Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sapphire Foods India Ltd (BOM:543397, Financial) reported a 10% growth in consolidated restaurant sales, reaching 717 crores.
- The company added 13 KFC stores and one Pizza Hut restaurant in India during the quarter, bringing the total count to 886 stores.
- Pizza Hut saw a significant improvement with a 17% sequential uplift in ADS, reversing a six to seven quarters declining trend.
- Sri Lanka operations showed strong performance with an 11% SSSG growth and a 13.2% restaurant EBITDA margin.
- The company received the Indian Green Building Council Gold Certification for one of its KFC restaurants, highlighting its commitment to sustainability.
Negative Points
- Consolidated restaurant EBITDA margin declined by 210 basis points to 15.1%, and consolidated adjusted EBITDA declined by 88% year-on-year.
- KFC's SSSG was down by 6%, significantly impacted by the shift in the Navratri festival days.
- The company faced a decline in dine-in revenues for KFC, attributed to a broader industry trend and macroeconomic factors.
- Pizza Hut's overall revenue growth was modest at 3%, and the brand's SSSG was negative at -7% for the quarter.
- Increased marketing expenses and wage inflation impacted the company's margins, with limited opportunities for further cost efficiencies if negative SSSG persists.
Q & A Highlights
Q: The trend for KFC's same-store sales growth (SSSG) has been worsening over the last three to four quarters, with a significant decline of 6%. Are you seeing any improvement or stabilization in the industry trend?
A: Apart from the month of April, the trend is still steady but slightly negative. The impact of the Navratri festival in April significantly affected the brand. Adjusting for this, the trend is steady, neither improving nor worsening.
Q: For Pizza Hut, the sequential improvement is encouraging. Does the guidance of no step-up in store additions until reaching a 10% margin still hold?
A: We are cautious about store openings and will not aggressively expand until we see improvements in SSSG, ADS moving towards 50,000, and profitability approaching the 10% mark. We will open fewer stores and remain cautious this financial year.
Q: The dine-in revenues for KFC have seen a sharp deceleration. What explains this trend?
A: The decline in dine-in is an industry-wide trend. We are taking steps to improve dine-in, including specific value menus and lunch advertising. We are also experimenting with coffee offerings and refurbishing stores to enhance the consumer experience.
Q: Despite the sequential improvement in ADS for Pizza Hut, margins are still lower compared to last year. Is this due to incremental marketing spend?
A: Yes, a significant portion of the margin impact is due to additional marketing investments. There is also the impact of wage inflation and other cost increases.
Q: What is the contribution of non-vegetarian items in the Pizza Hut franchise?
A: Approximately 75% of Pizza Hut's menu is non-vegetarian. During vegetarian festivals like Navratri, non-vegetarian consumption is impacted, but normal food consumption continues.
Q: Are geopolitical issues affecting consumer sentiment for your brands?
A: Yes, there are pockets where we are impacted by geopolitical issues. We continue to face challenges in these areas without any significant bounce-back.
Q: What are the margin levers for KFC, and can you maintain current margins if negative SSSG persists?
A: We have achieved cost efficiencies across labor, operating costs, and utilities, which helped limit the downside. However, if negative SSSG continues, it will impact margins, and we may need to revisit our expansion strategy.
Q: How do you view the trend of delivery versus dine-in for KFC and Pizza Hut?
A: There is a slow structural shift from dine-in to delivery. Additionally, we have added a late-night delivery daypart, which has increased delivery's relevance in our mix.
Q: What is the outlook for store openings for KFC and Pizza Hut this year?
A: For KFC, we will continue to expand cautiously, aiming for a 19-20% margin. For Pizza Hut, store openings will be muted until we see improvements in brand performance and margins.
Q: How do you view the impact of marketing spend in a weak macro environment?
A: In a weak macro environment, additional marketing spend is necessary to regain consumer interest. For KFC, we have maintained similar levels of spend, while for Pizza Hut, we have increased advertising to drive brand performance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
