Margin topping adds to Jubilant FoodWorks show

Company more selective in opening outlets and sweating existing ones to boost same-store sales growth

Jubilant FoodWorks reported a better-than-expected September quarter performance. The operating profit margin at 14.1 per cent was up 450 basis points year-on-year, the highest in 14 quarters. It was led by revenue performance and cost optimisation. Most analysts had estimated the margin number at 12-12.5 per cent.

Operating profit jumped 59 per cent over a year to Rs 102 crore; revenue grew nine per cent to Rs 726 crore. This was led by strong growth in volumes and a 5.5 per cent same-store sales growth (SSSG). The top line growth would have been better considering that the company passed on GST benefits (two per cent reduction in tax) by reducing prices. 

Passing on of input credit gains to customers in the form of more product additions (toppings) at the same value and absorbing the food inflation also helped. Profit after tax was up 124 per cent to Rs 48.5 crore with net margins at 6.7 per cent.

SSSG was led by continued traction from the everyday value offering launched in the first quarter and the new Domino’s campaign in August. It was, however, lower than analysts’ estimates of 7-7.5 per cent growth. SSSG was 6.5 per cent in the June 2017 quarter and 4.2 per cent in the June 2016 one.

Analysts had estimated five or six new stores in the quarter but the company has become conservative on this. It added one Domino’s store and shut another, ending the September quarter at 1,125 (1,081 a year before), the same as at the start. Store additions are to follow a more exhaustive criteria.

There is a focus on cost management by higher personnel utilisation and improved productivity, while cutting on administration and promotion expenses. Lower other expenses in the quarter were, for example, a function of what the company called optimising of advertising cost.

The other area the company is focused on is cutting the loss on its Dunkin’ Donuts franchise. The company continues to rationalise the store portfolio of this brand, having closed five and added two, taking the total at the quarter's end to 52. That number stood at 73 in the year-ago quarter. It expects to reduce losses by half in FY18 from this business and see break-even in FY19.

Himanshu Nayyar, analyst at Systematix Shares, said, “If you look at same stores sales are almost same on q-o-q basis, we could see good margins at Ebitda (earnings before interest, tax, depreciation and amortisation) level and it shows that the cost control measures are showing some results.”

However, there are no stores opened during the quarter, this may be the reason for no substantial increase in their cost structure. If this kind of profitability is delivered, there is definitely upside for this stock, he said.

The strategy, clearly, is on opening new stores selectively and to drive SSSG from existing ones. Coupled with everyday value offerings, this is expected to drive volumes, growth and profit. While there is scope for margins to improve, the company is investing in technology to improve customer experience (online and offline) and reduce cost, while scaling up operations. This and rising input cost could keep a lid on the margins.