Loss-making fast food specialist Taste Holdings is still pinning its hopes on the rollout of cash-guzzling global brands Starbucks and Domino’s Pizza for its long-overdue recovery.
Taste’s results for the six months to August 2017 were probably hard to swallow for long-suffering shareholders as it reported an after-tax loss that nearly doubled to R66 million (previously a loss of R34 million).
The blow gets worse. It reported a headline loss per share of 15.9 cents and operational cash flows were negative to the tune of R31 million.
The problematic division for Taste is the food business, which bloated its losses to R61.5 million from R53.2 million.
“Taste has been loss-making for a while. In previous periods they showed that on a core earnings basis they were slightly loss-making. But now they are properly loss-making,” said Jean Pierre Verster, portfolio manager at Fairtree Capital.
Even Taste’s luxury jewellery division, which has historically been a cash generator, joins the food business in delivering losses.
The jewellery division, comprising Arthur Kaplan, World’s Finest Watches, and NWJ, pulled in operating losses of R769 000 compared with profits of R21.7 million in the previous year.
Taste CEO Carlo Gonzaga blamed the “brutal and sustained” decline in consumer sentiment and spending for the poor results.
But market watchers have warned that Taste’s appetite for global brands is coming back to bite as it overcommitted capital in Starbucks and Domino’s while neglecting its lower-end domestic eateries including Maxi’s, The Fish & Chip Co and Zebro’s.
Starbucks and Domino’s are capital intensive to run as they are corporate owned (by Taste) while the domestic brands are owned by franchisees. Taste earns royalties from franchisees.
It costs R6 million to open a Starbucks outlet and biggest costs include market research, IT systems, establishing a supply chain network, employee costs and store infrastructure – compared with R1.8 million for Domino’s.
Gonzaga believes in the strategy of backing global brands, which are expected to be the growth vector for Taste. Gonzaga said 12 Starbucks and Domino’s outlets would be rolled out in 2018.
Fairtree Capital’s Verster said what might work in Taste’s favour is that upper-end consumers (mostly Starbucks and Domino’s patrons) are in a better financial position than those in the lower-end (mostly Maxi’s, The Fish & Chip Co and Zebro’s patrons).
Taste might breakeven in the next 18 months but this hinges on the state of consumers and if “things don’t go pear-shaped with them.”
Arguably a bigger concern is Taste’s weak balance sheet, which boasts debt of more than R250 million and cash on hand of R86.1 million.
“Our challenge now is to restructure our balance sheet to allow us to open stores next and get to a point where we don’t burn cash anymore,” said Gonzaga. Being vague, he said Taste has several proposals that would deleverage the business appropriately.
Another rights offer might be on the cards after it failed to sell its luxury jewellery business, in which the proceeds would fund the Starbucks and Domino’s expansion. This was Taste’s last resort to free up cash.
“The timing of the sale was terrible as the last six months for the jewellery business was tough. The offers or expression of interest would have been far below their own assessment of their value,” said Verster.
In June, the company raised about R97 million in fresh capital through a rights offer. This means that the small-cap (R427.1 million) would have raised more than R600 million through share-for-cash placements and rights offers in three years. Verster questioned whether Taste’s future rights issues would be supported by its anchor shareholder Conduit Capital as the financial services counter is facing its own woes. “Taste has probably lost credibly in the eyes of shareholders.”