At a time of slowing demand, store closures and lowered sales growth guidance are like cautionary road signs for investors in shares of quick service restaurant operators. Devyani International Ltd is a case in point. Lately, it has expressed concerns over demand and lowered its store expansion projection for FY24.
Devyani, a franchisee of Yum Brands, operates KFC, Pizza Hut and Taco Bell restaurants in India.
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Same-store sales performance of Devyani’s core brands KFC and Pizza Hut has been subdued in recent quarters. In the September quarter (Q2FY24), KFC and Pizza Hut same store sales fell by 4% and 10.4%, respectively. This marks the second and fourth consecutive quarter of drop in same-store sales for KFC and Pizza Hut, respectively. Same-store sales measure the comparable sales over a particular period.
In Q2, Devyani also saw a drop in average daily sales at KFC and Pizza Hut. KFC’s sales were impacted owing to the general slowdown in demand and more vegetarian days owing to a prolonged religious period of Shravan this year, when a large part of the Indian population avoids non-vegetarian diet. Pizza Hut bore the brunt of stiff competition in the pizza category and customers shifting to its more affordable Flavour Fun range.
Against this backdrop, Devyani has moderated its net new store guidance for FY24 to 250-275, from 275-300 earlier. In Q2, it increased store count by 68 in the September quarter, taking the total count to 1,358. The company remains dedicated to reaching 2,000 stores by 2026.
Investors have now pinned their hopes on Q3 when there is a typical seasonal boost to demand owing to festivities. Devyani expects Q3 to be better than Q2. This time, Q3 would also be aided by the World Cup, especially during specific significant matches. Even McDonald’s operator Westlife Foodworld Ltd is banking on the festival season for recovery in Q3.
Still, margin is something that investors might have to keep a tab on, considering higher input costs. In Q2, Devyani’s gross margin expanded year-on-year, but Ebitda margin fell. Ebitda is earnings before interest, tax, depreciation and amortization.
Devyani’s shares have underperformed the Nifty 500 in the last one month, dropping by 14%. Investors will watch how near-term recovery in same store sales growth shapes up, which would in turn determine the margin trajectory and share price movement.