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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 announced before the results already that they are writing off a significant chunk of money on GBK. But lets unpack the results.
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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.
SOUTH AFRICA AND THE REST OF AFRICA AND MIDDLE EAST (AME) REGION
While the influx of new international operators has slowed, the competitive landscape remained intense, with industry participants under pressure to innovate on menu offerings and price ladders to retain market share and generate viable margins in the current price-sensitive environment. Country-specific risks in SA also continued to shape the operating context, with consumers facing sustained financial hardship and socio-political uncertainty. Businesses across the economy were adversely affected by service delivery protests, industrial action and civil unrest, while the provision of basic services deteriorated further, exacerbated by local administration inefficiencies and disruptions caused by water shortages and cable theft. Despite this context, segments of the South African consumer base showed early indications of optimism and improved confidence in the wake of recent positive developments in government leadership.
- UNITED KINGDOM (UK)
The trading environment was characterised by intensified competition, declining footfall in malls, and rising input costs of labour and property rates. The slow pace of progress on Brexit negotiations also continued to subdue consumer sentiment.
- GENERAL
Across all our markets, delivery and online ordering remained key drivers of growth in the industry. Notably, Fast Casual and Quick Service offerings continued to outperform Casual Dining establishments, largely due to their perceived appeal as convenient and less expensive, in a constrained disposable income environment. In SA and the AME, the Quick Service segment of the industry continued to benefit from upward social mobility of the population, the relatively young demographic profile of consumers and growing urbanisation.
More detailed overviews of progress made during the last reporting period is reported on below by Famous Brands.
" SOUTH AFRICA
Brands
- We prioritised our Leading mainstream brands, upweighting resource support.
- Expanded the home delivery offering across all our brands.
- Grew capability in the digital and social media arenas; and - Entrenched our presence in key AME markets.
- We are currently rolling out ground-breaking campaigns to entrench market leadership of our Leading brands.
- Our plans to expand tashas footprint in the UAE are on track. - The pipeline of new and relevant branded offers is well advanced.
Logistics
- We commenced implementation of a 10-year programme, Project Decade, aimed at steadily building capacity and catering for planned longer term growth. Manufacturing - We launched our plant-wide efficiencies programme, Manufacturing Way, with rewarding initial results.
- We have established new partnerships in our general foodservice supply and fruit juice businesses, namely FoodConnect and TruBev (formerly TruFruit), and expect them to deliver good results.
- The Lamberts Bay Foods business, acquired in 2016, has delivered satisfying results. AME
- We continued to grow the footprint and contribution of our Leading brands in the region.
- We commenced trialling an improved delivery offering, with pleasing initial results.
- Solid progress was made in strengthening our marketing capability and aligning social media platforms with the SA operation.
- We continued to leverage remedial improvements in the Mr Bigg's business in Nigeria.
UK
Notwithstanding the effect of the difficult macroeconomic climate on the GBK business, management identified the following areas at the end of the prior financial year as requiring urgent attention: operational benchmarks which no longer met gold standards; the need for improved customer engagement across the offering; sub-optimal management capacity; and lack of traction in key growth areas, including the delivery component. In this regard, a range of key strategic imperatives and corrective measures were outlined, and good progress has been achieved regarding the following:
- The core leadership team has been strengthened and management oversight improved.
- We have re-established and leveraged GBK's brand assets.
- A targeted refurbishment and high-street brand facelift programme has commenced. - We have simplified menu design and entry and exit pricing. - The supply chain has been simplified and streamlined.
- The targeted closure programme for distressed sites has progressed, with the closure of six stores."
SOUTH AFRICA AND THE REST OF AFRICA AND MIDDLE EAST (AME) REGION
While the influx of new international operators has slowed, the competitive landscape remained intense, with industry participants under pressure to innovate on menu offerings and price ladders to retain market share and generate viable margins in the current price-sensitive environment. Country-specific risks in SA also continued to shape the operating context, with consumers facing sustained financial hardship and socio-political uncertainty. Businesses across the economy were adversely affected by service delivery protests, industrial action and civil unrest, while the provision of basic services deteriorated further, exacerbated by local administration inefficiencies and disruptions caused by water shortages and cable theft. Despite this context, segments of the South African consumer base showed early indications of optimism and improved confidence in the wake of recent positive developments in government leadership.
- UNITED KINGDOM (UK)
The trading environment was characterised by intensified competition, declining footfall in malls, and rising input costs of labour and property rates. The slow pace of progress on Brexit negotiations also continued to subdue consumer sentiment.
- GENERAL
Across all our markets, delivery and online ordering remained key drivers of growth in the industry. Notably, Fast Casual and Quick Service offerings continued to outperform Casual Dining establishments, largely due to their perceived appeal as convenient and less expensive, in a constrained disposable income environment. In SA and the AME, the Quick Service segment of the industry continued to benefit from upward social mobility of the population, the relatively young demographic profile of consumers and growing urbanisation.
