The Restaurant Group reports a challenging trading period across leisure brands and good performance from pubs and concessions. Total revenue up 3.4% to £358.7m with like-for-like sales down 3.9% and operating profit down 4.4% to £37.5m.
Strong free cash flow of £35.8m is reported with emphasis on 33 underperforming sites identified for closure/sale.
The interim dividend is maintained at 6.8p per share, reflecting confidence in the current trading forecast and the first phase of operating strategy review has been completed.
There has been an appointment of a new Executive team including strengthening the Board with the appointment of two new Non Exec Directors. This follows on from the announcement on 12 August 2016 that Danny Breithaupt who after 15 years with the company, and 2 years as CEO, left with immediate effect.
Somewhat alarmingly Frankie & Benny’s performance is reported to have suffered ‘due to insufficient focus on value, unsuccessful menu development and poor operational execution’.
Debbie Hewitt, Chairman said: “This has been a challenging trading period for our Leisure brands, albeit with a good performance from our pubs and concessions businesses. The Board has moved quickly to undertake a review of the operating strategy and we now have clarity on the issues facing our Leisure brands, particularly Frankie & Benny’s. The brand remains relevant and popular and we are confident that improved performance will be achieved by being more customer-focussed and data-driven, and through better operational execution.
A new executive team is in place to lead the implementation of this first phase of the review and to apply the learnings to our other brands.
The Company is profitable, highly cash generative and has a strong balance sheet, and given our confidence in the current trading forecast, we are declaring an interim dividend of 6.8 pence per share, unchanged from last year.”
The full report can be read below.
Chairman’s statement
Introduction
The first half of 2016 was a challenging period for the Company with a disappointing trading performance exposing issues across our Leisure business. Our Pubs and Concessions businesses have continued to trade well.
We have taken decisive action to begin to address the issues facing us.
In April we commenced a detailed review of our operating strategy, led by the Board and with the input of external consultants. This review began with an extensive analysis of the drivers of underperformance at Frankie & Benny’s which is now complete. We have a detailed action plan to improve trading at Frankie & Benny’s, and a number of initiatives are already underway. The review is now focussed on our other Leisure brands.
In the first half, the Board was restructured with Debbie Hewitt becoming Chairman and the recruitment of two new NEDs – Mike Tye, to Chair the Remuneration Committee, and Graham Clemett, to Chair the Audit Committee. Alan Jackson and Tony Hughes stepped down from the Board at the AGM in May.
Action has also been taken to ensure that the Company has an executive leadership team in place with the right skill-set to drive the business forward. Barry Nightingale was appointed as CFO in June and we look forward to Andy McCue joining as CEO in mid-September.
The Board believes that the new leadership team have appropriate credentials to prioritise and implement the actions from the operating strategy review, having a strong customer-focus, being data-driven and with proven turnaround skills.
The Board has taken measures to ensure that we now have a more rigorous and disciplined approach to the allocation of capital. With the review of operating strategy continuing, the Board has decided to slow down our site roll out plans until we can be sure that the Group’s brand and location strategy is sufficiently robust.
We have taken action to exit 33 underperforming sites immediately, as we do not believe that these sites are capable of generating adequate returns. We have also decided to impair the asset value of a further 29 sites.
Whilst the performance in the first half of 2016 was disappointing, the Company is profitable, highly cash generative and retains a strong balance sheet. The Board has confidence that it has identified the issues impacting performance and is taking the correct actions to improve performance and create value for shareholders.
Trading results (vs comparable 27 week period in 2015)
2016 is a 53 week year and the first half contained 27 weeks (H1 2015: 26 weeks). For comparability, the growth figures and 2015 comparatives set out in this section reflect the performance vs. the comparable 27 week period in 2015 unless otherwise stated.
While overall turnover grew slightly by 3.4% to £358.7m (2015: £346.9m) due to the increased number of sites, like-for-like sales were down by 3.9%. The like-for-like sales performance reflected a challenging performance across our Leisure brands, partially offset by a good performance from our Pubs and Concessions businesses.
