Higher gross margins, cost control initiatives aid Westlife's profitability

Despite a high base of last year, the company was able to post a same-store sales growth of 9.2%. The metric a year ago was 14.7%

A strong operational performance in the December quarter by Westlife Development, which runs the McDonald’s chain of stores, led to a 10 per cent uptick in its stock price on Thursday. 

Despite a high base of last year, the company was able to post a same-store sales (SSS) growth of 9.2 per cent. The metric a year ago was 14.7 per cent.

The SSS growth, which was at 5.6 per cent in the fourth quarter of 2018-19, has been consistently moving up over the past four quarters and is led by McCafé, Breakfast, and Delivery formats. 

While SSS growth is expected to remain high, the company indicated that medium-term SSS growth would be in the 7-9 per cent band. The McSaver campaign helped increase the footfall and volumes, which, coupled with 11 new outlets, helped boost revenues by 16.8 per cent to Rs 433 crore.  

Amit Jatia, vice-chairman, Westlife Development, said higher footfall, larger menu options, and value-for-money offerings helped the company maintain the pace of growth in the quarter. The other takeway was the strong gross margin performance by the company. Despite no price increases and higher cost of raw materials, Westlife posted a 248-basis points (bps, or bips) increase in gross margins. 

As a percentage of revenue, gross margins are at 66 per cent and were largely led by higher scale of operations. The gross margins are expected to be maintained at current levels. The company added 11 stores in the quarter, to take its total store count to 315 and is on target to add 25-30 stores for the current financial year. 

The operating profit margins at the unit (restaurant level) witnessed an uptick of 246 bips to 17.5 per cent, led by gross margins, cost control initiatives, and higher operating efficiencies.  

Going ahead, analysts expect higher margins, steady SSS growth and store expansions to help the company augment its financials. While the outlook remains strong, given the 50 per cent jump in the stock prices over the last six months, analysts believe investors with a long-term perspective can add the stock to their portfolios.