Guzman y Gomez’s momentum shows no signs of slowing
As we noted earlier last week, Guzman y Gomez (ASX:GYG) has wrapped up its first full financial year since going public with exceeding expectations and its prospectus guidance provided in May.
The 26 per cent increase in network sales and 48 per cent rise in underlying earnings before interest, tax, depreciation and amortisation (EBITDA), which were both slightly ahead of prospectus forecasts has prompted house broker Barrenjoey to adjust its expectations upwards.
Moving into FY25, Guzman y Gomez’s momentum shows no signs of slowing down with same-store sales growth (SSSg) of 8.1 per cent for the group and Australia of 7.4 per cent. Keep in mind an aggressive store rollout is also underway at the company, and Guzman y Gomez continues to invest in its growth trajectory, increasing general and administrative expenses by 37 per cent amid broader challenges for other operators in the Australian quick-service restaurant (QSR) industry.
The firm has raised its SSSg forecasts for FY25 from 5.5 per cent to 6.4 per cent, driving an EBITDA upgrade of 3-8 per cent across FY25 to FY27. These revisions mean that Barrenjoey’s FY25 underlying EBITDA forecast now stands approximately 16 per cent above prospectus expectations.
Importantly, Guzman y Gomez reported higher-than-anticipated corporate store margins which expanded by a whopping 300 basis points to 17.4 per cent, beating prospectus forecasts thanks to stronger-than-forecast 2H24 sales, labour efficiencies and the operating leverage as volumes grow. There is also plenty of room to improve store margins further noting overseas QSR competitor store margins of up to 26 per cent.
Given the debate about valuations, it is vital that store network growth plans remain on track. The company opened another 25 new restaurants in FY24, with the network now at 220 stores. The prospectus’s medium-term target of 40 store openings annually is at least partially supported in the short-to-medium term by 91 board-approved sites. Meanwhile, almost 90 percent of new stores will enjoy the margin and volume benefits of the drive-through format.
As an aside, and to put store growth potential into perspective, the network of 220 Guzman y Gomez stores (including a handful of stores in Japan, Singapore and Chicago), compares to Subway’s 1300 locations in Australia, McDonalds’ 1000 stores, KFC’s 680 locations, and Hungry Jacks’ 420 restaurants.
Increased store margins and volumes should also be boosted by round-the-clock trading at some stores and ongoing growth in breakfast trade. Strong 18 per-cent growth in breakfast sales has been driven by tradies rolling up to drive-throughs in their utes for a takeaway breakfast burrito. Breakfast now constitutes around seven per cent of Guzman y Gomez’s total sales. As with store numbers, breakfast trade represents a significant opportunity to leverage fixed costs and improve margins, especially when compared to McDonald’s, where breakfast accounts for 20-25 per cent of sales in Australia.
Meanwhile, Guzman y Gomez’s move to 24/7 operations at five stores suggests a strategic push to exploit this untapped market further.
Both corporate and franchised stores demonstrated strong performance throughout FY24, with SSSg showing similar strength across both business models. Franchisee store margins and return on investment were particularly strong, at 21 per cent and 53 per cent, respectively, helping to shorten the investment payback period for franchise operators.
Summarising sources of growth (the FY25 EBITDA multiple of >60 times admittedly requires strong growth to be justified), Guzman y Gomez will generate rising earnings from a continuation and even an acceleration in same-store sales growth, accelerating store expansion, including overseas, possible price increases, longer opening hours including breakfast and 24/7 in more locations, increased marketing, higher royalty rates as franchisees migrate to a new royalty program, and a general recovery in QSR trade conditions as the economy adjusts to higher interest rates or benefits from a cut in them next year.
Is the market valuation crazy?
We note that even despite analysts’ upgrades to earnings, the FY25 EBITDA multiple appears high at over 62 times. But we also note that U.S. peers trade at even higher multiples. By way of example, Mediterranean QSR operator Cava (NYSE:CAVA) trades at more than 70 times FY25, U.S. salad chain Sweetgreen (NYSE:SG) trades 111 times, and chicken wings chain Wingstop (NASDAQ:WING) trades at 50 times with less impressive growth potential than Guzman y Gomez. Unless the entire market or the sector is reappraised lower, Guzman y Gomez, with its extraordinary quiver of growth levers, does not appear as expensive as some commentators might believe.
Read more on Guzman y Gomez here
Interests associated with the author own shares in Guzman y Gomez.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
