Retail: Persistent weak demand …

22 Feb 2024 , 11:21 AM

Q3FY24 witnessed another weak quarter in terms of demand, evident in the SSSG which has continued to deteriorate sequentially as well due to softer demand on non-festive days, except for BBQ. Key takeaways 1) Pizza remained the most impacted space fuelled by intense competition apart from weak demand sentiment. 2) KFC for both the franchises which was holding till Q2 saw SSSG decline in Q3 which could have been impacted by higher number of veg. days in Oct’23. 3) Devyani (DIL) would open more stores (KFC led) than Sapphire focusing on longer term opportunities, while latter would focus on unit economics per store before opening new stores; end of Q3 total DIL store count was up 7% QoQ while it was 4% for Sapphire. 4) Ebitda margin (pre Ind AS) for the sector declined ~150bps YoY owing to negative operating leverage dragged by higher decline in DIL (-550bps), WLDL (-226bps) while Burger king (+262bps) and BBQ (+64bps) saw margin improvement.

Store opening 

• Jubilant added 40 new Dominos stores in the quarter vs analysts of IIFL Capital Services estimate of 50 stores however the mgmt. re-iterated its FY24 guidance of 200 odd new Dominos outlets (87 new stores asking rate in Q4) 

• DIL added 94 new net stores in Q3, led by 30 stores addition in PH vs 14 in Q2 and 50 stores in KFC vs 30 in Q2. Sapphire had a contrasting trend impacted by lower openings in PH at 8 in Q3 vs 9 in Q2, while in KFC 25 stores were added vs 23 in Q2. 

• Burger Players – 1) WLDL added 10 new stores in Q3 vs 9 in Q2 and reiterated its store addition guidance of 40-45 stores in FY24. 2) Burger king added 37 new stores as it is seasonally strong quarter for store additions in Q3FY24 vs 45 in Q3FY23.

ADS/revenue performance 

• ADS declined for the QSR players YoY except Burger king while sequentially also there was a decline/flat growth, with Pizza QSRs being the most impacted. 

• JUBI performed relatively better among the Pizza players at -7% YoY ADS decline. Pizza Hut ADS for Devyani declined at -16% YoY while it was -21% for Sapphire. SSSG was -19%/-13%/-5% for Sapphire PH, Devyani PH and JUBI respectively. 

• Burger King SSSG of +2.6% (+3.5% in Q2) was better compared to WLDL whose SSSG stood at -9% impacted by external events , even after adjusting for the impact SSSG was -3% (+1% in Q2). 

• BBQ’s SSSG continued to be weak at -4.9%, however management mentioned Oct’23 was affected by higher veg. days, adjusted for this SSSG would be ~-2.2%. 

• On-premise/off-premise contribution to overall business has largely stabilised for all QSR players. 

• Overall, the revenue growth for Most QSR players in Q3 was largely driven by addition of new stores as SSSG continues to deteriorate QoQ and YoY

Cost and Margin performance 

• Gross margin continue to expand for all players YoY owing to easing inflationary pressures. • Ebitda margin (Post IndAS and Pre IndAS) contracted for all players (except Burger King and BBQ) despite GM improvement, driven by higher employee and other expenses 

• Despite flattish YoY revenue growth in Q3 for BBQ, adj. Ebitda margins were higher YoY due to Gross margin improvement, portfolio rationalization and cost containment. 

• Devyani KFC saw a higher YoY contraction in restaurant Ebitda margin by 70bps YoY (~40bps contraction QoQ) to 19%, a complete contrast to Sapphire KFC which was flattish YoY (90bps expansion QoQ) at 19.2%. 

• Pizza Hut for Devyani saw 800bps contraction YoY (~160bps contraction QoQ) to 6.1% vs. 980bps contraction for Sapphire (~300bps contraction QoQ) which stood at 4.6%.