Analysis: Jubilant FoodWorks: Outperformance in question

Pick up in same store sales growth and improvement in profitability is imperative to justify high valuation and outperformance of the stock

Jubilant FoodWorks has slightly exceeded analysts’ estimates on sales growth but disappointed on the profitability front in the September 2012 quarter. This trend may continue for some more quarters as the company is still on an expansion phase, which includes growing the Dunkin Donuts business now. Given stretched valuation of 55 times FY13 estimated earnings, the slowdown in s ame store sales growth needs to improve.

Growth slows, profits impacted

The company’s sales growth of 42% year-on-year is a tad higher than expected rate of around 41% but is the lowest since past eight quarters. Store expansion (50 opened in first half of 2012-13, including 26 in September quarter) and price hike (though it partly affected volumes) helped. However, same store sales growth (SSSG) of 19.8%, the lowest in last 13 quarters, has come lower than the expectations of 22-25%. This is partly due to customers ordering lower priced products.

Says Ajay Kaul, chief executive officer of the company, “Consumers are showings signs of not growing the frequency. They are not reducing   number of orders but ticket-size is coming down.”

The company’s performance on profitability front was also disappointing thanks to lower operating leverage on account of slowing SSSG, jump in expansion related costs and opening of Dunkin Donuts (5 stores now). While analysts were expecting operating profit margin to remain flat or slip marginally (by about 25-30 basis points), the same dropped by about 100 basis points to a seven quarter low of 17.2%.

Raw material costs were under control but employee costs (annual salary hikes) and expansion related overheads like rent among others (as percentage to sales) were up 150 basis points combined. Weak operational performance was followed by jump in depreciation (store expansion) and taxation. Thus, even net profit margin declined 91 basis points and slipped below 10% (9.4% to be precise).

Store expansion led growth

The company has increased its store addition target for Dominos from 100 earlier to 110 in FY13 (10 maintained for Dunkin), a trend also seen in the past quarters . While this reflects the strong opportunity (in tier 2 and 3 cities) and will add to its topline, sustaining profitability is also important. Store expansion related costs and   new launches (read: higher promotions)   will keep overall expenditure high.

Says Gautam Duggad, analyst, Motilal Oswal Securities, in a post result comment “New store opening will maintain momentum in sales growth, however same store sales is important for margin improvement. For now, we maintain neutral on the stock largely due to premium valuation.”

Dunkin Donuts (target of 80-100 stores in next 5 years) is at a very nascent stage to support profit   performance. The company is also expected to undertake price hike of 3.0-3.5% in Dominos Pizza, which may further affect volumes. In short, all is not hunky-dory for the company compared to the past.

Unless it is able to sustain higher same store sales growth and improve profitability, the high stock valuations may become difficult to sustain and so will the stock's outperformance.