Momentum Ongoing For Guzman y Gomez

Small Caps | Apr 11 2025

Guzman y Gomez reported another strong quarter of sales growth, and continues to guide to FY25 profit greater than the prospectus forecast.

-Guzman y Gomez posts a strong March quarter
-FY25 profit expectations re-iterated
-Tougher comparables ahead
-Longer term growth story intact

By Greg Peel

Back in October, Australian-based Mexican fast food chain Guzman y Gomez ((GYG)) revealed a robust start to FY25, with its sales growth for the first seven weeks ahead of guidance. The result flew in the face of legacy quick service restaurant (QSR) chain experience at the time, when the big names were complaining of subdued sales due to cost of living pressures.

Success came despite Guzman y Gomez offering familiar Mexican dishes at a higher price point than burger and chicken joints. Analysts saw the company's positioning as the "healthier" fast food choice largely compensating for its price disadvantage. According to the company, "Clean is the new healthy".

"Clean", in the context, implies no added preservatives, artificial flavours, colours, etc.

As a result, brokers began to jump onto the Gusman y Gomez bandwagon, suggesting the company's over the top PE multiple post-listing may have some substance behind it after all.

This week Guzman y Gomez provided a March quarter update.

Still Robust

There's been little let-up in cost of living pressure in the interim, save for a slowing inflation rate and one RBA rate cut, but Guzman y Gomez reported another strong period of revenue growth. Australasia (Australia, Singapore, Japan) same-store sales grew by 11.1% in the quarter, albeit slowing slightly from the first seven weeks (12.2%), implying 9.8% growth for weeks 8-13.

Analysts are unconcerned about the slowdown, noting the company engaged in heavy promotion in the March quarter last year, leading to sales acceleration and thus tougher comparables.

Growth was particularly driven by "dayparts" (specific periods of sales during the day), mostly breakfast and late night, as well as menu innovation. The comparables nevertheless get tougher from here, given 5.9% growth in the March quarter last year, 6.6% in the June quarter and 9.4% on average for the September and December quarters. Yet, management reiterated guidance for FY25 profit to exceed prospectus forecasts.

Fledgling US segment network sales improved to $3.2m from $2.6m a year ago, benefiting from two new stores. Guest experience metrics improved throughout the quarter, driven by a deliberate investment in restaurant labour. Whilst the US remains a small part of the business, Morgans believes sales momentum relative to previous quarters should improve from here with the opening of its Evanston (Chicago) store, which is the first US store in a college town, and the first-time launch of "Clean is the New Healthy".

The US represents only 1% of UBS' sum-of-the-parts valuation yet a greater share of investor interest, the broker notes, especially on a long-term basis given the size of the opportunity. Restaurant growth is continuing, but sales growth in the March quarter was arguably flattish (and was down in the December quarter), suggesting more work is required to build brand awareness and traffic.

Given increased labour costs, broader investment in culinary and operations, and more restaurants, UBS forecasts higher earnings losses in the US, peaking in FY26, before reaching breakeven in FY29.

Stores

In Australia, three new store openings were offset by two closures of legacy format stores with the number of corporate stores decreasing to 73 versus 74 at end-December and the number of franchised stores increasing to 138 versus 136. Net net, closing legacy stores is a benefit to Guzman y Gomez's network, Morgans suggests, given sales are captured by nearby stores at higher margins.

So far in the June quarter, the company has opened two new stores in Australia meaning there are ten more to open to hit guidance of 31 new stores.

Dividends

Guzman y Gomez anticipates a maiden dividend payable in September, post the FY25 result, representing "the distribution of the majority of earnings to shareholders, while retaining significant flexibility for continued investment in growth".

This is in line with the prospectus (the company IPO-d last June), which suggests "Following the completion of FY25, the Board will consider the payment of a final dividend and associated franking credits with respect to FY25". More detail will be provided at the FY25 result release.