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We take a look at struggling food group, Famous Brands latest financial results. And we say struggling food group as their entry into the UK market with the acquisition of Gourmet Burger Kitchen (GBK) has blown up in their face. They have written down a massive chunk of their R2billion odd investment in GBK. So how did things go for the group up to end of February 2019?
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About Famous Brands
Famous Brands owns a large number of franchised restaurants, coffee shops and bars. And they have been fueling their growth over the last number of years by way of acquisition. They have been on a tremendous buying spree and they were hoping to replicate their local, South African success in the UK with the acquisition of GBK. However they are finding that it is a lot harder to do this than what they initiall thought. They bought GBK for almost R2billion, and recently announced a significant write off on that acquisition. But we will get to that soon. So which brands belong to the Famous Brands group?
Well they own the following brands (note we only listing a few of their brands below).
Well they own the following brands (note we only listing a few of their brands below).
- Mugg & Bean
- Wimpy
- Fishaways
- Debonairs
- Steers
- Vovo Telo
- Tashas
- Keg
- Mythos
- Turn 'n Tender
- Milky Lane
- Salsa Mexican Grill
- Giramundo
So whats contained in the results released today?
Below various extracts from the results announced today.
OPERATING ENVIRONMENT
Economic and political uncertainty defined our major markets, both locally, in the lead up to the national government elections, and in the United Kingdom, as the Brexit process continues to unfold. Across these markets, the trading environment was characterised by restrained consumer discretionary spend and negative sentiment, while keen competitor activity intensified margin pressure. In South Africa, weak economic conditions were exacerbated by country-specific risks. Technological advancements continued to cause a strategic shift in the industry, evidenced by the rapid growth of online ordering and door-to-door delivery services in our sector. Our strategic response continued to be to develop new skills sets and constantly evolve our customer-facing offering in terms of efficiency, costs and total customer experience. Aligned with the global demand from stakeholders for improved disclosure on environmental, social and governance (ESG) policies and accountability, is growing consumer activism regarding issues such as cage-free eggs, eliminating single-use plastic and greater health consciousness. We are mindful of these developments and have formulated sustainability policies and are committed to implementation timeframes in this regard.
GROUP PERFORMANCE
Our key strategic focus areas during the review period were to:
In the Leading (mainstream) brands portfolio, we made good progress in aligning our supply chain and cost drivers to provide better support for the brands, to ensure they are positioned to deliver like-for-like growth ahead of food inflation. In the Signature (niche) brands portfolio, following our sustained investment over recent years, our interventions were directed at significantly improving our own operating margins in this division.
Across the Leading and Signature brands, we continued to review and optimise our footprint in terms of trading relevance, rental viability, changes in footfall, and competitor activity. Our goal to deliver sustainable returns to our shareholders is underpinned by ensuring that GBK Restaurants Limited ("GBK") outperforms the UK casual dining market and delivers ahead of our targeted performance. On 11 December 2018 we notified shareholders that GBK UK had completed a Company Voluntary Arrangement (CVA) aimed at improving the financial viability of the business. Management is optimistic that remedial actions underway to ensure the long term sustainability of the business are gaining momentum, reflected by the stronger trading results reported for the second half of the year compared to the first half, and the positive like-for-like sales recorded in the period since year-end.
In line with our stated intent to optimise capital allocation, good progress was made in better allocating capital to the appropriate business units in our Brands, Manufacturing and Logistics operations. This exercise has been significant in determining our future strategies to ensure the best return on capital employed across this diverse business.
OPERATIONAL REVIEWS
Brands
This portfolio consists of 25 restaurant brands, represented by a network of 2 871 operations across South Africa, the rest of Africa and the Middle East (AME) and the United Kingdom. The business is segmented into Leading brands and Signature brands, strategically positioned to appeal to a wide range of consumers across the income and demographic spectrum and across meal preferences and value propositions. The Leading brands are categorised as quick service, fast casual and casual dining.
Our network comprises 2 761 franchised and 110 company-owned operations.
