Guzman Y Gomez Ltd (ASX: GYG) shares are still really appealing to me as a long-term investment, despite difficulties with one of its sector competitors.
Investors may have seen the troubles that Domino's Pizza Enterprises Ltd (ASX: DMP) has gotten into. The pizza company is closing a number of stores in Japan and France. Some people may draw parallels between GYG shares and Domino's and worry about the Mexican food restaurant's growth plans to 1,000 Australian locations.
But there are a few reasons why I'm confident about Guzman y Gomez shares and the store rollout in the long term.
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Very profitable franchisees and increasing restaurant profits
Domino's said in its update that it was going to close 80 low-volume Japanese stores and between 20 to 30 French stores.
The aggregate contribution of these Japanese stores was loss-making, meaning they clearly weren't doing very well. Arguably, Domino's shouldn't have opened these locations.
In the Guzman y Gomez initial public offering (IPO) prospectus, the Mexican food business said its approach to franchising had underpinned the health of the franchise network. In Australia, all franchisees had a positive annualised franchisee return on investment (ROI), with the median franchisee ROI being 51%.
GYG also revealed that its restaurant sales have grown at a faster rate than expenses, delivering an increase in the comparable restaurant margin from 15.5% in FY20 to 17.7% in FY23 and 20.9% in the first half of FY24.
Comparable restaurant sales growth has been strong – in the first half of FY24, comparable sales increased 10.6% year over year.
Different markets
Domino's troubles are in Japan and France, whereas GYG's main focus is Australia.
The pizza business noted there has been an ongoing positive performance in Australia/New Zealand, Germany, and Singapore. I think that's good news for Guzman y Gomez shares, considering it has plans to open up to 1,000 locations in Australia over the next 20 years.
GYG's main focus is drive-throughs, which reportedly have better unit economics than other formats (strips, food courts and universities). Domino's does not operate a drive-through business.
According to GYG, at the time of the IPO, McDonald's had 1,031 locations in Australia, KFC had 785 locations, and Domino's had 736 locations.
Those quick service restaurant brands have already proven that Australia is capable of hosting hundreds of locations for each brand.
GYG isn't saying it's going to open hundreds of locations each year. Instead, it's planning to open 30 new locations in FY25 and reach 40 openings per year within five years. I think that's a sustainable level of growth.
Population growth
Some people may suggest that reaching 1,000 GYGs may be too many for Australia's population.
Australia has a population of 27.3 million according to the Australian Bureau of Statistics (ABS). McDonald's already has 1,031 locations, so that's around 26,500 people per McDonald's.
However, the ABS currently projects that in 2044, Australia will have 35.65 million people, so 1,000 Guzman y Gomez locations in 20 years would translate to around 35,650 people per store. KFC Australia's ratio today is 34,815 people per KFC outlet.
I think GYG is aiming for a sustainable number of restaurants in the long term.
Foolish takeaway
The current Guzman y Gomez share price is certainly not cheap. I'd prefer to buy GYG shares at $22 than the current value. I bought my own (very small) holding at a lower price than today.
But I think the business could be much bigger in ten years, with a growing number of (profitable) stores in Australia and hopefully rising margins. The GYG share price could drop materially from here in the short term, but the long term looks promising.
