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Morning Briefing for pub, restaurant and food wervice operators

Wed 7th Mar 2018 - Restaurant Group like-for-likes still falling 4%
Restaurant Group like-for-like sales still falling 4%: The Restaurant Group has revealed like-for-like sales fell by about 4% in the first eight weeks of its current financial year. In its presentation to analysts, the company also said Frankie & Benny’s covers were down 0.4% – despite a 7% food price reduction in mid-2017, plus a big increase in promotion activity. The presentation also showed the leisure business saw a sharp recovery in like-for-like covers but no improvement in like-for-like sales during the second half of the year. The company is now looking at extending discounting activity to Tastecard and Wowcher. The Restaurant Group disposed of 21 of its 41 closed sites in 2017 but admitted with more restaurant brands entering Company Voluntary Arrangements or administration, it was becoming harder to exit shuttered sites. The company said customers were recognising improvements at Frankie & Benny’s in terms of value for money (up from a score of 7.1 to 7.9), its kids menu and revisit intention scores. Meanwhile, the company said it was re-establishing the competitiveness of its other leisure brands. A new menu was rolled out at Chiquito in January this year while its Coast to Coast brand had seen “continued improved trading momentum via discounting”. Its new brand Firejacks was trading well with at least three Coast to Coast sites set to be converted to the brand in the coming months. Following the results, Peel Hunt leisure analyst Douglas Jack issued a ‘Reduce’ note on the shares with a target price of 220p. He said: “After drink price inflation, we estimate Frankie & Benny’s like-for-like sales are -7%. The fact Frankie & Benny’s like-for-like volumes are still negative and leisure’s incremental volume changes equally match incremental discounting suggests (a) like-for-like sales are still sharply negative; and (b) the incremental volume is discount-driven. As previous management has said, this incremental custom will leave when the discounts end. Management has indicated 2018E cash flow will be weakened by lower working capital inflow (circa £2m versus £12.5m in 2017) and refurbishment/maintenance capex returning to £20m to £24m (from £10.2m), and development capex rising to £20m to £24m (from £18.4m), targeting more pub sites. It continues to expect costs to increase by £16m to £19m, of which half should be offset by cost mitigation through the use of purchasing scale, labour scheduling and overhead savings. At 0% like-for-like sales, this would imply an £8m drop in profit before tax prior to expansion and closure benefits. After these benefits, we are forecasting a profit before tax drop of £3m to £4m. Management is doing well, in our view, improving technology, marketing and trialling new designs. It is also right to cease leisure expansion (in retail/leisure parks), but unfortunately this is where almost 75% of its outlets are located; it is where footfall, particularly for food, is in secular decline. The held dividend has been well received, but like-for-like sales will have to be strongly positive in the second half to avoid further downgrades, prior to which dividend cover is 1.2 times, with no signs of improvement in the trading backdrop.”

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