It’s not that they don’t know the truth (they might, if they stopped to think about it.) It’s not that they want to know the truth, either. Information is available if they looked for it. No, they fear the truth. And being part of a mob is a good way to hide from that fear—Seth Godin
In this issue:
Jollibee’s Domestic Growth Sales Fell to the Lowest in Recent History! PSYEi 30 Firms Borrowed Php 9.23 For Every Peso of Net Income in 1Q 2019!
-Falling CPI Equals Booming Economy? 1Q Net Income Grew 7.86%, Revenues Up 12.86%
-PSYEi 30 Firms Borrowed Php 9.23 For Every Peso of Net Income in 1Q 2019!
-Jollibee’s Domestic Growth Sales Fell to the Lowest in the Firm’s Recent History!
-JFC’s Faltering Top Line Margins
-More Backlash from JFC’s Pac-Man Debt Strategy: Interest Expenses Surge, International Risk Rise as Share of Domestic Assets Falls
Jollibee’s Domestic Growth Sales Fell to the Lowest in Recent History! PSYEi 30 Firms Borrowed Php 9.23 For Every Peso of Net Income in 1Q 2019!
Falling CPI Equals Booming Economy? 1Q Net Income Grew 7.86%, Revenues Up 12.86%
At the start of the year, falling inflation, it was proclaimed, would be a boon to the economy, and to earnings, said the experts in unison, consequently, justifying the intensive pumping of the headline stock market index, the PhiSYx.
So the major equity bellwether generated a hefty 6.09% return.
The top and bottom line results of the PhiSYx members in the 1Q of 2019:
Figure 1
The sharp rally in fixed income securities buoyed the banking system’s net income to juice up total net income growth by 7.86% to Php 178.8 billion for a Php 13.020 billion increase. (figure 1, upper table)
The banking system’s 24.08% jump in net income to Php 25.85 billion or an increase of Php 5.02 billion accounted for a hefty 38.53% share of the total.
Nine of the 30 PhiSYx components registered declines, one suffered a loss, while four posted gains below 5%. With 14 of 30 issues underperforming, it isn’t a puzzle why 1Q returns had been mediocre.
Revenue performance also manifested an almost similar dynamic where the banking system’s revenue surge of 35.11% contributed to a sizeable 21.96% share to the overall 12.66% revenue growth. (figure 1, middle table)
Excluding the banks, net income grew by only 5.52% while revenue expanded by 10.73%.
And mergers in retail enterprises like those of Jollibee and Robinsons Retail Holdings bloated revenue gains.
Applying the BSP’s 1Q 2019 CPI of 3.8%, the inflation-adjusted net income growth was 4.06% while revenue growth was 8.86%. For the non-banks, inflation-adjusted growth was 1.72% for net income and 6.93% revenues.
So what happened to the popular cliché of low inflation equals economic and earnings boom under a regime of inflation targeting?!
PSYEi 30 Firms Borrowed Php 9.23 For Every Peso of Net Income in 1Q 2019!
Of course, while the mainstream fixates on the top line and bottom line, the financing of such supposed growth will be barely touched.
The general idea is that revenues and net income are products of free lunches.
Figure 2
The BSP reported plunging debt for the real economy in the 1Q of 2019. (figure 2, upper window)
Well, it may have seemed that way since 1Q 2019 debt growth for non-bank PSE issues was only 9.35% against their annual debt growth of 17.08%.
In contrast, non-bank income grew 5.52% in the 1Q 2019 and 7% in the year 2018. That said, debt growth remains FASTER than net income growth in the 1Q (69.4%) as was in 2018 (144%).
San Miguel (25.7%), Ayala Corp (15.4%), Bloomberry (11.19%), MetroPacific (9.49%), Aboitiz Equity (6.66%), JG Summit (5.93%) and SMPH (5.77%) had the largest % shares, representing 80.1% of the total. (figure 2, lower window)
But headline numbers can be deceiving because of the base effect.
From the debt-to-income or credit intensity perspective, the non-bank Phisix firms in the 1Q borrowed Php 7.06 to generate a peso of net earnings or in marginal context Php 9.23 of gearing for every peso of income.
In so many words, mounting debt will not only erode on the listed firm’s capacity to generate income but also encumber cash flows generation or liquidity.
And the leveling off of liquidity in the banking and financial system must be symptomatic of these escalating debt to income dynamic.
Even more, debt has been amassing on a few firms to highlight increasing systemic risks through concentration risks.
Jollibee’s Domestic Growth Sales Fell to the Lowest in the Firm’s Recent History!
One of the most striking developments of the 1Q had been the deterioration in Jollibee Food’s financials.
While media focused on the 14.7% drop of net income which was blamed mainly on losses from its recently acquired US food chain Smashburger, that’s only part of the story.
By the way, Jollibee shares have been one of the six issues that hit fresh record highs in 2019.
Elucidated below are JFC's unpublished escalating financial woes.
Figure 3
However, in the Segment Information of section 5 of its notes to unaudited consolidated financial statements on its 17Q, reported 1Q domestic sales of Php 29.437 billion was only 7.08% higher from Php 27.491 billion in the same period of 2018. (figure 3, upper window)
7.08% sales growth represents the smallest sales growth in JFC’s history ever since it published its FS in 2009!