More detailed overviews of progress made during the last reporting period is reported on below by Famous Brands.
" SOUTH AFRICA
Brands
- We prioritised our Leading mainstream brands, upweighting resource support.
- Expanded the home delivery offering across all our brands.
- Grew capability in the digital and social media arenas; and - Entrenched our presence in key AME markets.
- We are currently rolling out ground-breaking campaigns to entrench market leadership of our Leading brands.
- Our plans to expand tashas footprint in the UAE are on track. - The pipeline of new and relevant branded offers is well advanced.
Logistics
- We commenced implementation of a 10-year programme, Project Decade, aimed at steadily building capacity and catering for planned longer term growth. Manufacturing - We launched our plant-wide efficiencies programme, Manufacturing Way, with rewarding initial results.
- We have established new partnerships in our general foodservice supply and fruit juice businesses, namely FoodConnect and TruBev (formerly TruFruit), and expect them to deliver good results.
- The Lamberts Bay Foods business, acquired in 2016, has delivered satisfying results. AME
- We continued to grow the footprint and contribution of our Leading brands in the region.
- We commenced trialling an improved delivery offering, with pleasing initial results.
- Solid progress was made in strengthening our marketing capability and aligning social media platforms with the SA operation.
- We continued to leverage remedial improvements in the Mr Bigg's business in Nigeria.
UK
Notwithstanding the effect of the difficult macroeconomic climate on the GBK business, management identified the following areas at the end of the prior financial year as requiring urgent attention: operational benchmarks which no longer met gold standards; the need for improved customer engagement across the offering; sub-optimal management capacity; and lack of traction in key growth areas, including the delivery component. In this regard, a range of key strategic imperatives and corrective measures were outlined, and good progress has been achieved regarding the following:
- The core leadership team has been strengthened and management oversight improved.
- We have re-established and leveraged GBK's brand assets.
- A targeted refurbishment and high-street brand facelift programme has commenced. - We have simplified menu design and entry and exit pricing. - The supply chain has been simplified and streamlined.
- The targeted closure programme for distressed sites has progressed, with the closure of six stores."
Touching on GBK in more detail
More details regarding the troubled Gourmet Burger Kitchen and Famous Brands plans with it was announced in the results too. Basically they announced that the business has been placed under "business rescue". The comments from FBR below:
"GBK: strategic decision
Shareholders are referred to the cautionary announcements issued on SENS on 17 August, 28 September and 24 October 2018. In light of GBK's continued underperformance in the current macroeconomic environment in the UK and deteriorating financial position, the Board of GBK has initiated a CVA process with the assistance of Grant Thornton. This decision follows extensive investigation into the options available to improve GBK'S financial stability. CVA Process The CVA is a process which is unique to the UK and employed increasingly in the food services and other industries given the rising percentage of distressed businesses in the current adverse trading conditions. The CVA is designed to promote the long-term financial viability and sustainability of an operation. In this regard, the goal will be to reach binding agreements or compromise with GBK's unsecured creditors, with a view to restructuring the business's leased property portfolio in line with current market valuations. This could potentially enable GBK to exit underperforming sites and achieve rental reductions on others, thereby improving the health and profitability of the portfolio and general financial performance of the business."
"GBK: strategic decision
Shareholders are referred to the cautionary announcements issued on SENS on 17 August, 28 September and 24 October 2018. In light of GBK's continued underperformance in the current macroeconomic environment in the UK and deteriorating financial position, the Board of GBK has initiated a CVA process with the assistance of Grant Thornton. This decision follows extensive investigation into the options available to improve GBK'S financial stability. CVA Process The CVA is a process which is unique to the UK and employed increasingly in the food services and other industries given the rising percentage of distressed businesses in the current adverse trading conditions. The CVA is designed to promote the long-term financial viability and sustainability of an operation. In this regard, the goal will be to reach binding agreements or compromise with GBK's unsecured creditors, with a view to restructuring the business's leased property portfolio in line with current market valuations. This could potentially enable GBK to exit underperforming sites and achieve rental reductions on others, thereby improving the health and profitability of the portfolio and general financial performance of the business."
So lets talk numbers
Revenue up a mere 5.4% to R3.58 billion
Operating profit margin down to 11.8% from 11.9%
Headline earnings per share: R1.88 (up 10.6%) placing hem on a PE of close to 27, which is VERy steep.
Cash generated from operations: R540 million (or R5.45 per share)
No interim dividend declared. So not really a counter to invest in for dividends.
Operating profit margin down to 11.8% from 11.9%
Headline earnings per share: R1.88 (up 10.6%) placing hem on a PE of close to 27, which is VERy steep.
Cash generated from operations: R540 million (or R5.45 per share)
No interim dividend declared. So not really a counter to invest in for dividends.
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.
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.