- Profits hit by surging meat and energy costs
- Like-for-like sales have slowed over the summer
- Industry headwinds to have ‘material’ impact on second half earnings
Shares in Tortilla Mexican Grill (MEX:AIM) slumped 27.4% to 106p after the UK’s largest fast-casual Mexican restaurant group served up mixed first half results with surging meat prices eating into margins, news that overshadowed the London headquartered company’s positive expansion progress.
The value-for-money burritos and tacos seller also warned industry headwinds will have a ‘material impact’ on second half profitability and said inflationary cost pressures are expected to continue beyond full year 2022.
MIXED FIRST HALF
Results for the half ended 3 July revealed a 30% revenue rise to £26.9 million with like-for-like sales up 19% versus 2019, although pre-tax profits plunged from £2.6 million to £300,000 with margins hit by a spike in energy and protein costs.
Meat and dairy prices have increased significantly, which has been particularly painful for Tortilla Mexican Grill given the popularity of its chicken and pork burritos.
Disappointingly, the restaurant group said growth has slowed over the summer due to ‘a combination of train strikes, the heatwave, and pent-up consumer demand for overseas holidays’, and warned cost inflation remains ‘the biggest challenge across the industry’.
Determined to protect its value for money proposition, Tortilla Mexican Grill ‘remains cautious’ over significantly hiking menu prices or resorting to heavy discounting.
‘We believe that it is important to resist making short term gains, as history tells us this is a quick way of undermining the offer and causing customer dissatisfaction,’ explained the company.
HUNGER FOR EXPANSION
Moving forwards Tortilla Mexican Grill, which acquired rival chain Chilango in May for £2.75 million, aims to step up the pace and open 12-15 sites per annum from full year 2023, taking advantage of the depressed property market and its excellent performance outside of London.
Beyond its own sites, the company is pressing ahead with the roll out of franchises through partnerships with SSP (SSPG) and Compass (CPG).
£3 MILLION EARNINGS DOWNGRADE
Following the warning, Liberum Capital has lowered its earnings before interest tax, depreciation and amortisation (EBITDA) forecasts by roughly £3 million for both full year 2022 and full year 2023 and slashed its price target from 235p to 170p.
‘New stores are trading well, and new site opportunities are plentiful on attractive terms, leading to an increase in roll out pace to 12-15 per annum,’ said the broker, also stressing that Tortilla Mexican Grill has net cash and ‘remains the leader in an attractive space which will bear fruit when the cost environment normalises’.
THE EXPERT’S VIEW
‘Tortilla joined the market a year ago and in the early days as a public company it’s important not to make any big errors, as they will be seized on by the market and it can be difficult to regain credibility once it’s been lost,’ commented Russ Mould, investment director at AJ Bell.
‘While Tortilla had previously said it had the ability to flex its offering thanks to a simple menu based on readily available basic ingredients, it could have done a better job of preparing investors for the risks of being exposed to rising protein prices.
‘What’s even more disappointing is a weak summer sales performance. Tortilla’s proposition should have been suited to a summer when the Covid shackles were finally off.
‘While it blamed overseas holidays, the heatwave and rail strikes for the disappointing performance, it probably makes more sense to draw the conclusion it is finding it hard to stand out in a crowded Tex-Mex market. With cost-of-living pressures mounting, there is an increasing risk Tortilla could fall flat.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) owns shares in AJ Bell.
