The Guzman Y Gomez Ltd (ASX: GYG) share price has reduced since its peak earlier in the year, dropping 27% from 19 February 2025, as the chart below shows. The business is looking like an attractive investment opportunity, in my opinion.
The Mexican food business has operations in four countries – Australia, Singapore, Japan and the US.
While the current valuation does price in future success, I think the company will be able to beat expectations in the coming years.
One of the first things I'm attracted to is how much the business is expecting to scale up in the coming years.
Restaurant openings to ramp up
The business opened 25 new restaurants in FY24, and it is expecting to open 31 in FY25 and 32 in FY26. In the medium-term, GYG is aiming to open at least annually. It said its focus is on AAA real estate and solid operational execution, more than rapid growth.
GYG believes it can reach at least 1,000 restaurants in Australia in the ultra-long-term. It's adding four to five sites per month into its pipeline.
The Mexican food business has a real estate team of more than 30, of which one third are full-time real estate development managers.
While each new restaurant can add millions of dollars to revenue, another added benefit is the operating leverage (increasing profit margins) that comes with. That combination could be very helpful for Guzman Y Gomez shares.
In the US, it's still trying to gain traction – the board has approved 15 restaurants in total.
Margins are improving
GYG says that it's expecting the new restaurants to deliver compelling economics in time, with a target return on investment (ROI) of around 50% and around 30% for franchise restaurants (including royalties).
The company said revenue is the key driver of restaurant economics, with a focus on driving volume rather than price. It's able to utilise its labour costs best by generating volume.
Pleasingly, the company is seeing an ongoing improvement in the restaurant margin, with it rising from 18.6% in FY20 to 21.8% in the first half of FY25.
GYG believes there's an opportunity to realise operating leverage with its investment in its real estate, technology, human resources and supply chain platforms.
In the coming years, I think GYG's profit margins can significantly increase, which I believe will be a tailwind for the Guzman Y Gomez share price.
Strong comparable sales
One of the main dangers of GYG growing its network is that it could cannibalise sales from other locations. So, same-restaurant (comparable) sales are an important metric and insight into the health of the business.
In the third quarter of FY25, the business reported that its Australian, Japanese and Singapore businesses delivered total comparable sales growth of 11.1%, which I think is an excellent growth rate, without incoming the addition of new restaurants. The FY25 third quarter's total network sales grew by 23.6% to $289.5 million.
There are a lot of growth drivers for the long-term success of the Guzman Y Gomez share price, which is why I'm excited about it.
