Jubilant Foodworks: Demand slowdown bites in Q1

Same-store sales growth plummets to 6.3% in Q1; margins fall 140 bps to 16.8%

The appetite for pizzas is slowing, going by the first quarter numbers of Jubilant Foodworks. The company’s stores are not selling as many pizzas as they did a year ago. Same-store sales growth has plummeted to 6.3 per cent in Q1 compared to 22.3 per cent in the corresponding quarter of the previous year. The company added 26 new Domino’s stores and four Dunkin’ Donuts stores in the quarter, which helped prop up sales growth. In the June quarter, the master franchisee for Domino’s Pizzas in India reported net sales Rs 396 crore, up 26 per cent compared to the corresponding period last year. The company’s operating profit (earnings before interest, depreciation, tax and amortisation) grew by 16 per cent to Rs 66 crore.

Although the firm has guided for top line growth of 8-10 per cent during the year, if overall economic growth continues to slow, this growth could be at risk. If the economy recovers and consumer spending picks up in the second half of the year, then the company may see double-digit growth.

Slowing growth has also had an impact on the firm’s profitability as its operating leverage has been affected by higher fixed costs and slower sales. For this reason, the company’s net profit has grown by five per cent in Q1 to Rs 34 crore, which is below the Street’s estimates. Given that sales growth has been modest and same store sales growth has dropped to 6.3 per cent, the company’s operating margins are down by 140 basis points to 16.8 per cent in Q1.

In order to beat the slowdown, the company has taken measures such as entering new markets and launching new products. The company opened 26 new Domino’s stores during the quarter and four Dunkin’ Donuts stores. Domino’s launched launch of new offerings such as the Spicy Baked Chicken and Lebanese rolls under the Domino’s brand at lower ticket prices. The company is now also entering newer markets as demand begins to slow in existing markets. Domino’s is now available in Baramati, Hosur, Cuttack and Erode. The impact of these may be visible only over the next few quarters analysts believe, if consumer spending picks up.

Over the years, investors have paid a huge premium for the stock as it was growing at a scorching pace. But with same store sales growth falls or consumer spending continues to weaken, then the stock may correct further, believes Gaurang Kakkad of Religare Capital Markets. The stock trades at 36x its FY15 earnings and 45x its FY14 earnings. If growth does not return, the company’s stock may correct further.