Guzman Y Gomez shares tumble on Q1 update

It isn't selling as many burritos as the market was expecting.

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Guzman Y Gomez Ltd (ASX: GYG) shares are falling on Thursday morning.

At the time of writing, the quick service restaurant operator's shares are down 3% to $37.40.

Why are Guzman Y Gomez shares falling?

The catalyst for this morning's decline was the release of the Mexican food chain's first quarter update before market open.

According to the release, for the three months ended 30 September, Guzman Y Gomez delivered a 20.7% increase in network sales over the prior corresponding period to $278.8 million. This growth rate is slower than what is implied by its prospectus forecast.

This growth was driven almost entirely by its Australian operations, which reported a 21.1% increase in network sales to $260.2 million. Management advised that this reflects store openings and comparable store sales growth of 8.7%, which was ahead of expectations. It said:

Comparable sales growth in the Australia segment has been above expectations, driven by strong delivery performance, successful execution of the 'Clean is the New Healthy' campaign and guest demand for value menu items such as the $12 Chicken Mini Meal.

A 19.3% lift in Singapore network sales to $13.6 million and a 25% jump in Japan network sales to $2.5 million complemented this local growth.

Unfortunately, things weren't as positive in the US market. This is disappointing, given how the market sees its US expansion as one way to justify its lofty valuation.

Guzman Y Gomez reported US network sales of $2.6 million, down 3.7% from the prior corresponding period. This was despite the company operating four stores in the market during the period, compared to three in the prior corresponding period.

Nevertheless, management was pleased with its performance across the Pacific. It said:

The US segment has performed in line with expectations during the quarter, with the prior corresponding period benefiting from initial higher sales associated with new restaurant openings.

What's next?

Management believes it is tracking in line with expectations in FY 2025. It said:

Overall GYG expects to meet its prospectus forecasts for the 2025 financial year, including the opening of 31 new restaurants in Australia.

This would mean revenue of $428.2 million, EBITDA of $59.9 million, and a profit after tax of $6 million,  representing year-on-year growth of 25.1%, 33.7%, and 5.2%, respectively.

Following today's move, Guzman Y Gomez shares are still up 70% since listing on the Australian share market at $22.00 per share at the back end of June.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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