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In our previous reports on QSR peers, we have highlighted that the near-term operating environment remains challenging, which is also visible from weakness in same store sales and ADS performance over the past few quarters. Westlife too has seen moderation in SSSG; however, it has been relatively more resilient (Exh:2) vs. the weakness seen in other QSR categories like Pizza & Chicken (KFC), primarily due to its strong execution around menuarchitecture, new revenue drivers, omni-channel capabilities and relatively lower regional competition. In the near term (2QFY24), we expect SSSG to moderate – a function of high base (Exh:3) & muted demand environment. However, we believe these near-term issues are transient in nature. In our view, Westlife has adequate levers in place to navigate these phases, capitalise on the large opportunity (TAM of > INR 200bn) and achieve its vision 2027. Any volatility should be used as an opportunity to add. Maintain BUY.

*High base and challenging demand to impact near-term SSSG, but still likely to be better vs other QSR categories: With demand scenario turning challenging in 2HFY23, we have seen a sharp moderation in same store sales performance across QSRs over the last 3 quarters. Westlife’s SSSG also saw moderation; however, on a relative basis, Westlife significantly outperformed peers in terms of SSSG/ADS as well as profitability in FY23 and 1QFY24. We expect sales growth to moderate further in 2Q – a function of muted demand environment as well as high base (much higher sales in the base quarter vs. 1QFY23 compared to the normalised trend where typically 2Q sales is weaker or similar to 1Q sales). That said, SSSG/ADS performance in the Burger segment is still likely to be better vs. Pizza segment, given relatively lower average order value and lesser regional competition in this sub-segment. The company has reiterated its focus on driving SSSG over the medium term and targets high-single-digit SSSG vs. mid-single-digits for peers.

*Store expansion to pick up pace in coming quarters; 40-45 store addition target should not be a challenge: Westlife’s store addition in 1Q was muted; however, it is expected to pick up pace from 2QFY24 and, company remains confident on achieving the guidance of 40-45 stores additions p.a. Also, store mix is quite diverse and focus is on enhancing the consumer experience (Exh:4/5) – through EoTF (currently in 72% of the network and plan is to extend it to 100% by 2027) and adding more drive-through stores (c.19% of overall network, which is much lower vs. global averages of McDonald’s in other key markets) and going ahead, 30-35% of new store additions are expected to be in this format. A combination of different formats (EoTF/Drive throughs have higher ADS vs system avg) and presence across dayparts, we believe, will continue to aid ADS for the company.

*Stable RM & adequate levers on product mix & supply chain efficiencies to aid margins: GM profile may be stable in the near term, with no material change in the input costs. Also, despite value offerings, there has been no adverse impact on mix as it was largely offset by scaling up meals/McCafe/McChiken where margins are higher. We believe Westlife will continue to dial-up on these levers, which along with focus on extracting supply chain efficiencies, will aid its margin profile over the medium to long term. 

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