Jubilant FoodWorks: No real uptick in consumer demand yet

While the stock cheered higher-than-expected same-store sales growth, management believes this is largely a function of low base effect

Jubilant FoodWorks (Jubilant), the operator of Domino’s Pizza and Dunkin Donuts outlets in India, reported a weak set of numbers for the December 2014 quarter. Notably, the 1.9 per cent same-store sales (SSS) growth number, which comes after five quarters of negative SSS growth, can be misleading, even as it was higher than Street expectations of a flattish number. The reason: the latest number is largely a function of low base effect in the corresponding quarter of last fiscal and does not indicate any sign of improvement in consumer demand. Jubilant’s SSS growth had fallen 2.6 per cent in the December 2013 quarter. "The SSS growth number looks better cosmetically primarily due to a low base. There is no conclusive evidence of a dramatic change in consumer sentiment," Jubilant’s management said in a post-results call with investors. The management is cautiously optimistic about future demand trends and growth prospects.

In the December quarter, weak Ebitda margins ate away a large part of the top-line gains. A 479-basis point year-on-year fall in the tax rate provided some support to the net profit, which grew at a far slower pace than sales. Jubilant's net sales grew 21.4 per cent year-on-year to Rs 554 crore while net profit grew by a subdued 4.2 per cent to Rs 35 crore. Both these numbers, though, were largely in line with Bloomberg consensus estimates of Rs 551 crore and Rs 36 crore, respectively.

Price hikes of 3 per cent implemented in November 2014 partly aided top-line growth, and so did new store openings. Benign input costs (down 101 basis points to 21.9 per cent of sales) were more than offset by higher employee costs (up 229 basis points to 20.8 per cent) and rental costs (up 76 basis points to 9.7 per cent). Thus, Ebitda margins contracted by 170 basis points to 13.1 per cent compared to the year-ago period. While strong addition of new stores (41 Domino's, 12 Dunkin Donuts) pushed up rental costs in the quarter, employee costs were fuelled by a hike in salaries and a higher employee base. Going forward, the management believes margins will be a function of SSS growth and inflation. Even though new stores are margin dilutive, the management believes if inflation remains at the existing level, current margins will be sustained.

Going forward, Jubilant is on track to achieve its targeted store addition of 150 new stores for Domino's Pizza and 30 new Dunkin Donuts stores this fiscal. In the first nine months of this fiscal, the company has opened 112 stores and 20 stores, respectively — the tally currently stands at 844 and 50. Contribution of average online ordering (OLO) to delivery sales remained stable at 27 per cent sequentially and online (including mobile and app) will be a key area of cost-efficient customer acquisition and servicing for the company. The management also plans to continue adding new products and innovation to its menu in both pizza and doughnuts businesses. The company expects Dunkin Donuts to break even in another two-three years from now when the total stores tally reaches 125-150.

Post results, which came during market hours on Thursday, the stock gained steam to close at Rs 1,432, up 6.5 per cent over the previous day’s closing. At current levels, the Jubilant scrip trades at high valuations of 45.7 times FY16 estimated earnings. Given the uncertainty regarding a pick-up in consumer demand, these valuations appear unsustainable. Analysts remain divided on the company, with eight of the 14 polled by Bloomberg this calendar year having a Buy call and the rest having a Sell recommendation on the scrip. Their average target price of Rs 1,408 indicates a downside of about 2 per cent from current levels.