Stocks In Focus: Guzman Y Gomez, April 23 2025

0:10G'day fools, it's Scott Phillips here from the Motley Fool and welcome back to Stocks in focus. This is our YouTube and podcast series where we take you through one company a week. We're one of our rockstar analysts who know these things very, very well. We're going to give you their considered views about the company. Now, I will say at the front, I'll say this every single week. I have to because it's appropriate. Firstly, this is not personal financial advice. It's general advice only. Go and consider how it meets your needs, objectives, goals, all that good stuff. Secondly, we're recording this one towards the end of April 2025.

0:42Five, there's every chance of the trend now, and whenever you are watching or listening to this, things may have changed. The company might have changed, the circumstances, the valuation, anything could have changed. So please bear that in mind, general advice only, and record it at the date and date and time that we're making this recording. All right, with all that out of the way, we're going to talk about a business that I am a little bit partial to, at least as a customer, but is it worthwhile as an investment? Let's ask Darius Zagami, one of the Motley Fool's analysts, as I said. Darius, g'day.

1:11G'day, Scott. How are you? I'm very well. Thank you for joining us. For this episode, you're going to talk about Guzman y Gomez, the burrito maker, at least that's my favorite option, recently listed, relatively new, lots of fanfare. Just start, I mean, obviously burrito making gives part of it away, controversial or difficult. What is Guzman y Gomez? Tell us about the company itself. Yeah. So Guzman y Gomez, GYG. I do want to say straight up, I'm just like you. I eat way too much of it. yeah uh growing up my my family obviously had like weekly fish and chips weekly pizza but for me now it's it's monday night gyg oh yeah anytime during the week when i can't be bothered making lunch it's it's gyg um i think that the the drive-thru lines also tell me that i'm generally not alone in that view i think it's it's other people's rituals as well um but gyg it's a fast-growing quick service restaurant uh chain specializes as you mentioned in Mexican-inspired foods, so burritos, tacos, nachos, quesadillas.

2:10I actually think I've seen them, and I'm going to try it, a dessert nacho sundae. So they've brought out, it's corn chips with soft-serve ice cream. It sounds good and bad at the same time. It's a really interesting one. Intriguing, and that might be the right word, Doc. Yeah, yeah. But while Guzmina Gomez has been around for, I think it's been around since 2006 is when they opened their first restaurant, as a listed company, it's only been around for about a year, just under a year now. But today it's come a long way from 2006. And today it has about, it's got around 250 restaurants. The majority of those are in Australia.

2:47So about 200 of those are in Australia. They've got about 20 in Singapore, four in Japan, and then four, six stores in the US. Of those stores though, majority are actually franchises. There is some corporate owned stores, but the majority are franchises. and its Singapore and Japan stores operate under what's called a master franchise agreement. So those are also franchises, but all through one specific company, basically. But all up, these stores have produced a little over a billion dollars in sales in the past 12 months. And I think that's a lot of Mexican food and that's UIG in a nutshell, basically.

3:23Nice, mate. Really, really good summary. Yeah, we're drawing back from Canberra. Not long ago, I wanted to get a good friend on the way home. Couldn't find one between there and my place, but we'll have to look harder next time because he was a little bit dizzy. Coming soon. Yeah, I bet it is. I bet it is. Mates, all right, so that's the company. Great, great outline. Thank you. I'm sure almost everybody watching and listening to this has at least seen one, if not tried the food. Very good food tubes, quietly. Putting Taco Bell on the show, that's tried to re-enter the Australian market and only recently used that.

3:51Basically try and sell itself off or close itself down, such as the lack of demand given and already very well served by government and some other option. Let's go through the company as an investment then. Let's talk about things we can like about it, don't like about it. We've got the risk opportunities, whichever way you want to go. Why would someone consider an investment in Goods New Go? What are the pros? What are the positives? Yeah, there's plenty to like about GYG as a company and as an investment. The company's currently focused on the Australian market. So it does have some stores overseas, but it's really very focused on that Australian domestic market right now.

