We have had full year 2015 results from Restaurant Group (RTN) today, which shouldn't have come as much of a surprise to the market as they updated on trading earlier in the year. At that time you may re-call that the shares took a big hit as they were cautioned about trading at the end of last year and on current trading in the New Year. Despite this though they have now actually reported strong looking numbers which are actually ahead of where estimates were before the most recent downgrades - which is a bit weird. For example the eps had come down from around 33.6p to 33.2p but they have now actually reported 33.8p of eps, while the dividend was up by 13%, which they say is in line with their 2x cover policy, to 17.4p v 17.1p forecast so another beat there too.
So it is a bit surprising to see the shares off another 15% or so at the time of writing again this morning on the back of this, but as ever the devil is in the detail. The problem seems to be that they continue to highlight weak consumer demand and particularly reduced foot fall in retail parks as on line shopping becomes increasingly popular. I have to say this does seem a bit strange given the generally improving consumer real income and generally positive retail spending data that we have been seeing - see graph below for example, although as a consumer facing business I guess they should know.
Of more concern seems to be their admission that increased competition seems to be impacting on them and as a result they are flagging current trading in the year to date being up by 6% in the first 10 weeks but with negative like for like sales of 1.5%. They go onto say that in the current environment consistent like-for-like sales increases are likely to be difficult to generate. This is a significant change from what the business has delivered in recent years and may well therefore lead to more downgrades for this year and perhaps helps to explain the fall in the shares this morning.
Nevertheless it has not suddenly become a bad business, it is just that it is not likely to be growing so quickly on a like for like basis as the competition seems to have caught up and consumers have become more cautious and perhaps become bored with of some of their offerings may be? So looking at the growth they opened a net 34 sites this year, after closing 10 where leases came up and they did not want to renew. This took them from 472 sites to 506 sites, an increase of 7.2%. Meanwhile in 2015 they reported LFL's of +1.5% and revenues up by 7.9% in total.
In terms of new openings they seem to have done gross and are planning the following opening for the coming year:
Frankie & Benny's 261 units (Mass market) - opened 14 last year & same again this year.
Chiquito 86 units (younger end) - opened 9 & same again this year - trading well.
Coast to Coast 21 units (more upmarket F&B?) opened 8 & expect to open 5 to 7.
Pubs 54 units (Older end / Grey £) opened 3 target 5 to 7 in 2016 in Midlands.
Concessions 61 units (Airports etc.) opened 7, 2 to 4 planned for 2016 benefit from increasing passenger traffic.
All of the brands described above have substantial roll out scalability in the UK. They are confident that they can expand the Group to 850+ restaurants, all financed out of internally generated cash flow. From their current 506 sites this would seem to offer potential for another 8 to 9 years of roll out growth if they carry on at the current rate.
As they have clearly demonstrated in the past the Company has the financial and operational capability to deliver this scale of roll out successfully while maintaining consistently high levels of return. Further more the Group's financial strength and disciplined focus on return on investment and cash flow means that they have the financial capacity to deliver on their long-term growth objectives. This financial strength also means that they can continue to invest in maintaining their existing sites and infrastructure to a high standard and at the same time pay a growing level of dividend.
Thus it seems like they plan to open another 38 to 40 sites this year which would be another 7% or so increase if you assume another few closures, but current and possible further negative LFL's this year seem likely to trim the growth in revenue overall. As I mentioned earlier they say this is currently running at 6%, so lets assume 5% revenue growth overall for the full year to be conservative. That would suggest £719m of sales for the full year which is about 4% below the current £749m forecast. Assuming that flows straight through to the bottom line would take eps for 2016 down to around 35p. although hopefully that might prove a conservative figure. With the 2 time cover policy they flagged in the statement might mean a flatish dividend of 17.5p or perhaps up by 4% or so if they increase it in line with the growth in earnings. All in all that's not too bad but potentially a big step down from the 14% or so that they have grown the dividend at over the last 5 to 6 years.
Summary & Conclusion
So another slightly underwhelming update from Restaurant Group, despite reporting good numbers, which the new CEO seems to be making a habit of. Nevertheless the outlook for their growth in LFL terms does seem to have deteriorated and it looks like the growth rate may step down from mid teens to mid single digits. Given the two steps down that we have seen in the share price this quarter, perhaps the market has now digested this? Taking my hopefully conservative 35p forecast (but let's see where the estimates settle in the days ahead) at the current price around 450p this puts them on 12.85x with a historic yield of 3.9% which may be flat or could maybe grow by 4% to 5% if my forecast proves too pessimistic. Which seems fine, but not that exciting given the diminished growth outlook.