Restaurant Group sales shrink but confidence grows in turnaround

Restaurant Group sales deteriorated as the first half of the year wore on, but the Frankie & Benny's and Chiquito owner served up a flat dividend as it reported early signs of volume improvement and broke back into the black.

For the 26 weeks to 2 July, like-for-like sales shrank 2.2% and, with 12 new sites opened and eight closed, group revenues fell 1.9% on a 26-week basis or 7.1% versus the 27-week period last year.

But weaker sales masked growing volume momentum in the business from the roll-out of the new Frankie & Benny's menu that was completed in early May where dishes are on average 7% cheaper.

Looking forward, the comparatives get easier with 3Q16 YTD L4L sales of -3.7% and FY16 was -5.9%.

Current trading was also said to be in line with management expectations, with LFL sales for the 34 weeks to 27 August down 2.5%.

With adjusted operating margins down to 7.9% from 10.5%, the FTSE 250 company's adjust operating profits fell 30% to £26.5m and adjusted profit before tax by 30% to £25.5m.

At the statutory level a £2.8m PBT followed last year's loss of £22.5m thanks to lower exceptional charges of £22.7m this year versus £59.1m last time.

Adjusted earnings per share was down 30% to 10.0p while a statutory EPS of 0.6p reversed the 11.2p loss per share last time.

Thanks to continued strong free cash flow of £35.1m versus £35.8m last time, the interim dividend was maintained at 6.8p per share, with the board also insisting that this reflected their "confidence in the plan".

The turnaround plan, revealed in March, was focused on four main points: "re-establishing competitiveness" of the Frankie & Benny's, Coast to Coast and Chiquito leisure brands via investment in price and quality and with the launch of a new menu during the half; serving customers "better and more efficiently"; growing the pubs and concessions businesses; and building a "leaner, faster and more focused organisation".

Chief executive Andy McCue said on Thursday that "good progress" had been made against these strategic initiatives in what he stressed remains a transitional year where LFL sales and margins will "come under inevitable pressure in the short term" as necessary investments are made.

"Our leisure customers are enjoying a better value, higher quality product; our growth plans for our pubs and concessions businesses are advancing well and we have made good progress in delivering cost efficiencies."

Efficiency savings of around £10m are expected for the current year, which are expected to be reinvested back into price.

Where opportunities to accelerate progress present themselves McCue said he will "invest appropriately", saying that so far the full year 2017 cost of goods sold margin is expected to be between 1.5 and 1.8 percentage points higher than 2016, thanks to that £10m of cost savings, which means adjusted profit before tax for the full year should be in-line with current market expectations.

The target is to open 18-20 units in 2017 and 10-20 units in 2018.

Restaurant Group shares spiked up more than 12% in early trade on Thursday and by almost 1000 BST were up almost 7% at 340p.

"It is easy to forget that RTN is conducting a turnaround against a tough backdrop of increasing inflationary pressures and a highly competitive eating-out market," said analysts at Liberum, viewing the results as "very encouraging", with cost savings captured ahead of plan, investments in price, proposition, technology and people.

It was noted that there had been an immediate positive volume response since May when the majority of the price investment was made. "While this impacts LFLs in the short term, we see the potential grassroots of the strategy working. Cashflow remains strong, debt is negligible and maintaining the dividend is a sign of confidence."

Broker Canaccord Genuity said the numbers were a sliver ahead of its expectations, with LFL sales negative but masking early signs of improved volume momentum in the business.

"We continue to believe that real signs of tangible recovery will be increasingly evident in H2," analysts wrote, calculating that the core Frankie & Benny’s and Coast brands are valued at just 4.7 times EBITDA or just £0.9m per site at the recent share price.

For Numis the half was as expected, demonstrating the impact of known LFL sales weakness at a time of industry-wide cost inflation.

"Encouragingly, the lfl decline in the most recent two months is slightly better than expectated and the company expects to deliver £10m of cost efficiencies earlier than planned. This will enable it to invest 150-180bp of GM in price, to fuel the sales recovery."