Retail Food Group feels impact of continued scrutiny on franchise sector

Retail Food Group (RFG) widened its loss in the first half of FY19 to $111.1 million, after posting an $87.8 million loss in the same period a year ago.

The owner of Donut King, Michel’s Patisserie, Gloria Jean’s, Crust, Pizza Capers and Brumby’s Bakery reported a 73.4 per cent drop in underlying net profit after tax to $6.6 million in the half, which was decimated by $123.7 million in non-cash impairments and write-downs and provisioning.

The fast food franchisor blamed the drop in profit on a number of factors, including the impact of store closures, investment in its restructuring activity, declines in new store, resale and renewal activity and ongoing negative sentiment towards franchising.

RFG initiated a number of strategic changes in the half to turn the business around, including the appointment of Peter George as executive chairman and the commencement of major restructuring activity.

The restructuring is forecast to deliver around $20 million in annualised cost savings. RFG is also in negotiations to sell its Donut King and pizza businesses, but said no formal binding agreement with the proposed buyer has been reached.

The company had 1252 stores as at 31 December 2018 after closing 93 units in the half. It will continue to progress the closure of outlets identified last year, with no material changes to the number of expected closures by 30 June 2019.

RFG expects to face challenges from ongoing negative sentiment in connection with franchising, poor retail trading conditions and increasing occupancy costs going forward. These issues will also impact franchisees. But the company’s executive chairman Peter George said the business has a six-point plan to stabilise the business, reduce debt and improve operations across its business units.

The plan includes refocusing the group on its core retail food franchise and coffee supply operations and divesting or discontinuing non-core underperforming businesses, strengthening the balance sheet to improve financial stability, right-sizing shared services resourcing and implementing initiatives to consolidate supply chains for more efficient businesses, extending product categories and introducing new product campaigns to drive traffic and revenue, growing coffee revenue in external markets and driving growth in the franchise business.

While lenders agreed to waive testing of financial covenants under RFG’s senior debt facility during the half, the debt facility is subject to a potential review process at some time after 28 February 2019, the company noted.

“A number of measures have been implemented to support the six-point plan and stabilise RFG’s performance, however, the company anticipates that future results will remain subdued whilst retail market conditions remain challenging and the company executes its restructuring program,” Georg said.

RFG currently anticipates FY19 underlying EBITDA to be in the range of $43 million to $48 million, assuming full-year contributions from all business units and the realisation of forecast annualised restructuring benefits.


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