Katrina Group released its first half result of FY17 two weeks ago. The result was terrible, and its share price plunged following the announcement. Revenue declined by 1.6% yoy, but gross profit dived by 41% yoy. This impact to bottomline is huge, and net profit dropped from 1.7m to just 420k.
Few points to discuss:
Revenue – Katrina did open three more outlets in 17H1, but the increased revenue was offset by the lower same-store-sales of existing outlets. This revenue number is reflecting Katrina as a slow-growth story now instead of a high growth story as projected during IPO. The negative development is worse than many had anticipated. The total number of outlets stands at 37 now and is expected to increase to 41 as Katrina plans to open 4 more outlets for the rest of the year. I think the management should focus more on managing existing outlets than expansion.
Administrative expenses rose by 12.9% yoy. No surprise given that they were opening new outlets. Also, in first half of 2016, the two founders’ new service contract was not effective yet. The contract became effective after IPO, and the two founders are now withdrawing much higher salary than before IPO. The company also incurred additional cost for statutory filing requirements as it’s a public listed fir now.
Gross margin fell from 15.5% in 16H1 to 9.3% in 17H1. This is a surprise to me as it’s a sharp drop. Part of the increase in Cost of Sales (COS) was attributed to the three new outlets. But, because Katrina includes fixed-cost such as rent in COS, it becomes difficult to analyze the changes in gross margin. Another reason for the falling gross margin is online food orders.
Online Food Ordering
Just in one year, the online delivery sales for Katrina increased from just 1.5% of revenue in 16H1 to 10.1% now. That’s nearly 7-fold increase. Katrina became very active in online food ordering since mid last year. For 2016, it achieved online revenue of $2.5m, but for first half of 2017 only, the online revenue already hit $2.8m.
Unfortunately, online food ordering comes with high cost. For that $2.8m online sales, it paid sales commission of 0.5m, which was included in COS. That’s 17.8% sales commission rate!
Just google Katrina’s restaurant and you will find: balithaidelivery.com.sg, sophodelivery.com.sg, streatsdelivery.com.sg, and foodpanda. Based on some online information, Foodpanda is charging 10-15% commission for online order and 20-25% commission if Foodpanda also does the delivery. Katrina’s 17.8% online sales commission rate falls within this range.
As I was googling Katrina online delivery, this ads appeared on my youtube. Seems to me they are really aggressive in growing online sales. I wonder how much Katrina paid for online ads in a year and how much it was as a percentage of revenue. This is really telling us that digital advertising continues to grow. That’s why Google continues to grow after so many years.
This development is new to me. I did not expect traditional restaurants like Katrina’s to generate 10% of revenue from online order. If that 10% remains as sit-in customers, that would have generated 7% service charge as additional revenue. But instead of getting the service charge, they are now paying 17.8% commission rate.
Of course, if the online orders are actually additional revenue on top of existing dine-in customers (i.e. the number of dine-in customers did not drop), Katrina would have reap all the benefits from new sales channel. But, it seems to me that the online orders are having negative impact to overall performance of Katrina. If we look from another angle, maybe it’s because the number of dine-in customers has dropped substantially that the management started online ordering to fill up the gap. I have no idea on this.
The falling same-store-sales, rising online orders and new stores expansion are three important events that are taking place at the same time at Katrina. It’s difficult to analyze how it will look like for next 1-2 years and how competent the management are in tackling these challenges. So far, the performance has deteriorated significantly. For these reasons, I am not able to value Katrina with confidence. So, again, I will just stand aside and just watch.
We did talk about its IPO last year (see this post). Since its IPO, the share price has plunged by 41%. Investors who were bullish during the IPO and bought at high valuation are now suffering significant losses.