International sales rocketed by 38.06%, from the incorporation of Smashburger, to offset the plunge in domestic sales growth!
The combined 1Q sales increase of 14.11% was higher than the average 9-year period (2010-2018) of 13.54% growth.
So Smashburger, puffed up the JFC’s revenues in 1Q 2019!
Because JFC’s domestic stores expanded 8.5% to 3,141 in the 1Q 2019 from 2,895 in the 1Q 2018, new stores delivered almost all of the sales growth with hardly any contribution from existing outlet sales. Domestic sales per store even plunged to -1.31% in the 1Q 2019 from +9.16% in the same period last year. (figure 3, middle window)
International stores soared 48.7% to 1,402 in the 1Q 2019 from 943 last year. International sales per store shrunk 7.14 but did better than last year’s 12.95% contraction.
Partly because of Smashburger, JFC worldwide inventory of stores swelled 18.37% to 4,543 from 3,838 over the same period to bring about a decline in total sales per stores to -3.6% in 1Q 2019 from +3.94% a year ago.
JFC’s Faltering Top Line Margins
And because of falling sales growth relative to higher rates of costs of goods, JFC’s gross profit margin dwindled to 15.68% sharply lower than 17.38% a year ago.
Operating margin likewise tumbled to 4.4% from 5.57% a year ago from higher administrative expenses. And please do note that even before Smashburger’s inclusion, JFC’s gross and operating margins have plateaued from 2013 to 2016 and from here begun its descent. (figure 3, lower window)
Sorry, but domestic sales, which accounted for 73% of JFC’s top line, did most of the damage to its 1Q performance. Smashburger only exacerbated it.
But it comes as a surprise that mostly cash-based Jollibee’s sales had been affected more by the March collapse in consumer credit rather than retail enterprises dependent on credit cards.
The deterioration of JFC’s top line has massive implications on the consumer’s spending capacity. The impact from the ongoing liquidity crunch has begun to impact more on the middle and lower class.
But it doesn’t stop here.
Recall that in March, I propounded of the transition of JFC’s erstwhile sound business model to an aggressive debt-financed PAC-Man strategy.
Part of the 1Q 2019 fallout in sales must have been from these. [See Jollibee’s Fantastic Paradigm Shift: From Consumer Value to Aggressive Debt-Financed Pacman Strategy March 3, 2019]
In the recent past, JFC has expanded aggressively through horizontal integration. That is, JFC bought out and tacked into its fold, its domestic competitors. That’s JFC’s Pacman Strategy.
Now the thrust has been to expand also horizontally but externally.
JFC’s external recourse may be about the weak peso. As a means or a strategy to hedge against this, the company engaged in foreign FDI. However, JFC may be venturing into the unknown or to unfamiliar markets, where its competitive advantage may be deficient. It may not possess the same quality of knowledge and expertise in dealing with foreign consumers.
JFC’s 1Q deterioration comes in the face of its aggressive expansions as the ongoing liquidity crunch pulls the economy down.
More Backlash from JFC’s Pac-Man Debt Strategy: Interest Expenses Surge, International Risk Rise as Share of Domestic Assets Falls
It isn't a bad thing to experiment by moving away from one’s competitive moat. It becomes a gamble only when aggressive leveraging has been used to boldly finance such undertakings.
Figure 4
JFC should be an example.
Compounding JFC’s top line woes have been the rocketing of debt and its attendant spiraling of interest rate payments. (see figure 4)
JFC’s 1Q 2019 debt surged 27.32% to Php 25.803 billion from Php 20.266 billion from the same period a year ago. With rising debt burden comes higher interest payments. JFC’s 1Q interest expense vaulted 123.9% to Php 319.84 billion from Php 142.9 billion over the same period. Rising financing costs erode on JFC’s margins.
Figure 5
Like its bigger peers, JFC has been borrowing more than it earns.
For instance, it borrowed Php 5.54 billion more this year compared with a decrease in net income of Php 234.4 million. JFC’s borrowing binge accelerated only in 2015. (figure 5, lower window)
Lastly, while domestic sales accounted for 73% share of total sales in 1Q 2019, it has been falling. International sales have been gaining ground in its stead.
On the other hand, JFC’s share of domestic assets has shrunk to 54.14% of total assets from 56.92% share last year and from 71.13% its peak in 2011.
Such point to JFC’s rapidly growing international exposure even when its competitive moat is here.
If JFC’s gambit of an aggressive credit financed external expansion should turn out to be unsuccessful, then it is likely to have a severe impact on the company’s balance sheets.
The stock market has paid exuberantly for JFC’s credit financed gambles in the expectation that the company will conquer the world's retail food chain markets. Good luck to them.
However, the glorious performance of the past doesn’t guarantee rosy future outcomes.
Not with excessive risk-taking on ventures outside the ambit of one’s competitive advantage that had been financed aggressively by credit.
Jollibee should show us the way.
Oh by the way, I’m still a fan of Jollibee’s products.
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