Perplexing buyback from overvalued ASX share
Earnings continue to grow but investor expectations are too high.
Mentioned: Guzman y Gomez Ltd (GYG)
Guzman y Gomez’s (ASX: GYG) first-quarter 2026 network sales grew by 19% compared with last year, mostly underpinned by new stores. Australian same-store sales lifted 4%. The company also announced a share buyback of up to $100 million.
Why it matters: First-quarter sales growth is tracking to our full-year estimates, which stand. We expect fiscal 2026 network sales growth of 19% and Australian same-store sales growth of approximately 4%. We expect earnings per share to lift 80% to $0.25.
- The buyback is perplexing. Only 15 months ago, the company issued $200 million of equity at $22 per share. It now intends to buy back $100 million with the share price above $26. It’s a small buyback, but selling low and buying high does not create value for shareholders.
The bottom line: We maintain our fair value estimate for no-moat Guzman y Gomez at $16 per share. The impact on our fair value of buying back shares at today’s prices is negligible. We estimate only 4% of its shares are likely to be bought back.
- Shares are expensive, trading at about 100 times next year’s earnings. Too high, even considering its solid earnings growth trajectory. We credit Guzman with strong earnings growth over the next decade, with a 10-year EPS compound annual growth rate of close to 40%.
- We believe the market is perhaps too optimistic on the brand’s global rollout, particularly in the US, where it competes against well-established Mexican-style fast food competitors. We do not believe Guzman’s US stores will turn a meaningful profit within our 10-year forecast period.
Guzman hopes for much greater margin than us but we expect diminishing returns
Guzman y Gomez operates a hybrid store ownership model, running corporate-owned restaurants and licensing its brand to franchisees. The company expects around 40% of stores will be corporate-owned over the long run. Most stores are in Australia, but Guzman also has a nascent presence in Singapore and Japan through master franchisee agreements and runs a handful of corporate stores in the United States.
Rolling out stores under a franchise model significantly reduces Guzman’s capital investment and funding needs. Franchisees are responsible for new store capital expenditure and ongoing maintenance. The more capital-intensive corporate stores provide Guzman with greater control over customer experience and serve as a testing ground for new ideas to optimize operations and improve its offering.
In return for using its brand and operating model, Guzman collects a royalty fee from franchisees. The royalty rate flexes with store turnover and averaged about 8% of global franchisee sales in fiscal 2024. This is a higher royalty rate than KFC-franchisee Collins Foods pays Yum Brands. However, after adjusting for other fees, we estimate a franchisee’s total payments to the brand owners, as a share of sales, are on par.
Based on recent return metrics, we think Guzman franchisees will support the rollout of around 40 new stores per year for the next decade—of which, on average, we estimate franchisees open 24, and the company operates the other 16. However, because the brand is still relatively young and its strength is yet to be fully tested, the planned expansion may need to slow in the longer term if store economics diminish. Beyond our 10-year explicit forecast horizon, we think the rollout will become more challenging as Guzman pushes into less lucrative catchments and faces more competition from quick-service restaurant operators with stronger brands, including McDonald’s, KFC, and Domino’s.
Bulls say
- It is early days, but Guzman’s Australian restaurant economics rival that of best-in-class brands KFC and McDonald’s. This is the key metric for a durable, franchisee-driven store rollout.
- The Australian QSR market is highly fragmented, and larger brands like Guzman could keep taking share from independent operators.
- Guzman is demographically well-positioned. It has a young, health-conscious customer base and sees higher average spending per transaction than major QSR peers.
Bears say
- Guzman needs to ensure store economics hold up as its ambitious rollout progresses. Overly aggressive expansion could destroy value.
- Guzman isn’t the only Mexican-inspired QSR chain with ambitious rollout plans in Australia with home-grown Zambrero and global brand Taco Bell key competitors.
- Very few international brands have found success in the US, and Guzman’s US expansion could wind up as a costly distraction from the Australian business.
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