Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Westlife Foodworld Ltd (BOM:505533, Financial) opened six new restaurants this quarter, reaching a milestone of 400 McDonald's restaurants across 66 cities.
- The company aims to open 45 to 50 new stores in FY25, focusing on South India, smaller towns, and drive-thrus.
- McCafé food items like cookies and brownies are being extended across the entire network, aiming for a 15% to 18% contribution to store AUV by 2027.
- Digital sales stood at 69% with over 3 million monthly active users on the mobile app, indicating strong digital engagement.
- Gross margin in Q1 was 70.8%, showing an upward trajectory despite the value platform play, underscoring the robustness of the business model.
Negative Points
- Same-store sales growth (SSG) was negative at -6.7% on a base of +7.4% from the previous year, indicating a decline in on-premises business.
- Profitability was subdued due to unfavorable operating leverage and higher royalty costs, with restaurant operating margins and operating EBITDA lowered by around 400 bps YoY.
- Other operating expenses were higher due to elevated marketing spend, which is expected to continue for the next one or two quarters.
- The cohort of stores impacted by external community-related issues continues to drag overall momentum, with these issues being more prolonged than initially expected.
- On-premises business declined by 3%, and the average sales per store on a trailing 12-month basis was INR61.3 million, indicating pressure on in-store sales.
Q & A Highlights
Q: Starting from the negative SSG and now we have launched the entry-level burger, do you think this is enough for us to arrest the decline in SSG or we need to do more activities in terms of the localized promotions and there is a need for further improvement in new products?
A: Thank you, Shirish. To me, the first point is as you would know and as you would look at our industry, we always believe that we want platforms to work. And I think we had launched our value EVM platform last year in June and further strengthened it in October of last year. Post that, when we looked at our situation, we saw that there was an opportunity for us our value platform to be strong enough for snacking. And McSavers Plus platform INR69 for one plus one is an endeavor in that direction. And we believe that these platforms along with our existing platforms are good enough to drive not only short-term, but long-term sales; that's how we've been looking at it. And then we believe that it's a part of the play which we've already committed to in Vision 2027, which includes being a leader in meals, snacking through coffee, burgers, and chicken.
Q: Our margins have been at the lowest. Now, if the value layer picks up, for example, you will be positive say LFL or your same-store sales growth will improve. But does that mean that the margin, there are very limited levers at this point of time to improve from here?
A: So, Shirish, this is Akshay here. So from our point of view, as you've seen, we've consistently delivered an increase in both gross margin and EBITDA margin over the years. And the current drag in margin has typically come from operating deleverage, obviously because of negative same-store sales. From our point of view, as we see average unit volumes picking up, you will not only see margin grow, you will see grow exponentially because of the operating leverage that will come in. And as we demonstrated even if we deploy value platform, we continue to increase margin by doing a few change. One of them being removing cost from the system, the second one being using in product mix effectively. For example, McCafé will only accelerate the momentum further as the coffee market is growing in our country and we are very well positioned both from a quality as well as a value point of view. And number three, in terms of taking pricing where required strategically. So I think that we are more concerned with driving average unit volumes which will increase operating leverage and margins will only follow.
Q: On 403 stores what we have now and there are two parts. One is that out of the six how many drive-thru we have open and out of 403 what percentage of stores are now drive-thru?
A: Around 20% are drive-thru. So around 403 is around 82 drive-thru in total, and we've opened one drive-thru in the last quarter.
Q: If the overall SSG has declined, I'm sure you would be tracking the SSG in the drive-thru. Is the out-of-home consumption, which was challenged, is drive-thru is also seeing that similar trend?
A: For now, drive-thru actually is a very small portion while 20% drive-thru are there. The ticket window sales is not a substantial part and therefore we've never reported it separately. However, to just let you know we haven't seen any negative growth on drive-thru.
Q: I'm just trying to understand the operating leverage in your business. So since this is Q1, I'm looking for another normal Q1 where you were operating. So basically, FY24 Q1 we saw things going up, but now things have sort of moderated either because there was some amount of revenge spending, which has come down or there is a general demand slackness, et cetera. So I'm just dialing back to your Q1 FY20. Now, on a per-store basis, your sales is 20% higher than Q1 FY20. But your margin is still the same, exactly the same as Q1 FY20 currently. So why is it that we are not getting any operating leverage in this business? The other way I can look at it is if you want to look at something more recent, then we can look at Q3 FY22 where the sales per store is actually a tad lower than what we have done this quarter. But we had a margin of 16.6%, and now, we have a margin of about 13%. So why is it I can understand that negative same-store sales growth, et cetera, but ultimately, the sales per store should correlate to what kind of margins you are able to deliver?
A: Thank you, Percy. Essentially, when we talk about operating leverage or de-leverage, obviously, benchmark get created every year. From that standpoint because inflation always keeps up. Once in five years rental will increase, every year there will be 2% to 3% inflation on utilities, so that keeps on changing. So to me, 2021/2022 won't be the best representation. However, if you look at it, we've got 40 extra restaurants with 40 extra fixed costs. So if you were to remove that fixed cost, you will see that our unit economics is relatively being stable from last two to three years, if not more. So that's why you get the operating leverage or de-leverage. If this average unit volume goes up further, you will see it coming down, it coming up dramatically our profitability and vice versa.
Q: We have seen a sequential moderation in our SSG. So wanted to check if this quarter per se there was incremental impact of heatwaves, et cetera, and going into Q2 we should see a relatively better sequential improvement?
A: Yeah, so thanks for the question. What we maintain is that we expect H2 to be better and SSG to progressively get better as the year goes by. Like Saurabh mentioned at the beginning of the call, we've further strengthened our value platform. We're continuing to grow our off premise business. And we're very confident that with this strategy and business model, H2 should be progressively better.
Q: Are you sort of satisfied with the footfall at your stores in Q1 or there was some impact due to extra heatwave this time around?
A: So obviously, we are absolutely not satisfied. We wouldn't call this our best performance for sure. There was significant amount of pressures on dining. While there was pressure in terms of consumption, climate, or whatever you want to call it, I can't quantify it. But we have spoken about that there is also a cohort of stores, which was impacted and hasn't shown progress which we expected to show progress by now. So that's how I would summarize it. And then
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
