Fulham Shore's growth looks unsustainable

When the company reported half-year results in December, restaurants that had been open for longer than a year were on average contributing less per site than 12 months before, “with increased volatility and some expected cannibalisation” from new openings in nearby locations. This, along with rising costs, means that while new openings should lift cash profits for the full year, cash profits will not be up by anywhere near as much as originally expected and EPS is expected to fall. What's more, uncertainty about future trading was palpable in the half-year results statement, with management warning conditions were “limiting our visibility for the second half and beyond”. Indeed, since full-year results in July 2017, house broker Allenby has downgraded forecasts for 2018 EPS by 28 per cent and has cut its 2019 expectations by a third. 

The headline first-half EPS for Fulham Shore was flat. Meanwhile, cash from operations halved to £3.3m, aggravated by a reversal of the previous year's rise in payables. And after spending £7m on openings in the period, net debt more than tripled to £9.7m. The trading difficulties look particularly worrying in light of the pace of recent expansion, which saw the number of sites double between late March 2016 and December 2017. The company had 58 locations when it reported half-year results, consisting of 16 The Real Greek, 41 Franco Manca, and one Bukowski Grill. There are plans to sell the latter loss-making restaurant along with the Soho property it operates from. The asset is valued on the balance sheet at £213,000 following a £312,000 impairment taken at the half-year stage.

While the company's experienced management has said two more openings are expected before the year end, the long-term pace of openings seems less certain. Some recent openings were delayed due to negotiations with landlords aimed at making landlords contribute more. A scaling back of openings to concentrate on issues facing the existing estate may be the sensible option at this point, but it does not follow that a scaling back of the company's growth ambitions will necessarily resonate well with shareholders.

Management hasn’t been confident enough in trading to put through any price increases in case it puts off customers, so margins could be in for a further squeeze after falling from 5 per cent to 4.4 per cent in the first half. Weak sterling also means that input costs have increased.