Does strong SSS growth provide a case for Jubilant's optimistic future?

Everyday value offerings and aggressive marketing during IPL season aided the strong 25.9% SSS growth

Jul 26, 2018 04:07 IST India Infoline News Service

Jubilant FoodWorks (JFL) reported strong numbers for Q1FY19 beating the estimates on all fronts led by strong same-store-sales (SSS) growth of 25.9% yoy (read more here). Revenue for the quarter jumped by 26% yoy to Rs855.1cr, against estimate of Rs810cr. The strong traction in SSS growth was aided by (a) buoyant demand post GST reduction (November 2017), (b) healthy traction to Everyday value offering in regular pizzas (launched in Q4FY18), and (c) aggressive marketing during IPL season. 
 
Exhibit 1: Strong SSS growth (%) continued in the quarter 
Source: Company, IIFL Research

Growth in delivery was stronger than dine-in and was aided by JFL’s digital investments (share of online delivery orders rose to 65% in 1Q).
 
Benign dairy prices and operating leverage aided EBITDA margin
Despite healthy traction in the lower gross margin Everyday value regular offerings, company witnessed 20bps qoq improvement in gross margin to 74.5%. Benign input cost environment, especially in dairy related inputs (cheese accounts for ~10% of sales) coupled with better product mix aided this improvement. Moreover, the newly opened commissary in Noida also aided the margins. Operating leverage gains offset the increased marketing spends (other expenses up 21%). Consequently, the company reported 489bps expansion in the EBITDA margin to 16.6%. 
 
Further scope left for cost rationalisation
As a strategy to drive productivity, company focuses on leveraging all cost items, especially rentals (through rent negotiations) and employee expenses. Management believes that these initiatives are an ongoing process and there is further scope for driving higher efficiency. Further, with strong traction in SSS growth over the last few quarters, several stores are facing capacity constraints. Further, to invest in additional in-store infrastructure, JFL is also in the process of identifying such locations where splitting of stores is required to maintain consumer experience (new stores within the catchment area would be opened).
 
Aim at achieving break-even for Dunkin format by FY19 end
 Dunkin’ Donuts format witnessed healthy revenue growth in 1QFY19 led by its core categories of donuts and beverages. Further, company’s initiatives to control costs across line items (employee, rentals, electricity, corporate G&A, etc.) and closure of unprofitable stores (26 net store closures in FY18) are also yielding results. The company reiterated its target of breakeven by FY19 end. Current count of Dunkin’ Donuts stores stand at 37 (1 store opened and 1 store closed in Q1FY19).
 
Exhibit 2: Net addition in Dunkin’ format; closing unprofitable stores 

Source: Company, IIFL Research

75 stores addition in FY19E maintained
In FY18, JFL focused on improving store economics through an improved value offering and cost rationalization, and hence, added only 24 stores against average annual addition of ~130 stores over FY13-17. Now with strong SSS growth and the need to split stores at few locations, JFL would have greater focus on new store additions going forward. Company reiterated its guidance of 75 store additions in FY19E (including stores added through splitting of existing stores).
 
During the quarter, company added only 13 Dominos’ stores in 1Q, and hence, acceleration in pace of store additions would be the key monitarable.
 
Online ordering continues to rise
In order to drive customer experience and control costs, investment in technology is a key for JFL. It launched all new Domino’s Pizza app with new features like easy location selection, easy order tracking and hassle-free payments among others. Online ordering (OLO) contribution to delivery sales increased from 51% in Q1FY18 to 65% in Q1FY19. In addition, the mobile ordering sales contribution to overall OLO stood at 83% against 69% in Q1FY18. JFL expects share of online orders to continue to rise.
Exhibit 3: Traction in orders from online medium to continue
Source: Company, IIFL Research

How does the future look for Dominos’
Continued tailwinds from GST reduction, steady demand strength and healthy traction across Everyday value/upgraded product offering is expected to aid FY19E SSS growth. Further, the operating performance is expected to improve given (a) moderation in other expenses, (b) operating leverage gains, (c) continued productivity and cost control benefits, and (d) reduction in losses at Dunkin format. 
 
We estimate 15.5% revenue CAGR over FY18-20E led by SSS growth of 15.5% in FY19E and 8.5% in FY20E. EBITDA margin is expected to expand by 340bps over the same period aided by aforementioned cost control measures. PAT of the company is estimated to report 38.5% CAGR over FY18-20E. 

Jubilant Foodworks Ltd is currently trading at Rs1,416.60 up by Rs16.1 or 1.15% from its previous closing of Rs1,400.50 on the BSE.

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