Restaurant Group rebounds as concessions serve up strong first quarter

First quarter sales from The Restaurant Group have improved significantly from the end of last year, but are still in decline and are not expected to benefit from less helpful conditions as the year goes on.

For the 20 weeks from the end of January, like-for-like sales fell 1.8%, with total sales decreasing 1.5%. This compares to the 3.9% LFL drop last year and 5.9% collapse in the fourth quarter.

Speaking ahead of the FTSE 250 company's annual shareholder meeting chairman Debbie Hewitt said the period had seen strong performances from concessions in airports due to strong growth in passenger numbers, and from the gastro-pubs business amid the better recent weather.

"We continue to be focused on the turnaround of the Leisure businesses which benefited from cinema admissions having a good start to the year. Over the remainder of the year, growth in passenger numbers and cinema admissions is anticipated to moderate."

The leisure business includes chains including Frankie & Benny's, Garfunkel's and Joe's Kitchen and many are based in shopping and leisure parks including cinemas.

"The implementation of our strategy is progressing well as we make the required investments in price, marketing and our offer," Hewitt said, referring to transformation plans put in place by ex Paddy Power boss Andy McCue who was appointed chief executive last summer and has since carried out a review of the business.

On the outlook, Hewitt reiterated that 2017 is a transitional year but that cash flow and the balance sheet remain strong and that management continue to expect PBT for the full year will be in-line with current market expectations.

"We continue to address the competitiveness of our Leisure businesses and are focused on achieving a sustainable volume-led turnaround. Where opportunities to accelerate our progress present themselves, we will invest appropriately."

In March the company maintained the full year dividend and warned "it will take time" to turn around the business, before in April finance director Barry Nightingale left the company with immediate effect having only joined the firm last June.

Shares surge, helped by JP Morgan

RTN shares surged on Friday, rising as much as 11% in early trade, before settling around settling at just over 346p, a 9% rise for the day, but still some way from the 380p March and the 700p-plus from 2015.

They may well have been helped by an upgrade from JPMorgan Cazenove, which said the company had a better start to 2017 than many in the market may have expected.

"Sales so far this year have been supported by tailwinds that we do not assume will continue, while the full effect of TRG’s investment in pricing will only be felt in the second half."

Analysts left their estimates unchanged, but with the 2018 EV/EBITDA ratio back down below 7x, they saw enough upside potential to the price to upgrade to 'overweight' with an increased target of 380p.

Earlier in the week, UBS downgraded the stock to 'sell' from 'neutral' after analysing the new Frankie & Benny's proposition following the recent menu launch, along with 20 key competitors, and found that although prices have fallen, there is a value gap versus the branded pub chains which are around 22% cheaper. While UBS reckons the strategy is moving in the right direction, it sees greater risk that with the F&B value positioning still ahead of core competitors price cuts will not drive the required footfall increase to offset the like-for-like pressure from falling prices.

The shares were testing May's highs and major moving averages, said Mike van Dulken at Accendo Markets, meaning they have recovered nearly almost all of the ground lost since a mid-month sell-off began, kicked off by fresh uncertainty about US President Trump and global growth, and culminating this week with concerns about an overdue menu refresh.

"Confidence at this early stage, despite growth for the Concessions and Leisure likely proving more moderate in the second half of the year, and more investment (price, marketing, new menus) required, suggests potential for an upside surprise come year end. Investors are clearly looking through a fall in Q1 sales and recent concerns, putting faith in the new CEO.

Providing some technical analysis of the shares, van Dulken said bulls would welcome the bounce from the floor of a 2.5-month falling channel, though bears will note the shares are still hampered by the ceiling of that channel "and point to the long-term downtrend that began in late 2015 and failure to make higher highs since last August, leaving multiple hurdles along the way".