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Jollibee (JFC) Business Transformation - from Restaurant to what?, holders should brace for more pain

Jollibee peaked at 328.40 sometime in January of 2019. Before that, JFC acquired 100% of Smashburger an American fast-casual hamburger restaurant chain a for a total of around US$210 Million (around 11 Billion Pesos). JFC was then hunting for acquisitions in its bid to become a top 5 restaurant companies in the world. It appears that JFC felt that its growth in Philippine market where it is the dominant player has started to stall and it has to sustain its growth by acquisition.

Smashburger was a loss maker. It was not profitable when JFC acquired the American hamburger chain. The losses of Smashburger were immediately felt in the results of JFC. The consolidation of the losses of Smashburger to the financial statements of JFC marked the start of the decline of JFC from its peak. The market was sending a message that JFC had it wrong. The message was like – acquiring a loss maker is not the way to grow.

Then in September 2019, JFC acquired another loss maker Coffee Bean & Tea Leaf for US$350 Million (roughly 18.3 Billion Pesos). The acquisition did not bode well to the market and JFC’s share continued its decline.

JFC entered 2020 with two loss making businesses, then COVID-19 pandemic arrived.

Judging by its 1H 2020 results, COVID-19 pandemic’s effect on JFC was horrible. JFC’s business operations drained 5.2 Billion Pesos of cash. JFC may have ran out of cash were it now for its massive capital raising. JFC raised 72 Billion Pesos of debt and debt- like securities. The massive capital raising solidify JFC’s finances for now giving it a cash of 57.9 Billion Pesos as of end of 1H 2020.

The havoc wreaked by the COVID-19 pandemic on JFC may have decimated the two loss making businesses that JFC had acquired earlier. It was not profitable to start with and now with the pandemic changing customer habits and preferences those business may no longer be viable. Impairment charges may have to be made by JFC for those acquisitions.

To address the continuing onslaught of COVID-19, JFC unveiled a somewhat vague Business Transformation spending initiative. It even provisioned 7 Billion Pesos for the Business Transformation spending initiative. JFC’s Business Transformation is unclear.

We have no way of interpreting the Business Transformation spending initiative of JFC but by its literal meaning. Transformation means a dramatic or thorough change in form or appearance. Business transformation would only mean change in the nature of business like from a restaurant to what?

The companies that thrive during the pandemic were tech (technology) companies like Tencent/WeChat, Alipay, Amazon, Microsoft, Netflix, Zoom, Facebook, Alphabet (Google and Youtube), Tesla, Bytedance/TikTok and the like. To ride on the trend maybe JFC is transforming into a tech company from a restaurant chain and the 7 Billion provision is maybe a provision for the acquisition of an internet platform or an IT platform for its restaurant chain. The business transformation spending initiative is maybe a way for JFC to fashion itself as a tech company. We bet that this maybe the business transformation that JFC may have been talking of.

JFC may have yet to charge impairment on the businesses it acquired for a total of 29 Billion Pesos which may no longer be working. Most business transformations are painful. For now the market may not yet have fully corrected JFC and holders must braced for more pain, from 328.40 at its peak to now 137.50 and maybe still declining.

Disclaimer: This is an independent analysis for discussion purposes with the aim of giving stock traders and investors an independent perspective. Accuretti Systems Inc. does not own any shares of Jollibee Foods Corporation.

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