Guzman Y Gomez Ltd (ASX: GYG) left investors with a bitter aftertaste following its FY25 results.
The concern wasn’t the FY25 earnings result itself but the slow start to FY26, with early sales growth falling well short of what the market had anticipated.
The GYG share price finished Friday down 18% to $23.70.
Why Has the GYG Share Price Plummeted?
In a trading update alongside its FY25 results, GYG revealed comparable sales for the first seven weeks of FY26 (from 1 July) had increased just 3.7%.
Management downplayed the result, blaming the timing of promotions and new menu items.
“To give you a little bit of flavour, over the last 7 years, we’ve had less than 5% weekly comps 16% of the time.” – Steven Marks, Co-CEO, 22 August Earnings Call
But for a business trading at an earnings multiple higher than 200, going into the result, sluggish sales growth of 3.7%, even over only the first 7 weeks of FY 2026, was not tasty enough to satiate investors.
Market Attention Shifts From Narrative to Earnings
Friday’s market reaction reflects a broader revaluation of the Guzman y Gomez share price. Investor attention has shifted away from narrative and towards fundamentals.
Guzman y Gomez markets itself as a disruptor, with catchy vision and mission statements plastered across their website, marketing, and investor materials.
Guzman y Gomez has an ambitious vision “to reinvent fast food and change the way the masses eat” which it aims to achieve through its mission to “be the best and biggest restaurant company in the world”. – Guzman y Gomez Prospectus
The business believes it can open 1,000 stores in Australia despite a crowded market landscape.
The market initially lapped up the big-picture growth story. Despite a $24 IPO price, shares started trading at $30 in June 2024. Within months, GYG shares touched $45.
Growth, however, couldn’t keep up. Shares sold off after the February half-year result, as it became clear earnings couldn’t support the lofty valuation.
Sentiment took another hit in April, when cornerstone investor TDM Growth Partners sold $80 million of stock after the first round of escrow restrictions expired.
As Guzman y Gomez’s largest shareholder with a 23% stake, TDM’s move was seen as a sign of further selling pressure.
Some commentators have suggested market sentiment has also weighed on the GYG share price. I don’t think that’s the case.
Sure, close peer Chipotle is down 29% this year, but McDonald’s for example, is up 8%. Closer to home, KFC operator Collins Food Ltd (ASX: CKF) is up 28%.
The share price movements reflect the idiosyncratic operational performance and valuation of each business, rather than a broader QSR market downturn.
How Did Guzman Y Gomez Perform in FY25?
Global network sales increased 23.0% to $1.18 billion, driven entirely by growth in the Australian segment, namely Singapore and Australia (GYG includes Singapore and Japan in its “Australian segment reporting”).
That flowed into revenue of $436.0 million, an uplift of 27.4% on the prior corresponding year.
Guzman y Gomez operates both franchise and corporate stores, collecting royalties from franchisees as well as sales from company-owned outlets.
Management pointed to a 9.6% uplift in same-store sales in the Australian segment, in addition to 37 new store openings, as the primary revenue drivers.
Operational initiatives, including after-9 pm trading, 24/7 outlets and breakfast marketing, also helped encourage a more even and growing customer spend throughout the day.
The US division continues to be loss-making, with the underlying EBITDA loss more than doubling to $13.2 million.
It remains unclear why the business continues to pursue the US market, in addition to Japan, when store economics fail to add up.
Guzman y Gomez reversed the loss recorded in FY24 to record a $14.5 million net profit after tax (NPAT). While the accounting numbers show a profit, the cash flow tells a different story.
Operating cash flows of $57.3 million were more than offset by capital investments and lease repayments. For the year, Guzman y Gomez made a free cash flow loss of $15.0 million.
Despite the free cash outflow, the Board declared a maiden dividend of $0.126 per share, possibly as a way to support the share price.
The dividend will be paid from Guzman y Gomez’s existing cash reserves of $281.7 million. The company has no debt.
GYG Stock Out Of Escrow
Guzman y Gomez announced that ~40% of its share capital would be released from escrow at the close of trade on Monday, 25 August.
Early investors such as TDM could continue to sell, placing additional pressure on the GYG share price.
Chairman Guy Russo owns 5.6% of the company. Founder and Co-CEO Steven Marks also owns 9.6%.
Guzman y Gomez Guidance For FY 2026
Management expects to open 39 new restaurants in FY26. And the underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin is expected to be between 5.9% to 6.3%.
We’re also told that the margin should expand to 10% in the next five years. Australian store openings are expected to reach 40 restaurants per annum in that time.
But there was no meaningful insight into comparable same-store sales growth, no breakdown of how stores perform over time, and no targets for NPAT or free cash flow.
Importantly, the margin guidance excludes leases – a significant cost for any restaurant business.
Analysts expect the company to earn NPAT of $27 million in FY26. That increases to $47 million in FY27.
That’s solid earnings growth, albeit off a small base. But the valuation already more than reflects it.
On those numbers, the forward P/E works out to 90 in 2026, falling to 52 in 2027.
And as we’ve seen with the FY25 results, when the valuation is high even a relatively minor miss can result in a significant share price response.
Would I Purchase GYG Shares?
When weighing up whether to purchase Guzman y Gomez shares, investors should take note of the following concerns:
- Investor communications that appear to prioritise narrative over fundamentals.
- Management persists with operations in loss-making geographies, taking resources and mindshare from more profitable countries.
- The dividend is supposedly supported by the company’s “strong balance sheet position and cash flow generation”, but free cash flow is negative.
- Forward guidance that doesn’t provide earnings visibility.
- Margin guidance does not account for all major expenses such as leases.
- Soft trading update that fails to provide clarity on same-store sales growth.
- Escrow restrictions lapsing and the potential for further share sell-downs.
- A valuation that still accounts for several years of growth in a competitive quick-service retail market.
I concede that I may be too bearish, but there are many amber and red flags so the GYG share price looks unappealing to me.
I do wonder if the sudden share price decline below the IPO price may be the catalyst for management to address some of these concerns.
There are aspects of Guzman y Gomez that I like. For example, the business has consistently grown network sales and management have serious skin in the game. But until the store economics and earnings trajectory become clearer, I’ll be eating my burrito from the sidelines.
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Disclosure: The author of this article does not own shares in GYG and will not trade GYG shares for at least 2 days following the publication of this article. The editor of this article, Claude Walker, does not own shares in GYG and will not trade GYG shares for at least 48 hours following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
The information contained in this report is not intended as and shall not be understood or construed as personal financial product advice. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Nothing in this report should be understood as a solicitation or recommendation to buy or sell any financial products. A Rich Life does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. Future results may materially vary from such opinions, forecasts, projections or forward looking statements. You should be aware that any references to past performance does not indicate or guarantee future performance.