Another tough six months for Famous Brands

‘I think the balance sheet looks in pretty good shape considering what we’ve been through in the last six months. So we are cautiously optimistic’: CEO Darren Hele.

SIMON BROWN: I’m chatting with Darren Hele, CEO of Famous Brands. A disclaimer – I hold Famous Brands shares. [Results for] six months to end-August [show]: revenue up 50%, headline earnings per share up 140%.

Darren, I appreciate the early morning time. Those two numbers I threw out there – revenue and headline earnings –suggest that this was a bit of a cakewalk of a period. It wasn’t. With the lockdowns, violence in KZN it has been another tough six months. Maybe not as tough as last year, but still massively challenging.

DARREN HELE: Morning, Simon. Yeah. I think having the bounce from April last year does make it look a bit easier than it probably was from a numbers perspective. Again, I think a little bit easier than last year just in that one understood what one was getting into in terms of Covid, and understood how to manage these waves a bit better. But the civil unrest was really a sideswipe, I think, for everybody, so no different for us, and very difficult both emotionally and physically in business from those kind of issues.

SIMON BROWN: And of course now we’re sitting here with load shedding. This is obviously post-period. You’ve got about 2 500 stores in South Africa – how many can operate during load shedding? Do they have backup power?

DARREN HELE: Yeah, they do, Simon. A lot of them do. We are probably sitting at a number of around 60% to 70%, depending on what those configurations are. Some of them can’t go – Level 4 does create different constraints in terms of the backup power that they have. We’re pretty okay in terms of what we can do. There are still a lot of shopping centres, for example, that don’t allow generators, because you can imagine every tenant trying to do that, and they haven’t put in that solution. It’s not 100% coverage, and of course it is the most inefficient use of power, unfortunately. So, yes, it does impact and the schedules are probably the biggest [problem for] many management [teams] to cope with because if you are load shed between five and seven at night, that’s peak period for QSRs [quick-service restaurants] particularly.

SIMON BROWN: We’ve had the lockdowns. I want to touch on your signature brand in a moment, but the quick service – obviously you can still do deliveries. Are you perhaps seeing a bit of a shift to lunches, maybe even breakfasts, and I imagine you are seeing a lot of shift towards delivery?

DARREN HELE: The delivery shift has probably plateaued. And I’m talking sort of post-August now. So for the reporting period definitely [that’s] a key part of [people’s] repertoire. But since the levels have eased people are definitely getting out and about again, getting back to their favourite places and being more mobile. We are starting to see people getting back into store from a QSR perspective for collect, and just moving around. But look, delivery is still elevated versus where it was prior to Covid.

SIMON BROWN: Signature brands are in the slightly fancier [areas]. There’s sit-down dining and the like. I imagine that they were really hit hard by the lockdown. You’d got the curfews, you’d got the alcohol bans. As those got lifted did you see a quick rush back into the stores, or is it still tough coming out of the hard lockdowns?

DARREN HELE: No, it’s pretty instantaneous. As you say, people get out quite quickly. Obviously there are always a few factors on which they are dependent and so on. But in the SA context as those levels eased in September, we saw people getting out – particularly with the [easing of the] curfew, because that does start to encourage a bit more night trade. Daytime dining has been fairly buoyant all along. But the big occasion is still evening, and that’s the one that’s been the most hampered. The curfew moving to 12, particularly, with restaurants closing at 11, was very beneficial. You’re getting that full sit-down experience. You’re probably getting only one sitting, not two, but we’ll take what we can get right now.

SIMON BROWN: I went to one of your restaurants – during I forget which level – and we got shuffled out at eight o’clock; it was a little weird. I felt like a kid again with my early bedtime.

Your logistics? We’ve seen supply-chain challenges globally. I imagine that for you, but less in your supply chains, your logistics are mostly internal within the country.