Leading brands portfolio
The strong organic growth reported by these brands in the first half of the year was not sustained in the latter six months, with our traditional peak holiday period results, specifically, failing to meet management's expectations. This downturn is primarily a reflection of weak consumer spend and confidence in the current uncertain economic and socio-political environment. Among our Leading brands, Debonairs Pizza grew market share in a robust category, while Wimpy gained back share, arresting the decline experienced in the previous year. Steers and Mugg & Bean retained their market share, and Fishaways did well to hold steady. Across these brands, our key focus during the period was to continue to improve the experience and service for our customers. Over 850 of our SA restaurants have now enabled online ordering via web or app. We also introduced driver-tracking technology and expanded our delivery offering to over 2 000 drivers on all major delivery platforms.
We continued to leverage CRM capabilities to communicate with loyal customers via push notifications; upgraded the care portal to facilitate quicker response; and introduced third-party technology in Steers and Wimpy to enable selected and strategic partners to utilise their loyalty points across the network. We are also rolling out e-Vouchering, which will be available in all of our restaurants by the end of 2019.
In order to capitalise on the sustained demand from customers for enhanced convenience and accessibility, we expanded our format offering to Steers containers and vending trailers; Mugg & Bean, Wimpy and Fego Karts; Mugg & Bean limited service and office park offerings; Debonairs Pizza containers; and Milky Lane pop-ups and a mobile truck.
Signature brands portfolio
On balance, our Signature brands under-performed management's expectations, and remain the subject of critical review. System-wide sales growth was derived primarily from new restaurants, while like-for-like sales declined. Additionally, the appropriate allocation of a higher proportion of central costs not previously allocated to this business unit resulted in a disappointing, but realistic, margin. In line with our strategy to apply a brutal filter to unclutter the business, we continued to aggressively rationalise this portfolio to position it for growth.
We exited the following brands: 14 on Chartwell (one restaurant); Thrupps (five outlets closed due to a strategy review by partner Total); O' Hagan's (two restaurants); The Bread Basket; and the Made pilot project trialled with Edgars. The key goal for this division is to ensure it is optimally structured to deliver returns which are proportionally aligned with our investment. A total of 32 new restaurants were opened across the portfolio and four were revamped.
OPERATING ENVIRONMENT
Economic and political uncertainty defined our major markets, both locally, in the lead up to the national government elections, and in the United Kingdom, as the Brexit process continues to unfold. Across these markets, the trading environment was characterised by restrained consumer discretionary spend and negative sentiment, while keen competitor activity intensified margin pressure. In South Africa, weak economic conditions were exacerbated by country-specific risks. Technological advancements continued to cause a strategic shift in the industry, evidenced by the rapid growth of online ordering and door-to-door delivery services in our sector. Our strategic response continued to be to develop new skills sets and constantly evolve our customer-facing offering in terms of efficiency, costs and total customer experience. Aligned with the global demand from stakeholders for improved disclosure on environmental, social and governance (ESG) policies and accountability, is growing consumer activism regarding issues such as cage-free eggs, eliminating single-use plastic and greater health consciousness. We are mindful of these developments and have formulated sustainability policies and are committed to implementation timeframes in this regard.
GROUP PERFORMANCE
Our key strategic focus areas during the review period were to:
- enhance the profitability of our franchise partners and the viability of the franchise model;
- ensure the improvement of returns for stakeholders through refining and implementing our long-term strategy in the UK; and
- optimise allocation of capital in the business.
In the Leading (mainstream) brands portfolio, we made good progress in aligning our supply chain and cost drivers to provide better support for the brands, to ensure they are positioned to deliver like-for-like growth ahead of food inflation. In the Signature (niche) brands portfolio, following our sustained investment over recent years, our interventions were directed at significantly improving our own operating margins in this division.
Across the Leading and Signature brands, we continued to review and optimise our footprint in terms of trading relevance, rental viability, changes in footfall, and competitor activity. Our goal to deliver sustainable returns to our shareholders is underpinned by ensuring that GBK Restaurants Limited ("GBK") outperforms the UK casual dining market and delivers ahead of our targeted performance. On 11 December 2018 we notified shareholders that GBK UK had completed a Company Voluntary Arrangement (CVA) aimed at improving the financial viability of the business. Management is optimistic that remedial actions underway to ensure the long term sustainability of the business are gaining momentum, reflected by the stronger trading results reported for the second half of the year compared to the first half, and the positive like-for-like sales recorded in the period since year-end.
