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Taste Holdings caught a ‘bit off-guard’ after a brutal first quarter

The group is evaluating a capital restructure to reduce debt and fund future Starbucks and Domino’s stores, says CEO Carlo Gonzaga.

NASTASSIA ARENDSE:  Taste Holdings published their numbers today. This is the conversation that Warren Thompson from Moneyweb had with Carlo Gonzaga, who is the CEO of Taste Holdings.

WARREN THOMPSON:  You announced those results in which the company sustained an operating loss of R73 million for the six months. Could you just give us your reaction to those, and a bit more colour as to where those losses are being incurred?

CARLO GONZAGA:  Certainly in the food division we did expect losses in this period, and we could expect them in the next period as well. But I think the part that caught us a bit off-guard was the current sales in the luxury goods business in Q1. The Q1 was I think brutal. So certainly it contributed – although that business didn’t make an ebitda loss, it was substantially down from the prior year. So that’s probably the part that was unexpected. The luxury goods is cyclical, so we expected a downturn in sales, but certainly not to that extent in Q1.

WARREN THOMPSON:  You announced earlier this week that you had halted the sale process for those luxury goods brands, which include NWJ and Arthur Kaplan. What was the reason for that?

CARLO GONZAGA:  Don’t read too much into that, other than we started exploring the sales in the earlier part of the year, and [that was] a combination of our own trading performances – but some of it political and macroeconomic uncertainty. It’s not a great time to try and sell a business like that one. So we engaged with a number of buyers but in the end decided it best that we rather focus on the business and operations of the business, particularly given the current environment.

WARREN THOMPSON:  You mentioned that you’d anticipated the losses in the food business. Just give us a bit of a picture there. Was the quantum expected, the R73 million specifically? And just give us an idea as to what you are doing to turn that operation around.

CARLO GONZAGA:  Not such a different story to May, really. Brands that serve low-income consumers – little more can be expected – minus 8% for the year in same-store sales. That I think is part of the cyclicality that we are all starting to realise.

On the start-ups on the Domino’s front we are quite happy with where the performance is. We’ve got quite a big base of support infrastructure that we built for those two brands and now, as it was in May, we’ve got to grow stores so their profits contribute to the overheads and exceed them. So that’s really what we need to do as a business. When we’ve finished building infrastructure it’s about rolling out, continuing to roll out the stores.

WARREN THOMPSON:  Just give us the quantum there. What do you anticipate rolling out in the next six months for Domino’s and Starbucks, and what’s the plan for the next two years going forward?

CARLO GONZAGA:  Probably the best way to answer that is that we’ve got to, as we’ve said about the cautionary that we are trading under in our announcement, de-gear the business. Much of the business has an inappropriate amount of debt in it for essentially what is a start-up loss-making business. We also need to raise capital to fund the Starbucks and Dominos stores. We think we will. Essentially that whole business is reaching towards a cash break-even [situation] during the second half of next year. And that’s even anticipating no massive consumer recovery but certainly it doesn’t get particularly worse than it is now.

Read: Taste still bets its recovery on Starbucks and Domino’s Pizza

WARREN THOMPSON:  Right, okay. Just give us a bit more perspective on the Domino’s and the Starbucks stores. How long after opening do those stores start to break even on a monthly basis?

CARLO GONZAGA:  That’s quite a tough one, because you have some stores whose first three months have far bigger sales than the next few months, [when] generally both those brands get up to operating pace. I would say in about six months quite easily it would cover all the stores. …A few days’ benchmark is not the right one, certainly in Starbucks’s case.

WARREN THOMPSON:  Just to put this in perspective, you said that the business is too highly geared for the kind of status and the change there that it’s going through at the moment. You have been to the market already this year to raise cash. Are you anticipating doing that again before this financial year is out?

CARLO GONZAGA:  We are currently evaluating a couple of options that we’ve got around how we are going to do that to sell both of those challenges…as well as funding Domino’s and Starbucks stores next year. I think when we get some more clarity on that in the next four to six weeks, then we’ll let the market know.

NASTASSIA ARENDSE:  That was Carlo Gonzaga, speaking to Warren Thompson.

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