Famous Brands posted respectable results for the six months to August 31, with headline earnings per share up 10.6% and revenue up 5.4%. That is, until the disaster in the UK is accounted for.
Earlier this month, the group cautioned that it had incurred R874 million in impairments in the six-month period, adding pressure on the stock as investors remain wary of the group’s UK operation.
Once impairments are accounted for a different picture emerges and the group reported a 572c loss per share.
In a statement, the group said delivery and online ordering remained key drivers of growth in the industry, with ‘fast casual’ and ‘quick service’ offerings continuing to outperform ‘casual dining’ establishments given their perceived appeal as convenient and less expensive in an environment of constrained disposable income.
Establishments in South Africa and the Middle East continued to benefit from the upward social mobility of the population, the relatively young demographic profile of consumers and growing urbanisation.
The United Kingdom market remains marred by uncertainty from the Brexit process, which is set to weigh on both consumer spending and the performance of Gourmet Burger Kitchen (GBK). “Our primary challenge in the UK will be to re-establish GBK’s gold standard across the entire value chain and customer journey and ensure the business is optimally structured to manage ongoing trading challenges,” Famous Brands admitted in a statement.
Macroeconomic headwinds also pose a threat to consumer spending, with the franchisor citing a lack of traction in key growth areas such as mall traffic and distribution. GBK registered a 2.9% dip in revenue for the six months ended August 31, with Wimpy UK surprisingly registering an 18.2% gain in revenue to R57.4 million.
“The fundamental issue is [that] Wimpy’s target market is slightly different – and when you think about the UK, the more premium top end of the sector, quite simply, they’re just spending less often,” says Darren Hele, CEO of Famous Brands. “Middle to mainstream income, however, has the same frequency, and Wimpy has a much smaller presence in terms of the upper-income market.”
Meanwhile, UK business segmental results further revealed GBK’s distress in the period under review with the chain’s operating loss widening 209% to R45.3 million.
In light of the headwinds in the UK market, Famous Brands has outlined a range of strategic imperatives and corrective measures – including a targeted refurbishment, simplifying the menu design and a targeted closure programme for distressed sites. “Our revamp programme cuts across our business and come to the end of February 2019, we would have done around 250 revamps, of which a small portion will be [in] the UK. We need to keep modernising in line with the trends,” says Hele.
Responding to what has driven the decision to close the six stores, Hele notes the role of the stores’ Ebitda (earnings before interest, taxes, depreciation, and amortisation) contribution as a ratio to overall costs playing a vital function. “The six stores were closed specifically based on Ebitda. If it is not contributing to Ebitda or the rent cost is higher than the Ebitda contribution, then that would be the metric to close the store. There are around 17 sites that fit that criterion.”
Adverse trading conditions
Despite suffering from “continued adverse trading conditions and sustained underperformance”, Famous Brands says the GBK business continued to be assessed as a cash-generating unit for the period under review.
In a statement, it says: “The recoverable amount of the cash-generating unit was determined on the basis of fair value less cost to sell, which amounted to R1.45 billion with future profits forecast over a period of 10 years applying like-for-like sales growth starting at 0% increasing to 3% over the 10-year period.”
No dividend was declared for the period following a capital structure review to ensure appropriate levels of debt and prudent capital allocation practices, with the group stating: “The board resolved that subject to operational requirements and potential acquisitions, future dividends will be triggered when the short- to medium-term gross debt: Ebitda ratio reaches two times.”
“It all comes down to expectations,” says Michael Treherne, a portfolio manager at Vestact. “As it stands, the market was not expecting a dividend from Famous Brands. They haven’t paid one since 2016. There is no doubt that more people would buy the stock if there was a dividend though. I’m confident that in years to come, we will know Famous Brands as a healthy dividend payer again.”