Westlife Foodworld Ltd’s shares have nose-dived 12% since late last week after it announced poor same store sales growth (SSSG) of just 1% for the September quarter (Q2FY24). This marks the fifth consecutive quarter of drop in the measure. High base and weak consumer sentiment along with elevated inflation levels have played spoilsport. Accordingly, net revenue grew by 7% year-on-year to ₹615 crore.
Westlife believes near-term challenges are temporary and that some recovery is likely during the festival season. The quick service restaurant (QSR) operator has guided for a high single digit SSSG in FY24.
Having said that, it helps that Westlife’s expansion strategy is on track. In Q2, it opened nine restaurants, taking the total count to 370 as at the end of September. It stays committed to adding 40-45 new stores in FY24 with most of them being in the South.
The company is a leader in the West and is now inching closer to becoming one in the South. For this, the McDonald’s operator is enhancing its reach and menu with items like McSpicy Fried Chicken and McSpicy Chicken Wings, while launching multi-lingual campaigns to engage regional audiences. The average unit volume is growing at a faster rate in the South compared to the West, according to Westlife. Further, profitability in the South is good because unit economics are structured even better in smaller towns in the South, said the company.
While demand is weak in the QSR space, Westlife is into high growth areas like burgers and fried chicken that are fast growing in comparison to pizzas, said Preeyam Tolia, analyst at Axis Securities.
With the focus now on South, Westlife could capture a larger market share in future. As a part of its vision, Westlife targets to reach 580-630 restaurants by 2027. Though, increased fixed costs owing to new store rollouts could impact profitability.
Meanwhile, the recent drop in the stock has meant that returns so far in 2023 are flattish. Some analysts expect the company to fare better than peers, while others are cautious. According to Kotak Institutional Equities, Westlife’s Ebitda margin is up 325 basis points (bps) versus H1FY20, led by a 225 bps gross margin expansion and a modest 100 bps operating leverage benefit despite a stellar 30% increase in average daily sales. Ebitda is earnings before interest, tax, depreciation and amortization. On a pre-IND-AS basis, Westlife’s Ebitda margin in H1FY24 stood at 12.2%. “There is ample headroom for operating leverage-led margin expansion and we will keep an eye on Westlife’s execution,” said Kotak’s analysts in a report on 27 October.