DARREN HELE: Yeah. We’re not as affected as you would probably read in the press; but we are certainly not getting away scot-free. We are quite localised in our supply chain, but you are still reliant on components. As an example, the civil unrest pushed us to have to replace a lot of equipment, particularly from the US. And that’s been very, very challenging. Prior to this it’s had its own challenges, and now we’ve got sudden demand – not just us, it’s our competitors as well – looking for product. On that side I think we’ll get through, but it’s been very challenging and very tight, and you can see a lot of these US factories have got back orders; they’re struggling for components and for labour.

SIMON BROWN: Inflation – certainly we’ve seen inflation data coming through. We’ve seen it particularly in food. I imagine you are seeing it in your space as well. You did say that you’ve managed to hold on to some of it rather than passing it through. But it looks like we’re going to see continued food inflation into the first quarter of next year.

DARREN HELE: Definitely from what we can see, and there are some big chunks coming through. Protein has been under pressure for most of this year. We’ve seen a few other things coming through now. Again, of course, the exchange rate doesn’t help with that volatility and shipping costs are typically in dollars. So there’s just an added pressure right now. We are not anticipating any respite, and think it will be fairly manageable. For us a little bit of an increase in food inflation is not such a bad thing. If it’s around 6/7%, where the economy is right now, we can probably manage it. But if it does start pushing up to 10/11%, as we’ve seen before, that does start to suppress demand.

SIMON BROWN: Your new openings. You are refurbishing some stores, you’ve closed some stores, but you’re constantly on a new opening. Has the pandemic shifted the sort of store that you are opening – perhaps in location, perhaps in size? We talk a lot about the smaller regional malls doing a lot better than the super-regional malls.

DARREN HELE: Most definitely.

The kind of restaurants we’re opening now are probably more rural, semi-rural, and closer to people’s homes.

Certainly not a lot of office components, which was a nice growth area for us before the pandemic. In shopping centres [there’s] virtually no growth opportunities right now. I think they’ll come. Not many transient opportunities, very little entertainment.

Yeah, a definite shift, but still opportunity for us. I think there’s still runway out there. One also needs to be careful that you don’t get lured into just opening somewhere now that looks great, but certainly once the pandemic is over people move on quickly and forget these temporary habits that they’ve created.

SIMON BROWN: That’s a good point – the pandemic will pass in time. On that point, I’m seeing out there that it’s busier. People are travelling, we are talking of holidays, some people are even going offshore and the like. The big worry I imagine for you and your team is a fourth wave. None of us are epidemiologists, we can’t predict it, but my sense is if it comes in late January, February, that’s better for the business than if it comes in December and brings lockdowns with it.

DARREN HELE: Yeah, absolutely. No wave is obviously the best solution for all of us, and vaccination is a solution to that, it would seem. If it’s later, certainly. I think that last year was probably the ultimate disaster in terms of the way it materialised for our industry. So if you can have a situation where it starts to peak in late January or mid-January, we’d be much better off, and people generally would have a Christmas – and that’s critical for us. We are planning for that. But obviously one might need to pull back. So that, as you say, would be a great solution for us.

SIMON BROWN: A quick last question. No dividend, you’ve been telling us. You told us this last year and mentioned it again. Your lenders are looking for a net debt Ebitda less than 2.5 times for two consecutive periods. I understand that that could be an interim and a final, or a final and an interim, but in my running of the numbers probably no dividend in 2022?

DARREN HELE: Simon, it’s difficult to say, I think it again depends on the cashflow recovery. I think our lenders are very pragmatic – and if you look at the balance sheet now it has been strengthened quite nicely. So one can’t make a comment, but we would love to get the dividend going again. One needs to be cautious, but it will purely depend on the recovery. I think the balance sheet looks in pretty good shape considering what we’ve been through in the last six months. So we are cautiously optimistic.

SIMON BROWN: I take that point. The balance sheet is looking [okay], considering a pandemic, and we we’ll see how that goes. We’ll leave it there.

Darren Hele, CEO of Famous Brands, I appreciate the time this morning.

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