Jubilant Food works continues to disappoint
Rich valuations fail to factor in the slow and painful process of recovery ahead
Though Jubilant Foodworks’ net profit was pulled down by one-offs in the March quarter (Q4), investors have quite a few reasons to worry. Fall in its same store sales growth (SSSG), for instance. SSSG denotes the sales growth from the stores that were operational in the comparable period. Continued impact of demonetisation as well as accelerated pace of store closures (those making losses) impacted this metric in Q4. Withdrawal of the buy one, get one offer in the quarter further impacted SSSG. As the company focuses on improving the SSSG as well as driving operational efficiencies, not only has it added lesser number of stores in FY17, but is also guiding for much lower store additions than it has historically. On one hand, the management is focusing on improving SSSG and the value proposition offered to the consumers, while on the other, it is also driving cost and operational efficiencies to improve store-level profitability. Given the slowing consumption demand and stiff competition, achieving this fine balance will be quite a challenging task for Pratik Pota, the newly-appointed CEO, and his team.
In the meanwhile, Jubilant’s quarterly performance could remain under pressure, believe analysts. In Q4, its revenues fell 0.9 per cent to ~613 crore, missing the Bloomberg consensus estimates of ~676 crore. A 7.5 per cent fall in the SSSG was a key reason behind this weakness. A surge in operational costs added more fuel to this fire and pulled down Jubilant’s operating profit margin by 160 basis points to 9.9 per cent. A one-time expense towards manpower rationalisation led to a sharp 75.9 per cent drop in net profit to ~7 crore — much behind the estimated ~25 crore. Even after adjusting for these oneoffs, net profit of ~19 crore missed the Street’s expectations.
Jubilant’s latest strategy of offering everyday value deals to customers has received an encouraging response so far and the management highlighted this wasn’t margin-dilutive. The company is also looking to halve losses of its Dunkin Donuts franchise this financial year by closing non-profitable stores and driving innovation. While these are steps in the right direction, it will bear fruit only gradually. The company is well-prepared to transit to the goods and services tax (GST) and will pass on the two per cent benefit from the lower rate of 18 per cent as well as the entire benefit of availing input tax credit under GST to the end-consumer, which could provide some support to its SSSG. With demonetisation blues behind, the company still has a lot to do to improve growth. Rich valuations of 44x FY18 estimated earnings, though, don’t capture the downsides adequately. As analysts start trimming their full-year estimates to factor in a weak Q4, these valuations appear all the more unsustainable.