On the back of this morning’s full-year update, M&C Report talks to The Restaurant Group’s chief executive Danny Breithaupt about recent trading, including record breaking performances over Valentines weekend; consumers trading up; targeting a 1,000-strong estate; city centre Coast to Coasts and expansion opportunities for the company’s pub estate. Plus analyst reaction.
Trading
Breithaupt said: “My view on the results is they are very solid against the backdrop of a difficult set of economic circumstances, the cinema sector being heavily down, a World Cup etc. So to come out where we have is pretty pleasing. To get the 40 sites open in 2014 puts us in good stead for this year, because a lot of them were open towards the back end of the year. We should reap the benefits over the coming 12 months.
“The key thing for me is the future. When you look at the current trading pattern, after the first eight weeks of the year like-for-like sales were ahead 2.5%, an improvement on the run rate on the final quarter of last year. We believe that the sales we are delivering now are pretty strong. What you have to take into context is that of those eight weeks, we had three weeks where as a business we were significant affected by snow. So to come out with 2.5% growth against that backdrop is a really strong performance and one we can build on in the remaining 10 months of the year.”
He said that the company had seen some “really strong performances across the business”. “Over the Valentines Weekend we saw a significant number of record sales broken across both the Frankie & Benny’s and Chiquito estates,” said Breithaupt. “Over 70 restaurants in Frankies ended up beating their weekend record and nearly half the estate in Chiquito. It sort of suggests that when conditions are right that trade is very, very strong.
“The other thing for us is about balancing the portfolio, to make sure we have got a collective group of brands that are all able to roll out and do their bit towards our overall expectation to open 40 to 50 sites. Chiquito brand as a whole is trading staggeringly well, we have got really good momentum behind Coast to Coast and Frankies continues to do the numbers. We have got a real breadth of portfolio which bodes well for moving forward.”
Trading up
Breithaupt said: “What we have seen, certainly in the first bit of this year, is good solid trading and then when there is a reason or event, we have seen gangbuster trade. What we have taken from that is that there a little bit more money about, people are more willing to out and spend on those special occasions a little bit more and that our brands are very much pitched at the right demographic at the moment.
“Maybe in the past when there wasn’t so much money about some of the cheaper, lower end brands took some market share but now that is not the case anymore. People are coming out and happy to spend a bit more, with a little bit more disposable spend in their pocket and coming out to the stronger brands and we will benefit from that.”
Management team and expansion target
Breithaupt believes that the company has got a much stronger management team than it has ever had. He said: “I spent the last three months of last year ensuring that in order to hit the ground running in 2015 that we had the right team in place. We have done that and we now have really good strength in depth and that will help us towards our goal of doubling the size of this business in the next eight years. When you look at where we are now, c475 restaurants, we can get close to 1,000 restaurants in that time. That’s a real statement of intent in terms of our aspirations and objectives. It will also allow us to take advantage of this improving economic environment at the moment.”
Frankie & Benny’s
Breithaupt said that the 247-strong Frankie & Benny’s traded well during the year with growth in turnover and profit. During the year, it introduced a number of menu initiatives, notably the introduction of a chicken section on the menu which has proved to be hugely successful.
During the year we opened 19 new restaurants, reaching a total of almost 250, an increase of some 20% in the size of the estate in the last three years. The company currently operates 247 sites and Breithaupt think the 250th Frankie & Benny’s will be at the new Stoke development, “but I can’t 100% guarantee that”. He anticipates opening between 14 and 18 new Frankie & Benny’s in 2015.
Garfunkel’s
The 15-strong Garfunkel’s is a good business generating significant cash flows and excellent returns on investment, according to Breithaupt, but expansion for the brand is not something the company is focused on. He said: “It is a great engine for us, delivers great profits and we have a nice portfolio of sites across London. If an opportunity came up that was slightly off-pitch and some of the fancy new start-ups weren’t going to pay crazy money for it then we would look at it.
“However, our core business is about our future brands, Garfunkel’s does a good job for us, we will keep evolving the menu and have updated the look and feel. We would not consider selling the sites, some are 25 years old and they make great money for us. They are really solid performers. We wouldn’t even consider putting another brand into the sites, because I don’t think anything else would make as much money. It hits the right spot for London.
Chiquito
Breithaupt said that the 80s-tring brand had an excellent year with strong growth in turnover and profits. He said: “Several years ago we made some significant management changes in this brand. This has been supplemented in the last 18 months by an evolution of both the fit out and the menu. The strong improvement in financial performance is clear testament to the success of these initiatives and we are now confident in increasing the rate of openings in Chiquito.”
During 2014, we opened eight new restaurants (compared to four in the previous year). Breithaupt said: “These are trading superbly and are set to deliver strong returns.” The company expects to open between eight and 10 new Chiquitos this year.
