Consumer Demand Slows for Most QSR Stocks in Q2

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The second-quarter earnings of Quick Service Restaurant (QSR) chains show how slowing consumer demand is impacting operating profitability. While the effect of extended Shravan period, which fell during June-September, may be regarded as a one-off, the tardy same-store-sales growth (SSSG) is a worry. Managements are optimistic on festive season (Q3), and aim to better operating leverage and margins. Here is a lowdown.

Consumer demand

Jubilant FoodWorks, the m-cap leader of QSR stocks, posted the slowest Q2 revenue growth (~5 per cent yoy) among the top-5 Indian players. Devyani International (franchisee of KFC and Pizza Hut) and Westlife Foodworld (owner-operator of McDonald’s) posted 8-10 per cent revenue growth, while Sapphire Foods (another franchisee of KFC and Pizza Hut) and Restaurant Brands (Burger King) clocked 14-19 per cent growth. Store additions mainly helped some QSR firms to show higher revenue. 

The worrying part of Q2 earnings was decelerating SSSG. Jubilant, which shares like-for-like or LFL growth (similar to SSSG), witnessed slowdown as LFL growth turned negative for the third straight quarter in Q2. Unlike the negative LFL growth for Jubilant, Westlife posted about 1 per cent SSSG but this was the slowest in 10 quarters. SSSG was flat for Sapphire and minus 4 per cent for Devyani. The only positive SSSG (+3.6 per cent) was for Restaurant Brands (India business) helped by higher dine-ins, but this was flat compared to Q1FY24. 

Slowing SSSG is due to tough macros (inflation), rising competitive intensity, and downshifting by consumers, from premium to value. 

Margins

Lack of LFL/SSSG momentum, coupled with absence of operating leverage and higher expenses, led to drop in overall EBITDA for many players. 

For instance, Jubilant saw an 11 per cent decline in overall EBITDA (20.3 per cent margin). Westlife’s EBITDA fell 1 per cent yoy and EBITDA margin saw a 100 bps dip to 16.2 per cent. 

Devyani’s EBITDA fell about 4 per cent yoy, and margins tanked about 270 bps to 19.4 per cent. Another KFC and PH franchisee, Sapphire posted a surprising 11.6 per cent rise in EBITDA, helped by tight cost controls, but margins dipped slightly to ~18 per cent. 

Restaurant Brands, which has the lowest EBITDA margins among top-5, clocked a healthy 50 per cent yoy EBITDA growth (standalone) and nearly 220 bps margin expansion at 14 per cent. Burger King business was aided by good demand for value-for-money offerings.

Post-earnings, the stock market has rewarded QSR majors with EBITDA growth in Q2. So, Jubilant, Westlife and Devyani have seen stocks dip by 2-3 per cent so far (November 15), while Sapphire and Restaurant Brands have seen shares inch up by 2-3 per cent in the same period.

Projections

Store additions hold the key to future growth. Devyani management expects to reach 2,000 stores by FY26 (vs 1,358 stores in 1HFY24), and the company is on track to open 250-275 new stores in FY24. 

For Restaurant Brands, the store count for Burger King stood at 404. 46 stores under construction and it is on track to achieve 450+ restaurants count by Q3FY24. Long-term plan is to have 700 stores for FY27. 

Pizza major Jubilant Foodworks retained a store addition target of 250/45 for Domino’s/Popeyes (chicken QSR) in FY24. 

Sapphire Foods added 23/9 stores under KFC/PH format (total stores count KFC/PH/Sri Lanka at 381/311/122) at the end of Q2. 

Westlife Foodworld opened 9 new restaurants in Q2, bringing the total number of restaurants to 370 in 59 cities. It plans to add 40-45 new stores in FY24, with the majority of them in the South. 

Outlook

Given that QSRs are linked to consumption, QSR stocks are undoubtedly pricey. The forward PE of QSR stocks ranges at 75 to about 100 times. Even on the EV/EBITDA valuation multiple, these stocks trade at 15-30 times for FY24 and FY25.

Given the expectations of robust growth, many of the QSR stocks, including Jubilant and Westlife, have seen earnings growth cuts after H1 results. 

Though weak demand, incremental competition in pizza QSR, and rising inflation pose short-term challenges, it is expected Domino’s and Pizza Hut (Devyani and Sapphire) will chart different paths. Westlife’s multi-category, multi-channel and multi-daypart strategy holds good potential to lift volume sales. 

Restaurant Brands’ (burgers) aggressive growth strategy is impressive, but incremental competition in the QSR space, especially from McDonald’s (Westlife), is monitorable.