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Weak Q1 leads to earnings cut; Maintain Hold

*  Q1 EBITDA was ~11% below our expectations. The 3Y revenue CAGR was ~10%, but it came in below our estimate of 12% on lower avg. rev/store CAGR of 1% vs. est. of 3%. Despite double-digit price hikes, gross margins fell 50bps vs. our est. of 30bps gain.

* Slowing SSG profile is a key challenge for the incoming CEO. JUBI expects better SSG with the new loyalty program, faster delivery (20min) and innovations. However, we expect relatively slower SSG for Domino’s, led by peers’ aggression and split-store impact.

* Store additions for Domino’s were robust at 58 in Q1 (~9% CAGR), in line with 250 stores targeted for FY23. JUBI expects 20-30 additions for Popeyes in FY23. Efforts are on to position Dunkin as a coffee-first brand, while Hong’s/Ekdum additions are on hold.

* We cut FY24/25E EPS by ~6%, factoring in the Q1 miss and 50bps lower SSG. 3M rollover restricts TP cut to ~3%. Faster Popeyes ramp-up remains a potential upside. Retain Hold with a revised TP of Rs595, based on 49x Sep’24E EPS vs. 50x due to 3M rollover

Weak revenue/store performance; robust store additions but in line: Revenues saw a 3Y CAGR of ~10% in Q1, led by a healthy ~9% CAGR in avg. store count. Avg. rev/store saw only 1% CAGR, despite double-digit price hikes YoY. LFL CAGR, adjusting for the impact of split stores, was also low at ~3% in Q1. Among channels, dine-in recovery was near preCovid levels, while the delivery channel grew sequentially. JUBI expects better SSG with the new loyalty program, focus on faster deliveries (20min) and innovations (Parantha Pizza). New loyalty program offers a free regular pizza (Rs399 max benefit) on completion of six orders above Rs350 within a year (ex-taxes/coupon discounts). Digital traction continued in Q1, with 8.2mn app downloads, taking cumulative downloads to 95.4mn. Store additions for Domino’s were robust at 58 in Q1 (~9% CAGR), in line with 250 stores targeted for FY23. JUBI expects 20-30 additions for Popeyes in FY23. Efforts are on to position Dunkin as a coffee-first brand, while Hong’s/Ekdum additions are on hold.

Assuring margin commentary, but we remain conservative: Despite double-digit price hikes, gross margins fell 50bps to 76.7% vs. our expectations of a 30bps gain. Weaker SSG led to EBITDA margins falling short of our expectations by ~120bps. While inflationary trends remain, JUBI expects stable margins, aided by price hikes and softening of commodities. We turn conservative and cut our EBITDA margins by ~20bps, led by our lower SSG assumptions.

Cut FY24/25E EPS by ~6%; prefer DIL/Sapphire/WLDL vs. JUBI: Slowing SSG profile is a key challenge for the incoming CEO. JUBI has a healthy medium-term potential of 16-17% earnings growth, but that is largely priced in. We prefer DIL/Sapphire/WLDL on better riskreward. SSG turnaround with new loyalty program/20min delivery and faster Popeyes rampup remain potential upsides. Maintain Hold with a revised TP of Rs595 (Rs605 earlier), based on 49x Sep’24E EPS vs. 50x earlier. Lower TP multiple is due to 3M rollover.

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