Guzman Y Gomez concedes defeat in US and warns of financial blow of up to $56 million

Mexican fast-food chain Guzman Y Gomez has conceded defeat and will beat an immediate retreat from its ambition plans to conquer the US market, admitting “mistakes” had been made.

The embarrassing withdrawal comes despite repeated commitments from its two founders, Hilton Brett and Steven Marks, that the venture simply needed time to gain traction among American consumers already spoiled for choice.

More importantly for investors, the failed attempt to build a brand in the US is set to cost GYG a one-off financial hit of between $US30 million and $US40m ($42m and $56m).

That includes a cash component of $US15m to cover payment of lease liabilities, employee costs, contractual commitments and other exit expenses.

Recognising that shareholders were already growing increasingly impatient with the pace of growth, Mr Marks and Mr Brett in February said they would not expand beyond the 15 planned restaurants in the US until its eight restaurants matched sales in Australia.

The company last month reported that sales at those loss-making stores rose $4m during the March quarter, up from $3.2m a year ago.

The relief of shareholders pushed shares in the company 17.4 per cent higher in early trade on Friday before settling 9.6 per cent higher at $19.81.

GYG told the Australian Securities Exchange that trading at its Chicago restaurants would stop immediately, saying “the financial performance of the US business has not been acceptable and is not meeting targeted hurdles”.

It offered no detail on the number of jobs that would be lost.

Mr Marks, who relocated to the US earlier this year in a last-ditch effort to steer the stores into profitability, admitted the differentiation of GYG’s food and guest experience was not translating to an improvement in sales momentum.

“Having spent the last three months in the US, I realised this was going to take significantly more time and capital than we had expected,” he said.

“In assessing the trajectory of the current network, the board and I have concluded that the business is unlikely to deliver the performance that would justify continued investment of shareholder capital.”

GYG said it would instead focus on building its “solid” foundations in Australia, where comparable sales grew 6.6 per cent in the three months to March 31 . It plans to open another 32 stores here this financial year, taking it further towards its ultimate goal of 1000 outlets, and is now forecasting underlying earnings growth of 29 per cent over the previous year to $85m.

GYC chief financial officer Erik Du Plessis told analysts rising inflation in Australia remained a threat to growth but it was working with under-pressure suppliers to control costs, saying price hikes would be “the last lever we will pull”.

It also remains confident of its master franchise expansion in Japan and Singapore, which just opened its 24th restaurant.

“We are very proud of our international partners in Singapore and Japan and see substantial growth ahead in each market,” Mr Marks said, noting lesson had been learnt from the US “and themistakes that we’ve made”.

“Beyond Singapore and Japan, we continue to believe there will be the right opportunities, in the right markets, with the right models.

“When those opportunities arrive, we will be ready. Today’s decision is about the US specifically, it is not a statement about GYG’s global potential.”

GYG said the costs of exiting the US are not expected to impact its final full-year dividend.

eToro analyst Josh Gilbert said it was a “tough decision for management, but it’s the right call, and the response we’re seeing from the market today tells you exactly what investors think”.

“GYG is one of the most shorted stocks on the ASX, meaning that investors had lost faith in the US story long before today,” Mr Gilbert said.,

“What the market has been crying out for is a clear pathway to profitability, and closing the US restaurants removes a persistent drag on capital and lets management focus on the business that’s actually working.”