- FY23 guidance downgraded
- Cost-of-living pressures impact eating out market
- ‘Robust’ growth targeted in 2024
Shares in Tortilla Mexican Grill (MEX:AIM) tumbled 8% to an all-time low of 50.5p after the UK’s largest fast-casual Mexican restaurant group served up a profit warning following a sour end to 2023, with subdued demand across the eating out market hindering growth in the fourth quarter.
The burritos, tacos and salads seller is now guiding for year-to-December 2023 adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) in the £4.5 million to £4.6 million range, well below the £5 million Liberum Capital was looking for.
Also suppressing investor appetite for the stock was a warning the eating out market will continue to be ‘challenged’ by cost-of-living pressures in 2024, especially outside of London, which means Tortilla Mexican Grill will dial back its store rollout and step up marketing spend to boost brand awareness in the new year.
SUBDUED DEMAND
Sales for 2023 are expected to be up 13.8% year-on-year at £65.7 million including the positive impact of year-to-date UK like-for-like growth of 3.7% and new site openings.
Unfortunately, this is slightly behind the board’s previous expectations, although Tortilla Mexican Grill’s margins did improve in the second half driven by cost control measures and abating food input cost pressures.
While the company’s London sites and restaurants in shopping centres and travel locations have continued to perform ‘particularly well’, trading at high street sites has been impacted by lower footfall in recent months and takings have also disappointed in ‘smaller tertiary cities and towns’ where brand awareness is lower.
TASTY PARTNERSHIPS PERFORMANCE
The reassuring news for investors is that Tortilla Mexican Grill remains ahead of its aim of opening 45 new sites across the five years following its October 2021 initial public offering.
In addition, franchise partnerships with Compass (CPG) and SSP (SSPG) have continued to ‘perform outstandingly well in the UK, benefiting from encouraging like-for-like growth, while the UAE franchise business enjoyed a record year and management is exploring further franchise opportunities in the Middle East and Continental Europe.
‘Notwithstanding the challenging trading environment, the group is targeting robust adjusted EBITDA growth in FY24 on the back of the full year benefit of cost initiatives, the sales growth from the marketing investment and the group’s store rollout program’, said the company.
CEO Richard Morris added that Tortilla Mexican Grill is taking ‘proactive actions to adapt to the changing market environment. We know that in buoyant eating out markets where the Tortilla brand is well known, we outperform. We have a strong portfolio of new sites in high quality locations as well as additional franchise growth opportunities.’
Following the warning, Liberum Capital downgraded its full year 2024 EBITDA forecast by 20% to £5.6 million and slashed its price target from 140p to 115p, although the broker reiterated its ‘buy’ recommendation on Europe’s largest burrito-led business.
‘With a reset to expectations, the group stands in a position to deliver robust EBITDA growth moving forward,’ commented Liberum, ‘benefitting from cost control measures implemented in full year 2023, as well as a dialled-back rollout consisting of high-quality sites.’