Coast to Coast
The company’s location strategy for Coast to Coast tends to be on leisure and retail schemes in larger markets. However, Breithaupt said that he was also confident that the brand can work well in some UK city centre locations, following its successful Birmingham Broad Street opening at the end of 2013. During the year, the company opened three Coast to Coast restaurants all of it which it said were performing well and set to deliver strong returns. It expects to open between seven and 10 Coast to Coast restaurants this year.
Breithaupt said: “Chester will be the next city centre site for the brand in the city’s Pepper Street, which will open around the half year stage. I think we will do very well there. If there was a central London site available for the right price we would certainly look at it.” The company also has an opening lined up in Union Square, Aberdeen for the brand.
Pubs
During the year the company three new pubs, all of which are performing well and are set to deliver strong returns, to its now 52-strong estate. In 2015, it expects to open between three and five new pubs.
Breithaupt said: “Our Pub business has the potential to grow over the medium-term to be a substantial business as a nationwide operator of high quality, food-led pubs.
“We are coming to the end of the conversions from the former Blubeckers estate to Brunning & Price. Most of them that we have seen real benefit in doing have been done. There is probably one or two that we will do some tweaking to, but fundamentally they all now run under the same set of management guidance and operational rules.
“On the whole what we have is a great ability to find unique opportunities, in a lot of cases a lot of the operators are looking for existing pub buildings that they will then refresh and refurbish under a new brand. We don’t always do that; we take old banks building, different style restaurant operation. We will look at all sorts of opportunities rather than the run of the mill, easy to do pub conversion. We have been very successful with that.”
Analyst reaction
Douglas Jack at Numis said: “We are holding our 2015E forecasts (of 11% EPS growth), following a 2.5% increase in LFL sales during its first eight weeks and a pick-up in the expansion rate. We believe there should be upgrade risk to forecasts as this year progresses. LFL sales rose 2.8% in 2014 against a backdrop of cinema attendance falling 4.9% and London airport passenger volumes increasing by 4.6%.
“In early 2015, LFL sales rose 2.5%, against a backdrop of the Peach Tracker rising by 1.4%, cinema attendance rising by 1.3% and London airport passenger volumes increasing by 5.9% in January. Current LFL sales growth is mostly volume-driven, with menu prices having risen by less than 1% in October. For the full year, we assume LFL sales rise 3.0%, supported by a strong cinema release schedule in Q2-4.
“40 new outlets opened during 2014. We forecast 45 new restaurants in 2015E, comprising: 17 Frankie & Benny’s (F&B), nine Coast to Coast, nine Chiquito, four pub restaurants and six Concessions. We believe the pick-up in Chiquito’s expansion rate reflects its new-design sites trading in line with F&B. A strong site pipeline underpins this expansion and that of future years.
“We believe there is upgrade risk to our 2015E forecasts (PBT: £86.3m; consensus £88.2m), which anticipate 11% earnings growth, based on 3% LFL sales, 10bps margin growth and no change in debt. We expect RTN to be a beneficiary of rising consumer disposable income and a strong cinema film slate in both 2015E and 2016E.”
Mark Brumby at Langton Capital said: “The Restaurant Group has reported what is clearly a good Christmas but it also suggested when it updated on the festive period that the rest of December may have been slow. With that in mind, the Jan & Feb trading numbers is OK. It is not knockout but accords with comments being made by other operators.
“The company is upping its opening programme at a time when many other, arguably more nimble, casual dining operators are doing the same thing and, at some point, overcapacity may become an issue. The group has pointed out that the economic fundamentals are good but, as we have mentioned on a number of occasions over recent weeks, the consumer remains reluctant to spend.
T”he group has performed well but, with EPS of around 33.7p forecast for the current year, its shares trade on a somewhat demanding 21.6x prospective earnings and they are not cheap. We prefer some of the group’s asset-backed competitors such as Marston’s, Greene King and Mitchells & Butlers but accept that RTN has a legion of supporters. However, we would still be minded to lock in some profits at these share price levels.”
Nick Batram at Peel Hunt said: “The solid start to 2015 is encouraging for a year that promises much. Labour is the main cost pressure, but ultimately The Restaurant Group should be a beneficiary of the improving consumer outlook. After a good run the shares may consolidate, but over the medium to long term we expect continued outperformance.
“Adjusted PBT came in at £78.1m (£72.7m), which was bang in line with our expectations. This was achieved on revenues up 10% to £635m, with LFLs of 2.8%. As expected, there was some slight slippage in operating margins (12.7% vs 12.9%), with profits of £80.5m. EPS rose 7% to 30p, while the full-year dividend was raised 10% to 15.4p. Cash flow was again strong, with free cash flow of £85m and net debt reducing to £39m (£43.6m).
“The shares are not cheap, and after a strong run may well consolidate. However, with a strong film schedule and the improving outlook for personal disposable income, the medium-term prospect for upgrades looks good. Therefore, we retain our Buy recommendation.”
