Westlife Development: Investors should await better sales growth, margins

Dine in go ahead in Maharashtra, cost optimisation to help improve show in Q3

Quick service restaurant major Westlife Development, which runs the west and south regions of McDonald’s India operations, posted a sequential improvement in revenues led by takeaway and delivery channels. Though sales are still down over 47 per cent over the year ago quarter, they more than doubled over the June quarter and are now at over 70 per cent of the pre-Covid levels. 

While in the pre-Covid period, the share of dine-in and convenience platforms (takeaway, delivery and on the go) was equally split, the share of the latter has gone up substantially due to the lockdown and restrictions on the dine-in format in key states such as Maharashtra.

The company has highlighted that the sales uptick in convenience platforms was led by multiple campaigns including no delivery fee, stay home combos and free offers. It is not surprising then that sales have reached pre-Covid levels for these formats (on the go is a new sales channel) and average value per order is 25-30 per cent higher. 

Sales are expected to pick up in the current quarter given that Maharashtra has given a go ahead for dine-in operations last month. The state with 150 stores accounts for half of the company’s revenues. The company indicated that the opening of the dine-in centres has been complementary to the convenience platforms and has not eaten into each others’ share. The opening up of malls and cinema halls is expected to add to the rising footfall at its outlets. 

With the omni-channel sales growth picking up, profitability too, is expected to see an improvement. While the company continues to make a loss at the operating level, this has come down to Rs 10 crore in Q2 as compared to Rs 58 crore in Q1. The company indicated that it hit break-even in the month of September at the operating level. While the company continues to rationalise advertising spends and rentals, some overheads (travel) could see an uptick in the coming quarters. 

While long term prospects for Westlife are strong given the change in consumer habits towards the fast food segment and
omni-channel sales, investors should await improvement in sales growth, margin improvement and return to profits before considering the stock.