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Operating deleverage drives earnings miss

Westlife’s 4Q and FY24 earnings print was weak on account of sharp moderation in SSSGs vs a stellar FY23. Macro & high base apart, external issues (negative sentiment vs US brands, issue around cheese usage) impacted the SSSG delivery. While there is progressive improvement in situation, it is in a more gradual manner; hence the same store sales are likely to be soft in 1HFY25. On the positive side, store additions in the year were inline with the management guidance and gross margins were managed well too despite increased focus on value portfolio, one-time vendor incentives in base as well as lack of pricing lever. Also, as far as store economics are concerned, management indicated that they have been able to improve store breakeven point and once volumes/SSSG starts to normalise, the benefit should be visible in the profitability. Given the weakness in same store sales in 1H, we expect stock to remain under pressure in near term. However, we believe these issues are more transient in nature and internal brand metrics remain healthy. From long term perspective, we remain constructive and weakness in stock price should be looked as opportunity to add.

* Inline revenue performance; recovery in same store sales to be more gradual: Westlife’s revenue grew 1.6% yoy (SSSG: -5%) to INR 5.5bn, inline with our expectation. Store count was up 11.2% yoy (inline), as quarter witnessed net addition of 17 stores (total store count stood at 397). Average sales per store declined by 8.7% yoy while TTM average sales per store was down 5% yoy at INR63mn. Same store sales performance although soft, decline was lower vs 3QFY24 (down 9% yoy). Management highlighted that quarter still had impact of external issues (negative sentiment versus US brands) seen in previous quarter along with additional impact especially in western market owing to the issue around usage of cheese. However, progressive improvement was seen in 4Q on the back of strategic interventions and proactive communication. Demand situation has largely stabilised and management anticipates external issues to bottom out over next couple of quarters; hence, incremental macro headwinds are unlikely. On store additions, Westlife ended FY24 with 41 store additions (inline with its guidance), and remains confident about opening 45-50 stores in FY25 and reach 580-630 restaurants by 2027.

* Gross margin delivery on track; scale deleverage impacts operating performance: GM (excl. processing charges) was tad lower vs expectation (down 163 bps yoy and 25bps qoq) at 69.6%, albeit on high base – 4QFY23 had one time incentive benefit from vendors. Input cost scenario remains broadly stable and manageable as per the management. Store level staff costs and royalty expense increased by c.15% each while other op expenses grew by c.6%. Resultant scale deleverage led to ROM (pre-IND AS) compression of 560bps yoy to 14.4%. Corporate G&A declined by 28% yoy, on a high base (4QFY23 had impact of one-time bonuses given to employees for stellar performance in FY23), as a result EBITDA margin (pre-IND AS) compression was lower at c.300bps yoy to 8.7%, translating to 25% decline in EBITDA to INR 483mn (7% below our estimate). Rep EBITDA declined by 15.6% at INR 747mn.

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