News of a 2 per cent squeeze in annual like-for-like sales at Restaurant Group (RTN) has put its £559m acquisition of Japanese fusion chain Wagamama back under the microscope. Despite enjoying a better second-half performance – which means adjusted pre-tax profits will now meet expectations – it's likely the Frankie & Benny's owner will be forced to defend the deal further.
Chief executive Andy McCue argues Wagamama is "an extremely high-quality business", and indeed recent trading at the chain has been strong – first-half like-for-like sales grew by 12 per cent. What's more, including just one week of trading from Wagamama pushed total group sales at Restaurant Group up 1 per cent overall.
But the concern is that Restaurant Group has bought Wagamama at its peak – and paid a whopping premium as a result. The Asian fusion chain may have succeeded in differentiating itself from other casual dining brands – enough to outperform the UK market for almost five years – but analysts at UBS are concerned about the longer-term opportunity.
Having already increased its estate by 25 per cent over the past five years, Wagamama is now one of the largest chains in the UK by numbers of sites, but operates in a sector plagued with significant oversupply issues. Restaurant Group says there's room for 40 to 60 new openings for the brand, but UBS counters that the roll-out potential is "limited". This certainly seems to be true in the context of growing profits. Wagamama’s 2018 financial statements revealed cash profits after pre-opening costs of £43m, up only marginally from £42.5m in 2017.
The deal means Restaurant Group has taken on another mid-market brand, one which is also exposed to falling footfall across the high street, while the debt taken on to part-fund the acquisition has pushed its net debt to cash profit leverage ratio up from roughly two times to 4.5 times on a lease adjusted basis.
Bulls might argue that Wagamama has successfully harnessed opportunities in the online delivery market. But the fact that 8 per cent of digital sales come via online takeaway service Deliveroo, could suggest those customers are loyal to the app, rather than the Wagamama brand.
