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Third time unlucky for Restaurant Group

An unbalanced portfolio and faltering discretionary spending are weighing on the UK restaurant chain's profitability
May 3, 2016

The fortunes of the UK hospitality industry reflect, among other things, credit growth within the wider economy and oscillations in the level of discretionary income. So industry analysts will be looking beyond specific operational issues when they consider the background to Restaurant Group's (RTN) third disappointing trading update this year. Some will see its travails as part of a wider downtrend in UK consumer confidence.

IC TIP: Buy at 292p

What's new:

■ Warning on full-year profits

■ Departure of chief financial officer

■ Four new sites in year-to-date

Restaurant Group, which counts Frankie & Benny's and Garfunkel's among its brand names, revealed that trading in 2016 so far has fallen short of expectations, with a fall-away in like-for-like sales of 2.7 per cent in the first quarter. If underlying trading patterns persist, this will translate into pre-tax profits in the range of £74m-£80m for the full year, implying a median point decline of 11 per cent from 2015.

Four new openings this year are all generating "good returns" and the group remains cash generative with a balance sheet supportive of the dividend. That's the nature of the beast, but management has initiated a review of the group's current operating strategy. Something had to give, so it was agreed that Stephen Critoph would vacate the role of chief financial officer after 11 years with the group.

 

Peel Hunt says…

Hold. Frankie & Benny's has been the main drag, with issues of brand relevance, lower footfall and site cannibalisation contributing to the decline. We believe the strategic review is unlikely to find any silver bullets in the short term, but shows management focusing on fixing the existing estate rather than rolling out new sites. Management guides to "supporting the dividend at 2x covered", the group remains cash generative and could reduce the cover in the near term. The shares currently trade on 5.4 times enterprise value to cash profits, but with more questions than answers regarding the estate, we downgrade our target price to 270p (from 389p).

 

Numis says…

Buy. The Frankie & Benny's brand is 38 per cent exposed to retail-only sites, which are seeing lower footfall and increased competition. The current priority for management is to reduce exposure to retail-only outlets and the Frankie's brand; more than 50 per cent of the portfolio is Frankie's and the aim is to reduce this to around 40 per cent to better balance the portfolio. The poor share price performance since the prelims suggests that the market has been anticipating a profit warning. Expectations have now been set at a realistic level and, while there are challenges ahead, on a PE ratio of 13 the shares are attractive. We have cut our target price to 475p.