4:23And as I previously mentioned, they have about 200 stores in Australia, but they believe that they can reach over a thousand stores within the next 20 years. And that's roughly maybe, I think that's on a plan of about 40 stores per year that they're hoping to roll out. This would really sit on par with its competitors like McDonald's, which operates about a thousand stores. Domino's has around 900 stores right now and is also looking to grow a little bit further. But beyond this, there's also that global opportunity that I mentioned. This will largely be driven, of course, through its master franchise agreements, but there's plenty more countries that it can enter.

4:59But what I really like about GYG's opportunity in particular is that its stores actually produce significantly more sales than its competitors do. As a comparison, on average, a McDonald's store produces between$2.2 to$2.7 million in sales. Domino's produces around$1.6 million in sales per year per store. That's, of course, with a much smaller store sizing format. But GYG, on the other hand, produces on average$4.7 million in sales annually, so significantly higher. And the profitability of these stores is actually higher as well. So the return on investment for a McDonald's or a Domino's is between 11 % and 17%.

5:42It can be higher or lower, depending on performance initially. But for GYG, it's 50 % at the moment for its franchisees. And that implies a payback period of about two years, which is quite incredible for a quick service restaurant chain. Impressive. Yeah. Something else I like about GYG, and I know we like it here at The Motley Fool, is that it's a founder-led business. GYG was co-founded by Stephen Marks and Robert Hazan. Hazan has stepped down when the company listed, but Stephen Marks has remained as the company's co-CEO. He still owns about 10 % of the company, which is considering it's a$3.3 billion company.

6:27It's a fair amount of the company, so about$310 million. I really like that. It shows plenty of skin in the game. It shows that he still really values the company as well. Something lastly I just really quickly want to touch on is the company's fundamentals. It's got a rock solid balance sheet, a few hundred million dollars in cash, no debt. And it does have some store leases, but its cash more than covers those. The company was also bottom line profitable in the first half of FY25. Its aggressive store rollout will mean that that can vary. It's going to have a lot of capex. It's going to have a lot of other expenditure that it needs to roll those out.

7:06But revenue has also been growing really strongly. In the first half, it was up 27%. but more importantly, its same store sales were up significantly as well. So those rose 9.4%. And what that indicates to me is that it's not just its new stores that are driving growth, it's existing stores that are also fueling that growth. I could go on with many more things I like about this company, but I'll stop there. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

7:41Darius, let's go to the other side of the ledger. Let's talk about reasons not to invest. We'll be wary of investing in Guzmidi Gomez. Yeah, there is a few of those as well. Important to be very balanced in our view. One, a big risk for the company is competition. There's no shortage of takeaway and diet-in options in Australia. They come in all price ranges, all food types. You've got McDonald's, Domino's, Red Rista, KFC. Then you've got mum and pock restaurants. You've got big chain restaurants. We're sport for choice here, really. Overseas, I think that's much worse. It's really been quite evident, actually, in the company's US stores.

8:20In the first half, sales actually declined in GYG's US stores by about 12%. And that was predominantly due to competition pressures. But going hand in hand with the risk of competition is the risk of a general change in consumer tastes. So I think there's only so much Mexican food you can really eat before you start craving pizza or KFC or something else. And maybe we haven't reached that point yet, but it could happen in the future. But going similar to that is the risk of economic downturn and people just not wanting to spend money on discretionary items. So we've been experiencing a cost of living pressures lately.

9:03If these were sustained, people lost their jobs potentially. Essentially, I'd hazard a guess that the weekly takeaway would be one of the first items of spending that would be cut in the budget. And that's really the definition of discretionary spending, which is not great in an economic downturn. It's important to note as well, though, that neither of these two risks is actually wholly within GYG's direct control. GYG doesn't control whether there's a new competitor that opens down the road. It doesn't control interest rates. It doesn't control inflation. GYG could, of course, try to reduce prices.

