Though the input cost scenario has been stable for the past months, the company expects costs to rise in high single-digits over the next one year. This, along with higher advertising (both for Dominos and Dunkin’) and capex (Rs 150 crore in FY13) on account of store expansion and other expenditure (related to Dunkin’) will put pressure on profitability. Says Ravi Gupta, chief financial officer of the company, “We spent five per cent of sales on advertising (Rs 50 crore) in FY12 and every year it is going up. It is going to go up significantly but there will be some leverage.” After spending Rs 9-10 crore in FY12 towards factory, back-end and R&D, the company plans to spend another Rs 12 crore in FY13 towards Dunkin’.

The company has a target of 80-100 Dunkin’ stores in the next five years. For the next one year, focus will be on the Delhi-NCR region and the company would examine which format (flagship stores, stores in malls, kiosks) is suitable for profitable growth before expanding to other locations like Mumbai and Bangalore. The stores will cater to three broad categories, namely, coffee and cold beverages, donuts and sandwiches, but keeping in mind the Indian taste.

Jubilant’s stock, which has outperformed broader markets by a wide margin in the last one year, fell by about two per cent on Thursday and is expected to face further pressure as valuations are high at 42 times FY13 estimated . Says , analyst, , “Current valuations are very expensive and do not factor in an increase in competition in the existing business and initial losses in new businesses.” While sales growth is expected to taper off due to pressure on discretionary spending and the base getting higher, profitability is also likely to see some pressure as the company is going to be watchful towards price hikes and store-related expenditure is only going to inch up.

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