International Expansion And Digital Ordering Will Drive Fast Casual Trends

Key Takeaways

• Aggressive expansion and digital innovation are fueling higher sales growth, margin improvement, and stronger operating leverage in the domestic fast-casual market.
  
• International growth, menu repositioning, and targeting ethical consumer trends provide optional upside for sustained earnings outperformance.
  
• Execution risks, margin pressures from delivery and value offerings, cost inflation, and rapid expansion threaten sustainable profitability and undermine long-term earnings potential.

Catalysts

Owns, operates, and franchises quick service restaurants in Australia, Singapore, Japan, and the United States.

• Ongoing rapid expansion, with a robust pipeline of 103 board-approved sites and a clear pathway to 1,000 Australian restaurants, is set to significantly expand GYG's footprint, capture more of the urban, fast-casual market, and drive long-term top-line revenue growth.
  
• Innovation in digital ordering, loyalty apps, proprietary delivery (GYG Delivery), and 24/7 operating hours are capturing higher average basket sizes, improving restaurant operating leverage, and are expected to drive sustained improvements in net margins.
  
• Strong sales growth channels, including value-focused menu innovation and successful marketing targeted at younger, urban diners-as well as an increasing focus on healthful, preservative-free offerings-position GYG to benefit from consumer shifts towards fresh, ethically produced fast casual and support above-market comp sales and earnings growth.
  
• Scale benefits from a higher proportion of drive-thru formats and incremental expansion into breakfast and late-night dayparts are expected to deliver favorable mix shifts, spreading fixed costs over larger revenue bases and driving ongoing margin expansion.
  
• Execution of international opportunities in Singapore and early U.S. expansion offer optionality for outsized long-term revenue growth, with U.S. market progress expected to accelerate following menu health repositioning and brand-building efforts, which could materially uplift consolidated earnings over time.

Guzman y Gomez Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Guzman y Gomez's revenue will grow by 22.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.6% today to 7.9% in 3 years time.
• Analysts expect earnings to reach A$59.6 million (and earnings per share of A$0.57) by about August 2028, up from A$-2.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$38.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 74.4x on those 2028 earnings, up from -1137.8x today. This future PE is greater than the current PE for the AU Hospitality industry at 33.0x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

Guzman y Gomez Future Earnings Per Share Growth

Risks

• Weak performance and declining sales in the U.S. segment, including slower-than-expected brand building and operational challenges, signal significant execution risk for international expansion and may negatively impact long-term revenue and earnings growth assumptions.
  
• Accelerated growth in delivery channel sales-although supportive of top-line momentum-are compressing margins due to higher delivery costs and aggregator commissions; continued shift toward this lower-margin channel poses a risk to network margins and future net profit growth.
  
• Reliance on value menu items and increased popularity of lower-margin dayparts (such as breakfast and late-night trading) could further dilute operating margins, especially as the channel and product mix evolves, dampening overall profitability and earnings leverage despite robust same-store sales growth.
  
• Rising input cost pressures, notably with avocados and potential broader commodity price volatility, along with wage inflation and tightening labor markets, present ongoing threats to cost of goods sold and operating expenses, potentially squeezing gross margins and net earnings over the long term.
  
• Rapid expansion of new restaurants, especially as the network scales and with a strong focus on drive-thrus, introduces risks of operational inefficiencies, initial margin dilution during ramp-up periods, and the potential for unit cannibalization or imbalance between store openings and sustainable same-store sales growth-impacting revenue quality and longer-term earnings power.

Valuation

• The analysts have a consensus price target of A$34.088 for Guzman y Gomez based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$54.0, and the most bearish reporting a price target of just A$16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$758.1 million, earnings will come to A$59.6 million, and it would be trading on a PE ratio of 74.4x, assuming you use a discount rate of 8.1%.
• Given the current share price of A$27.51, the analyst price target of A$34.09 is 19.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.