9:42They could try to cut costs to add value for customers. But that would really come, in my view, at the expense of its profitability, which brings me to my next risk, valuation. GYG is already trading quite expensively, at least in an operating earnings multiple. It's around 94 times, which is implying a lot of growth from shareholders. They believe store count will grow strongly, and they believe earnings are going to grow strongly. Any look to cut profitability, any look to reduce costs and pass those on to customers will, of course, potentially lead to a reduction in share price if its profit falls.

10:23Beyond this, GYG has a long runway for growth ahead of it. But at the same time, and I did mention earlier that its stores are producing significantly higher sales. But it's also worth noting that as its store count grows, these stores could actually cannibalize its existing stores to some extent. So if a GYG opens slightly closer to your home or your work, which one are you going to go to? The one you've always gone to or the one that's maybe two minutes closer to you? But yeah, the last risk I'd like to quickly highlight is related to GYG's franchising model and its reputation. Its reputation rests largely with its franchisees.

11:07It only takes one bad store, two bad stores, or a few bad stories to do some really real damage to GYG's reputation. I think an example that comes to mind many years ago, I don't know if you remember, Scott, there was a big scandal that was all over the news about rat poison in Sizzler's salad bar. That's right. That really hurt the company's reputation. And I think that's something that could happen to any restaurant chain, no matter how big it is. And if that happened to GYG, it doesn't even need to be something actually happening. It could just be rumors, but that could be really detrimental to the company's brand.

11:45Nice, mate. That's a really nice summary. Now, you mentioned that valuation 94 times. On one hand, there are those who are going to believe in the company and say, look, you know what's going to keep growing. It's going to justify that valuation. Get on now. Things are going to get to the moon. A lot of people are sitting around going, well, maybe I'll wait. If there's a share price fall, then maybe then I'll do it. Now, you don't always get the opportunity for the share price fall, and while you're waiting, it might go up. So there's a really difficult balance with all of these companies, particularly the fast growing, highly valued ones.

12:10You really are having to try and guess which side of the ledger is likely to give you the opportunity. So I'm going to bypass my judgment and ask you for yours instead, because I get to do that unhosted. But what do you reckon? If you think about, so firstly, we're long-term investors at the Maltby floor. We don't know. I'm not going to ask you what you think's going to happen to share price in a week or a month or even a year. But over our preferred horizon of five plus years, what do you reckon the odds are of GYG being an outperforming, a market-beating company from here? I think a lot of people are going to be quite annoyed at me.

12:36I have to say, I don't know for sure, unfortunately, if it beats the market from here. On the one hand, GYG is expensive, but that's also understandable because we're paying up for a high quality business. And while I think today it's executed on its strategy really well, I think that the potential risks and benefits that I've outlined, they're roughly equal in my view. Maybe I'd lean towards it beating the market just because its share price has fallen quite significantly recently. And I think that's been more sentiment driven and a little bit unwarranted. But I will say, I don't know, unfortunately.

13:15You know what I love about that, Doris? We are at the Multifil. This is a bit of another plug, but not deliberately. We're one of the few companies in our space that get to say, I don't know. The finance industry is full of people who have to say, oh, it's a buy, oh, it's a sell, or here's my forecast for the year for X, Y, Z, for the All Ords or something else. We kind of don't do that stuff. And if we're asked, we get to say, I don't know. I do it all the time when I'm asked in the media, it's like, I don't know. And it drives the interviewers nuts, but it's the most honest answer we can give, mate.

13:42So full credit to you for saying, I don't know, rather than feeling you need to make a call either way. It does feel pretty finely balanced. An impressive company, but a very lofty valuation. Mate, thank you for spending time and sharing your expertise with our listeners and our viewers. I look forward to chatting with you again, but thank you to you if you're listening and viewing, and or viewing. Thanks for being part of this Stocks in Focus video. Until we speak again, Fool on. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only.

14:14Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services License 400691.