Jubilant Foodworks: Same store sales set to turn positive in FY16

Hopes of a recovery in consumer sentiment and tie-up with railways could boost sales

Jubilant FoodWorks is seeing renewed interest from investors, after reporting a modest 1.9 per cent growth in same-store sales growth (SSSG) in the December quarter. The company has seen same-store sales and margins decline consistently over the past several quarters as demand remained weak. However, the perception is turning as the market believes demand has bottomed out and the company is set to clock double-digit sales growth from the second half of FY16. Also, a tie-up with Indian Railways to deliver pizzas to passengers has fuelled a rally in the stock, which rose 21 per cent in the past month.

Going by store additions and a low base over the past few quarters, analysts are optimistic on headline sales growth in the new financial year. The company is on track to add 150 new Domino’s stores in FY15. In the December quarter, the firm added 40 new stores, taking the total store count to 838 at the end of calendar year 2014. A marginal pick-up in consumer sentiment and negative SSSG over the past three quarters would enable the company to return to positive SSSG in the next financial year.

While Jubilant continues to expand the Dunkin’ Donuts franchise, analysts believe it would remain non-core in terms of its revenue contribution over the next two-to-three years.

However, this optimistic view is not shared by others. The company, too, remains cautious on any recovery in the consumer sentiment. In FY14, Jubilant saw same-store sales growth contract by 1.6 per cent and in the first nine months of FY15, SSSG contracted 1.9 per cent. The broader market believes the overall economic slowdown has led to a contraction in sales but Morgan Stanley believes the moderation in same-store sales is not entirely macro-driven. Increased competition, lack of innovation, less successful marketing campaign and overt focus on entry-level menu offerings are factors that might have contributed to the current trend of sluggish sales. Although Morgan Stanley is building in eight per cent same-store sales growth in FY16, it expects its margins to remain under pressure.

Unlike other consumer companies, Jubilant is not a big beneficiary of softening raw material costs. With same-store sales remaining lower than cost inflation, price hikes might not be an option for the company either. In the December quarter, Jubilant's operating margins dipped 160 basis points year-on-year to 13.1 per cent with operating income growing by 7.9 per cent to Rs 72.6 crore. Valuations continue to be rich compared to the current sales and profit ratios.