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Famous Brands bets the farm on UK burger restaurant recovery

But market watchers say the acquisitive fast food group is not yet out of the woods.
As expected, fast food group Famous Brands takes pain from its UK-based business Gourmet Burger Kitchen. Picture: Supplied

Having recently told shareholders that its UK-based eatery Gourmet Burger Kitchen (GBK) would take a massive bite out of its profit, in the next breath Famous Brands said its fortunes might improve next year.

Shareholders have watched the share price of Famous Brands decline by more than 35% so far this year as GBK suffered indigestion woes in the UK. The R2.1 billion acquisition of premium the burger restaurant chain GBK in 2016 – the biggest deal in its history under former CEO Kevin Hedderwick – was meant to be a diversification game changer for the owner of Wimpy, Mugg & Bean, Steers and higher-end tashas and Mythos.

But its appetite for the highly-competitive UK market isn’t living up to expectations, judging from its results for the six months to August 2017.

Its profit after tax declined by 53% to R192 million during the period under review from R410.5 million in the previous comparable period. The company’s headline earnings per share fell by 59% to 170 cents from 411 cents. And for a second year, Famous Brands shareholders will not be awarded an interim dividend in order to conserve cash in the business.

Listen: Famous Brands’ ‘tumultuous six months’ sees earnings down 59%

Besides its brands that are battling with a depressed economy in SA, GBK appears to be a noose around its neck.

GBK recorded a loss before interest and tax of £872 000 (or R16 million at the time of writing) on the back of like-for-like sales that were 3.2% lower (in pound sterling terms). This is a huge blow for Famous Brands investors, who expected the company to replicate its successful South Africa business model –which has remained remarkably resilient even though consumers cut their eat-out spend – in the UK.

GBK, which operates 103 outlets across the UK, is taking strain as consumer confidence has been hit by uncertainty over Brexit and intensified competition among fast food chains.

As a result of this and the high cost of opening new GBK outlets, Famous Brands ditched its initial plans to open ten to 15 new restaurants per year when it acquired GBK.

Darren Hele, Famous Brands CEO, said a number of initiatives are being tested for GBK to return to profitability. These include an intensified focus on the management of new restaurants opened, improved operational efficiencies and enhanced cost controls, he said.

Hele expects GBK to return to profitability in the second half of 2018. “We think there shouldn’t be too much strain next year. We hope that the second six months will show an improvement.

“We are not dealing with a recession in the UK but a structural change scenario in the economy because of Brexit.”

The acquisition of GBK introduced debt to Famous Brands’ balance sheet, which has risen to R2.9 billion and group gearing to 21%. Hele said plans are afoot to reduce group debt from existing cash resources. “We are not under any stress from a debt perspective. But having debt doesn’t give us the freedom to do some of the things we did in the past.”

More pain

The GBK acquisition also saw Famous Brands move away from its historical franchise model as the burger chain outlets are company-owned. This adds costs to Famous Brands; the approximately £1 million to open a GBK store is now borne by the company, said Jean Pierre Verster, portfolio manager at Fairtree Capital.

“It’s much more capital intensive and therefore the return metric on a return on invested capital (ROIC) perspective is not as attractive as the historical franchisees business model of Famous Brands. Investors are still quite cautious given GBK’s results and the change of business model,” said Verster.

Damon Buss, equity analyst at Electus Fund Managers, supported Verster’s concerns, saying before the GBK acquisition, Famous Brands’ ROIC was mid-30%, which he expects to drop below 10% in 2018.

Verster said GBK will continue to face competition from its UK specialty burger peers Smashburger and Byron Hamburgers, which are also fighting for market share at a time when consumers are eating at home rather than eating out. 

GBK aside, Famous Brands is also feeling the heat from its Wimpy operations in the UK, which reported a decline in operating profit by 17% to R8 million and recently shut its last remaining Steers outlet in the region.

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sa companies (similar to their aus cousins) do not travel well when their businesses go off-shore. that unfortunately is fact. much rather be buying more amazon, google and ali baba (which I am)!

GBK had much of the premium UK burger chain market to itself when it launched but there are scores of hipster-type competitors in the UK now.

GBK is not a bad chain but there is nothing special about it and it’s exactly the same it was years ago. Sounds like the founders offloaded the business at it’s peak.

Cant wait for Hele to eat his words next year when the results are just as bad and GBK crashes and burns.

End of comments.

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