In line with our stated intent to optimise capital allocation, good progress was made in better allocating capital to the appropriate business units in our Brands, Manufacturing and Logistics operations. This exercise has been significant in determining our future strategies to ensure the best return on capital employed across this diverse business.
OPERATIONAL REVIEWS
Brands
This portfolio consists of 25 restaurant brands, represented by a network of 2 871 operations across South Africa, the rest of Africa and the Middle East (AME) and the United Kingdom. The business is segmented into Leading brands and Signature brands, strategically positioned to appeal to a wide range of consumers across the income and demographic spectrum and across meal preferences and value propositions. The Leading brands are categorised as quick service, fast casual and casual dining.
Our network comprises 2 761 franchised and 110 company-owned operations.
Leading brands portfolio
The strong organic growth reported by these brands in the first half of the year was not sustained in the latter six months, with our traditional peak holiday period results, specifically, failing to meet management's expectations. This downturn is primarily a reflection of weak consumer spend and confidence in the current uncertain economic and socio-political environment. Among our Leading brands, Debonairs Pizza grew market share in a robust category, while Wimpy gained back share, arresting the decline experienced in the previous year. Steers and Mugg & Bean retained their market share, and Fishaways did well to hold steady. Across these brands, our key focus during the period was to continue to improve the experience and service for our customers. Over 850 of our SA restaurants have now enabled online ordering via web or app. We also introduced driver-tracking technology and expanded our delivery offering to over 2 000 drivers on all major delivery platforms.
We continued to leverage CRM capabilities to communicate with loyal customers via push notifications; upgraded the care portal to facilitate quicker response; and introduced third-party technology in Steers and Wimpy to enable selected and strategic partners to utilise their loyalty points across the network. We are also rolling out e-Vouchering, which will be available in all of our restaurants by the end of 2019.
In order to capitalise on the sustained demand from customers for enhanced convenience and accessibility, we expanded our format offering to Steers containers and vending trailers; Mugg & Bean, Wimpy and Fego Karts; Mugg & Bean limited service and office park offerings; Debonairs Pizza containers; and Milky Lane pop-ups and a mobile truck.
Signature brands portfolio
On balance, our Signature brands under-performed management's expectations, and remain the subject of critical review. System-wide sales growth was derived primarily from new restaurants, while like-for-like sales declined. Additionally, the appropriate allocation of a higher proportion of central costs not previously allocated to this business unit resulted in a disappointing, but realistic, margin. In line with our strategy to apply a brutal filter to unclutter the business, we continued to aggressively rationalise this portfolio to position it for growth.
We exited the following brands: 14 on Chartwell (one restaurant); Thrupps (five outlets closed due to a strategy review by partner Total); O' Hagan's (two restaurants); The Bread Basket; and the Made pilot project trialled with Edgars. The key goal for this division is to ensure it is optimally structured to deliver returns which are proportionally aligned with our investment. A total of 32 new restaurants were opened across the portfolio and four were revamped.
Touching on GBK in more detail
Famous Brands provided more details regarding their epic flop investment in Gourmet Burger Kitchen (GBK). Below the update from the group on their investment in GBK.
In the review period, being the 52 weeks ended 24 February 2019, the business recorded an operating loss before non-operational items of GBP4.6 million (2018: GBP3.6 million). The operating margin declined to (5.7%) (2018: (4.1%)). GBK (UK) system-wide sales (Sterling) for the period declined by 7.0%, while like-for-like sales decreased by 4.2% (2018: (6.8%)). Despite the constrained consumer spend environment, GBK started to perform better as remedial measures implemented during the year gained momentum. GBK (UK) like-for-like sales in the first six months were -9.7%, improving to positive like-for like-sales of 1.4% in the second six months. In the 12 weeks subsequent to year-end, the brand recorded like-for-like sales growth of 8.1%, trading ahead of the market.
