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Famous Brands soldiers on despite ‘very subdued environment’

The key December/January trading period dented FY revenue.

NOMPU SIZIBA: Famous Brands says it is working hard to get its GBK business in the UK back on track. It has lost a lot of money in relation to that business, with poor market dynamics in the UK. Famous Brands referred to this in its annual results today [Wednesday] for the 12 months ended February. The company reported total revenue up a mere 2%, at R7.2 billion. Operating profit declined by 5% to R850 million. The company reported headline earnings per share down 19% at 319 cents, with shareholders set to get a final dividend of 100 cents.

To reflect on what’s been happening with the business, I’m joined on the line by Darren Hele, the CEO at Famous Brands. Darren, you experienced slight revenue growth in the period under review, but your profitability was knocked a fair bit. Just broadly, what were the main drivers of this outcome?

DARREN HELE: Our profitability was flat, which obviously in the current environment is not unexpected, so the knock was really the result of the damage done in the UK, with operating losses out of the GBK business, and primarily that’s the major factor.

NOMPU SIZIBA: Let’s get straight into the UK business, which has really caused you some grief, I’d say. Last year you did report having to take an impairment hit of about R874 million worth on your GBK business. Just tell us about what you’ve been going through with that business – you did come out with a voluntary notice earlier – and what the status is now.

Read: Famous Brands sees R874m impairment as UK burger business struggles

DARREN HELE: We’ve taken write-downs on our investment, so our current value is now around R1 billion. But also within the business itself we had to restructure the business to do what’s called a CVA [company voluntary arrangement], which is a legal process that one takes to reassert the punitive leases that the business is starting to feel as a result of declining turnover, the change in the economic landscape. And obviously that would facilitate a write-down of some store assets within the business itself. So that’s really what’s hurt the operating profits more than just the normal trading losses. But we think we’ve got the business stabilised now, and hopefully not have the current impact on earnings it’s been having in the past couple of years.

NOMPU SIZIBA: You say stable – is that business now right-sized, and are you still getting people coming through your restaurants?

DARREN HELE: Ironically at restaurant level there is not such a significant challenge. The like-for-likes were down last year, but we’ve shown a good like-for-like growth, particularly in the second half of the year. The consumer support has always been there. It’s really been around the economic model, and really trying to stay in some of those rentals and the costs that go with it. And of course there has been some like-for-like pressure, but that certainly has been arrested and the last 12 weeks of this year, this first quarter, not the one we are now reporting, has shown very good growth, but so did the 16 weeks since we actually did the CVA.

NOMPU SIZIBA: Any anticipation around what the current situation politically means for your business in the UK right now, because it really is now extremely uncertain and it looks like a hard Brexit is inevitable?

DARREN HELE: We ideally thrive when there is good consumer sentiment, and people are buoyant. So spend is critical to us, so this is not conducive to spend. I suppose the key issue is one doesn’t know the impacts of a hard Brexit, but it certainly would impact us from the labour perspective. We are an entry-level employer, typically. We thrive on entry-level employment. We make it easy for people to work for us, but we have a big foreign workforce, and that’s likely to change with Brexit – if you listen to the commentary.

NOMPU SIZIBA: You play in other markets – the Middle East and the rest of Africa. What performances are you seeing in those markets?

DARREN HELE: Much more pleasing. The Middle East has a lot going on as the [Expo] 2020 trade fair gears up in Dubai, so a lot of activity around there. It’s a small play for us, but it’s really exciting. Lots of activity going on.

And then Africa has certainly been a lot more stable for us. The exchange rates have been a lot more stable this year, so we are laying a lot of groundwork into markets – so very exciting. But again, it’s still small, it’s less than 10% of revenue, the profit from our perspective.

NOMPU SIZIBA: Here at home it’s no secret that the economy has been far from conducive. But how have your various franchises been performing?

DARREN HELE: I must say that we are performing well, given it’s a very subdued environment, particularly a very low food-inflation environment, which is very difficult for us too, because ultimately your cost structure is still on a high-inflation base. So you can’t pass food prices on that aren’t there, so you’ve got to cover your costs. But I would say that we are pretty pleased with the performance, saying that H1 was much better than H2.

But the December/January period has really dented our business, and I think it dented a lot of businesses in South Africa. We felt it. If you took that out of it, probably not a bad year. But that’s a key period, the critical months, the trading period for us. The summer holidays is the key part of our revenue stream, like most retail businesses.

NOMPU SIZIBA: In what’s been quite a tricky market, how have you been supporting your franchisees, such that they can ride through the current economic difficulties, the weak consumer, higher operating costs, and so on?

DARREN HELE: Look, we are just trying to make sure we do what we can to try and optimise the business model, make sure they are getting growth at the front end, making sure landlords are being realistic and supportive, making sure that gross margins are in line, making sure that from our part we are delivering on the promotional strategy and giving them the gross margins that they need. That work is ongoing, it never stops, but it’s really been quite tough this past year in terms of the things we have to do.

So we continue to do that. They run their own businesses. Like any other business, they are finding it tough too. They are not immune from these things because they are franchises. They’ve got the same electricity costs that we experience at home and at work.

NOMPU SIZIBA: How are you dealing with competition out there, particularly your online-base type of competition, your Uber Eats and the like? Shouldn’t you guys be creating some apps of your own?

DARREN HELE: Competition has always been around, it’s always fierce. So I wouldn’t say that landscape is any less intense. But it certainly has hotted up in terms of the aggregate, I suppose there are competitors, but they also complement us. So we use them. On our own platforms we also compete against them. For our brands we have delivery app platforms for all of those brands, and we have been experimenting on an aggregator of our own. But again, I think the scale of those businesses and the services they offer, they are good at what they do but, again, they don’t just compete with us, they actually offer us the service. But we still have our own office.

NOMPU SIZIBA: Before I let you go, Darren, your net debt:equity ratio stands at 108%, which is an improvement on 126% in the year before, but still very high. When do you envisage you’ll be able to dramatically reduce your debt level?

DARREN HELE: We are actually comfortable with those debt levels. We think they will come down slowly. But we have said publicly that debt will be a part of our balance sheet going forward, so we are not looking to reduce it dramatically. We will reduce it slowly over the period, and hence see a reduction of the dividend. So we’ll be able to reward shareholders, as well as bring debt down. So we are very comfortable with that level of debt as it stands, all things being equal, as we stand today.

NOMPU SIZIBA: Our thanks to Darren Hele.

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