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Restaurant Group cuts prices to draw customers

Frankie & Benny's has cut prices, while Chiquito has reintroduced fixed price value menus to lure customers back into its restaurants
August 31, 2017

When Andy McCue took over as chief executive of Restaurant Group (RTN) he identified the previous management team’s desire to keep prices up as one of the key problems holding the company back. Part of his turnaround strategy was to cut prices to draw old customers back, and this is clearly under way in the first half of the year.

IC TIP: Buy at 339p

To that end, Frankie & Benny’s has launched a more competitive menu with comparable dishes an average of 7 per cent cheaper and the cheapest priced dish for each category reduced by more than a fifth. Marketing has also targeted lapsed customers with discounts and seasonal promotions. Chiquito reintroduced fixed price value menus and are trialling a new menu with more competitive prices at 20 of its locations. Another element of Mr McCue’s strategy involves making the business more efficient, with £10m of costs expected to be saved by the end of the year.

Like-for-like sales fell 2.2 per cent over the period, although this was better than analysts had been predicting. This decline, along with inflationary cost pressures and lower prices put pressure on operating margins – down 2.6 percentage points to 7.9 per cent – leading to a 30 per cent fall in adjusted operating  profit to £26.5m. This squeeze is expected to continue in the second half, but management is hoping to offset rising costs with a more efficient business.

Analysts at Numis expect pre-tax profit of £59.2m in the year to December 2017, giving EPS of 23.2p, compared with £77.2m and 30p in 2016.

RESTAURANT GROUP (RTN)  
ORD PRICE:339pMARKET VALUE:£681m
TOUCH:338.5-339p12-MONTH HIGH:410pLOW: 282p
DIVIDEND YIELD:5.1%PE RATIO:11
NET ASSET VALUE: 94pNET DEBT:10%
Half-year to 2 JulTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2016359-22.5-11.26.80
20173332.80.66.80
% change-7---
Ex-div:14 Sep   
Payment:12 Oct