These results are largely based on our intensified focus on re-establishing the gold standard across the product and customer experience; streamlining the operation to deliver improved efficiencies, enabling management to prioritise its relationships with staff and customers; targeted investment in refurbishments and a high street storefront facelift programme; and growing online sales through a multi-vendor delivery platform. Under new leadership, the restructured operations team implemented a range of key interventions which benefited the business.
A focused menu design, rationalisation, product innovation and renovation has resulted in a more relevant offering and a reduction in stockholding. A new corporate identity was also rolled out across all branded customer touch points. In line with the brand's premium positioning, we implemented order and pay-at-table functionality in all of the restaurants, complementing the at-counter system; this innovation has delivered encouraging uptake rates, improved the customer experience and increased per-head spend and table turns. In addition to these operational improvements, the CVA programme completed during the period is expected to have a positive impact on the long term sustainability of the business. GBK's network was reduced from 106 restaurants to 80, with the closure of twenty four stores in the UK during the period, including closures which took place prior to the CVA.
In the review period, being the 52 weeks ended 24 February 2019, the business recorded an operating loss before non-operational items of GBP4.6 million (2018: GBP3.6 million). The operating margin declined to (5.7%) (2018: (4.1%)). GBK (UK) system-wide sales (Sterling) for the period declined by 7.0%, while like-for-like sales decreased by 4.2% (2018: (6.8%)). Despite the constrained consumer spend environment, GBK started to perform better as remedial measures implemented during the year gained momentum. GBK (UK) like-for-like sales in the first six months were -9.7%, improving to positive like-for like-sales of 1.4% in the second six months. In the 12 weeks subsequent to year-end, the brand recorded like-for-like sales growth of 8.1%, trading ahead of the market.
These results are largely based on our intensified focus on re-establishing the gold standard across the product and customer experience; streamlining the operation to deliver improved efficiencies, enabling management to prioritise its relationships with staff and customers; targeted investment in refurbishments and a high street storefront facelift programme; and growing online sales through a multi-vendor delivery platform. Under new leadership, the restructured operations team implemented a range of key interventions which benefited the business.
A focused menu design, rationalisation, product innovation and renovation has resulted in a more relevant offering and a reduction in stockholding. A new corporate identity was also rolled out across all branded customer touch points. In line with the brand's premium positioning, we implemented order and pay-at-table functionality in all of the restaurants, complementing the at-counter system; this innovation has delivered encouraging uptake rates, improved the customer experience and increased per-head spend and table turns. In addition to these operational improvements, the CVA programme completed during the period is expected to have a positive impact on the long term sustainability of the business. GBK's network was reduced from 106 restaurants to 80, with the closure of twenty four stores in the UK during the period, including closures which took place prior to the CVA.
Outlook for the group?
LOOKING FORWARD
It is unlikely that local or global trading conditions will improve materially in the short term, but the efforts made this year to restructure our business to withstand adverse conditions should hold us in good stead. Our strategic agenda is clear: to focus on long-term growth levers and ensure that our investments are optimally aligned with the returns. If appropriate opportunities arise, we will pursue brand acquisitions in SA and across selected African markets, and upstream manufacturing acquisitions in SA. Driving the profitability of our business will be our overriding goal. The sustainability of our franchise model is key to this and our focus will be on improving cost leadership and enhancing our own margins, particularly in our Signature brands, Logistics and Manufacturing businesses.
We will also continue to leverage improvements made in the GBK business to enable the operation to deliver the returns we expect over the medium term. Brands The goal is to open 187 restaurants in the new financial year and 308 revamps are planned. This programme will however be determined by an improvement in trading conditions. SA The work undertaken this year has positioned our Leading brands to compete more effectively and enhance their leadership status in the categories we compete in. We will continue to align our supply chain and cost drivers to provide better support to enable them to deliver sustainable growth.
Our key focus areas in the year ahead will be on improving the total customer experience through optimising opportunities in the home delivery and consumer-facing technology arenas. Our Signature brands portfolio has been better structured for growth. Significant work, however, remains to be done to realise this business unit's full potential. We have clear strategies and competent management teams and joint venture partners in place to deliver on our growth agenda. We will continue to optimise the portfolio through rationalising under-performing brands and restaurants, driving our own margin growth and growing the footprint of brands which are scalable. In terms of our brand pipeline, we will continue to develop and incubate innovative ready to launch concepts which have the potential to be substantial brands.
