New offers to shore up Jubilant Foodwork's volumes, drive same-store growth

Lower prices, expanding market to drive same-store growth, margins

The Jubilant FoodWorks stock has gained 19 per cent over the last month on expectations of improving growth outlook and expanding margins. The company, which had launched its Everyday Value offer last year for medium-sized pizzas, has extended it for regular ones. The new offer, targeting smaller groups, enables consumers to buy two regular pizzas at Rs 99 each.

The new offer, a 24-40 per cent discount to menu prices, is expected to have a similar effect as the previous one. The earlier offer, launched in April 2017, was mainly responsible for Jubilant’s same-store sales (SSS) growth. Same-store sales were 7.5 per cent lower in March 2017 over the year-ago period. But since then it has grown to reach a peak of 17.8 per cent in December 2017.

Analysts at Nomura said the new offer would be a hit in smaller towns having low ticket sizes. It will allow customers to opt for cheaper products and will help compete with quick service restaurants and gain market share on the back of attractive prices.

The offer eliminates demand distortions and evens out pricing across all consumer segments, while increasing volume consumption, they added.

Higher affordability and product quality is also expected to increase in SSS growth. Analysts at Macquarie estimate that SSS growth should be about 8 per cent annually over the FY18-20 period. The new schemes have improved profitability, driven by operating leverage and higher SSS growth. Incremental sales growth is expected to come from additional stores. However, the company has been circumspect about launching stores aggressively and has adopted a measured approach. This, coupled with a reduction in the number of Dunkin’ Donuts stores, is expected to improve overall profitability by reducing costs and improving focus on the profitable Domino’s franchise. The company has been looking at reducing costs, especially on the employee front, which should reflect on margins.

While the new offer should improve volumes, lower input costs, be it for wheat or milk, are either flat or down 5 per cent from their peaks. This, along with the recent price hike, should augur well for profitability. Operating profit margins have moved up from Q4 FY17 levels of 10 per cent to 17 per cent in Q3 FY18. At the current price, the stock is trading at 41 times its FY20 earnings estimates and could be a long-term bet on dips.