Lower share of delivery sales leaves Westlife's investors with bitter taste

Westlife, which operates the McDonald’s chain in south and west India and earns around 50 per cent of revenues from dine-in, reported a decline of 6.9 per cent in same-store-sales in Q4
There is little doubt that the lockdown following the Covid-19 outbreak has changed consumer behaviour, weakening sales of many sectors, including quick-service restaurants (QSRs). Among QSRs, the pressure is higher on players that earn less revenue from delivery-channel sales, as is seen in Westlife Development’s (Westlife’s) March 2020 quarter (Q4) results, announced last Thursday.

Westlife, which operates the McDonald’s chain in south and west India and earns around 50 per cent of revenues from dine-in, reported a decline of 6.9 per cent in same-store-sales in Q4. The fall is double the 3.4 per cent decline reported by Jubilant FoodWorks (Jubilant) — the Indian franchise of Domino’s Pizza, and lower than analysts' expectations of flat growth. Same-store sales is the comparable revenue earned from stores that were operational in a given period.
This impacted Westlife's overall performance. The top line declined by 1 per cent YoY to Rs 336.4 crore and the firm posted a loss before tax and exceptional items of Rs 17.7 crore, as against a profit before tax of Rs 1.75 crore in the year-ago quarter. Even after adjusting for exceptional items and the impact of change in accounting norms, Q4's net loss is Rs 16.7 crore.

What's important is that the share of the delivery channel would be a key factor for QSRs, going ahead, too, where Westlife would continue to lag Jubilant, say analysts. According to Nirmal Bang, the near-term (1-2 quarters) operating environment would be weak for QSRs with higher impact on dine-in sales; the recovery would be gradual. 

 

 
The Street is also paying for the likely faster recovery of Jubilant. Its stock has recovered 41 per cent from March lows, while Westlife is up 2.5 per cent.

 
Though Westlife’s 50 per cent share of non-dine in channels, such as delivery and takeaways, looks comfortable, delivery channel sales, which are recovering faster, is just 25 per cent, according to analyst estimate, compared to about two-thirds for Jubilant. Westlife does not reveal the share of delivery channel. 
Vishal Punmiya, analyst at Nirmal Bang, which has ‘buy’ on Westlife due to its long-term growth prospects, wrote in his note: “While Westlife has taken various initiatives to continue its non-dine-in business, it won’t be enough to compensate for the sharp decline in dine-in.” Westlife’s management also expects dine-in sales to see some impact, even as the restaurants are fully operational, because of social distancing norms, and the situation to improve in six months.

Higher dine-in share in the current environment has also impacted Westlife’s profitability and return ratios, which are lower than Jubilant's. And, the trend is unlikely to change soon. Efforts to improve profitability by expanding high-margin stores like McCafe would get delayed due to the Covid-19 crisis, say analysts.

In this backdrop, the stock is likely to remain an underperformer in the near term.


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