It is unlikely that local or global trading conditions will improve materially in the short term, but the efforts made this year to restructure our business to withstand adverse conditions should hold us in good stead. Our strategic agenda is clear: to focus on long-term growth levers and ensure that our investments are optimally aligned with the returns. If appropriate opportunities arise, we will pursue brand acquisitions in SA and across selected African markets, and upstream manufacturing acquisitions in SA. Driving the profitability of our business will be our overriding goal. The sustainability of our franchise model is key to this and our focus will be on improving cost leadership and enhancing our own margins, particularly in our Signature brands, Logistics and Manufacturing businesses.
We will also continue to leverage improvements made in the GBK business to enable the operation to deliver the returns we expect over the medium term. Brands The goal is to open 187 restaurants in the new financial year and 308 revamps are planned. This programme will however be determined by an improvement in trading conditions. SA The work undertaken this year has positioned our Leading brands to compete more effectively and enhance their leadership status in the categories we compete in. We will continue to align our supply chain and cost drivers to provide better support to enable them to deliver sustainable growth.
Our key focus areas in the year ahead will be on improving the total customer experience through optimising opportunities in the home delivery and consumer-facing technology arenas. Our Signature brands portfolio has been better structured for growth. Significant work, however, remains to be done to realise this business unit's full potential. We have clear strategies and competent management teams and joint venture partners in place to deliver on our growth agenda. We will continue to optimise the portfolio through rationalising under-performing brands and restaurants, driving our own margin growth and growing the footprint of brands which are scalable. In terms of our brand pipeline, we will continue to develop and incubate innovative ready to launch concepts which have the potential to be substantial brands.
So lets talk numbers
So enough of the management commentary and updates already. Lets get to the numbers.
- Revenue: R7.2 billion (up a very weak 2%)
- Operating profit: R850 million (down 5%)
- Operating profit margin: 11.8%
- Headline earnings per share: R3.19 (down 19%)
- Cash generated from operations: R1.056 billion
- Cash generated per share: R10.56
- Cash on balance sheet: R454 million
- Cash on balance sheet per share: R4.54 (or 5.6% of share price)
- Net asset value per share: R15.36 (so the group is trading at 5.27 times its book value)
- Final dividend: R1 a share
- Dividend yield: 1.2%
- PE ratio: 25.62 (which is well above the overall market average PE ratio)
So how has FBR's share price been doing?
The graphic below shows how FBR's share price has been performing in recent years, and as readers can see FBR current share price is a long way off from the highs reached just a few years ago, showing just how tough the going has been for the group. The screenshot was taken from Sharenet
The summary below shows the share price performance of Famous Brands (FBR) over various time periods:
- 1 week: -3.03%
- 1 month: -2.93%
- Year to date: -16.21%
- 1 year: -24.17%
- 3 years: -30.00%
So should you buy FBR shares?
At this point in time, we would not recommend buying into the fast food/ casual dining market. South African consumers are struggling, the Food and Beverages sector has been spinning its wheels in South Africa for a while now, and FBR with their issues in the UK will be focused on trying to get that fixed, which according to us will leave management with less time to focus on South Africa and expanding their business and footprint here, in a market that is already struggling. They not the biggest dividend payer, they trading on a very high PE ratio, but on the positive side they have extremely strong cash generation. But overall we recommend staying away from FBR at this point in time.
But if you really want a benchmark or target price for Famous Brands (FBR), taking all their financials, their brands, their markets and their current issues and obstables into account, our valuation model places a value of R67.85 per share on FBR. We therefore feel that they are overvalued and would not recommend investing in them or any other company active in the sector right now
But if you really want a benchmark or target price for Famous Brands (FBR), taking all their financials, their brands, their markets and their current issues and obstables into account, our valuation model places a value of R67.85 per share on FBR. We therefore feel that they are overvalued and would not recommend investing in them or any other company active in the sector right now