Breadtalk suffers expenses outstripping revenue gains

The 2.8% gain could have been better.

According to OCBC, although BreadTalk Group’s (BTG) historical 3Q pickup in revenue came in better-than-expected (+21.5% YoY to S$116.7m, exceeding our forecasts by 12.5%), higher food and raw material prices – combined with greater staff and rental expenses – saw operating expenditure (+24.5% YoY to S$115m) outpace revenue gains to reduce the improvement in operating profits to S$5.2m (+2.8% YoY).

Here's more from OCBC:

While net profit grew 6.0% YoY to S$3.9m, greater accordance of earnings to minority interests saw 3Q12 PATMI decline 7.7% YoY to S$3.4m.

For the first time since quarterly results were published by the Group, gross profit (GP) margin fell to its lowest point of 52.3%.

Historically, GP margins had been hovering in the mid-54% range even in periods of rising cost pressures on raw material prices as the Group had been able to exercise effective procurement procedures i.e. bulk purchases and centralized sourcing.

At this juncture, we deem that a turning point has potentially emerged given the ultimate limitations on cost savings centralized sourcing and bulk purchasing can bring.

With the regulatory changes for labour hurting BTG more than expected and inherent difficulties in hiring service staff, BTG will likely see staff costs rising from its continued expansion.

Furthermore, rental rates could be pushed higher with tight occupancy rates in retail malls. Therefore, we lower our FY13 operating and net profit toS$1 7.6m and S$10.3m respectively.