The Pubs business continues to build on the strength of its food offer, providing good value, high quality food in attractive locations. We continue to be selective about new sites and maintain a high level of individuality in the fit out to ensure that venues offer strong local relevance.
The Concessions business continues to benefit from strong airport passenger numbers and a team who create innovative new brands that stand out in their location.
Against the backdrop of declining like-for-like sales, adjusted operating profit (EBIT) fell by 4.4% to £37.5m (2015: £39.2m) with the adjusted operating margin 0.8%pts down at 10.5% due to the impact of operational leverage.
Adjusted profit before tax for the period was down 3.7% to £36.6m (2015: £38.0m), with adjusted profit after tax down 3.3% to £28.5m (2015: £29.5m). Adjusted earnings per share were 14.3p, down 3.0% (2015: 14.7p).
The Group remains highly cash generative, generating free cash flow of £35.8m in the period (2015: £44.3m). This was down on 2015 due to a higher maintenance capital expenditure charge, reflecting the cost of bar conversions undertaken to enable us to add extra covers at a number of Frankie & Benny’s sites.
During the first six months of the year we opened seven new restaurants and pubs. We now expect to open 24 to 28 sites for 2016 as a whole (2015: 44 sites).
The Board recognises that we are facing increasing head winds on wages, food and drink input costs, fuel inflation and a growing ‘fixed’ cost base with rent, rates and service charges under pressure. We will continue to be vigilant on cost and to drive efficiencies. This will be an area of focus for the new executive team.
Restructuring and exceptional charge
A total exceptional charge of £59.1m has been made in the first half, of which £19.0m will be a cash cost. On a statutory basis, our loss before tax was £22.5m (2015: profit before tax of £38.0m).
We intend to exit 33 underperforming sites immediately as we do not believe that these sites are capable of generating adequate returns. These include 14 Frankie & Benny’s sites, 11 Chiquito sites and eight other sites. We have made an exceptional charge of £39.3m in the period including an impairment of fixed assets, provision for onerous leases and other associated costs as a result of this decision.
We have decided to write down the asset value of a further 29 sites and have taken an additional £17.8m non-cash impairment charge in respect of these.
The exceptional charge also includes some costs incurred in the first half related to the Board and management restructuring.
The benefit to the 2017 operating profit from the changes that we have made is anticipated to be between £6m and £8m. This relates to lower depreciation following the impairment charge, onerous leases having been provided for and other efficiencies.
Interim dividend
Given our confidence in the current trading forecast and the strength of our balance sheet, we are declaring an interim dividend of 6.8 pence per share, unchanged from last year. The interim dividend will be paid on 13 October 2016 to shareholders on the register on 16 September 2016 and shares will be marked ex dividend on 15 September 2016.
Review of operating strategy
We are in the process of undertaking an extensive review of the Company’s operating strategy. The review is being led by the Board, and the wider executive team, and is being facilitated by external strategy consultants OC&C, ensuring rigour and independence.
Market data has been used to understand and benchmark the external environment and to review our own performance over time and by location. Customer research and analysis of targeted competitor performance has also been used to assess brand relevance and customer loyalty.
We have to date focused primarily on Frankie & Benny’s, being our largest brand and the biggest driver of our performance.
Frankie and Benny’s
Whilst competition has been growing in the market, the review indicates that this has not been the major factor behind the brand’s weak performance.
We have identified three main internal drivers of our underperformance:
- We have lost value-conscious customers, a result of significant price increases and the removal of popular value offers. Above market increases in food and beverage pricing in 2013 and 2014 were compounded in 2015 by a reduction in value offers and the removal of a fixed price menu, actions which significantly reduced covers.
- In 2015, we began to introduce more “authentic” menus without sufficient testing of the concept. This led to the removal of many popular dishes from the menus and led to a further decline in covers.
- The absence of leadership for this key brand in the past two years resulted in weaker operating discipline and therefore an inconsistent and unsatisfactory service experience for many of our customers. Reassuringly, the research confirms that the Frankie & Benny’s brand and concept remain well loved by our customers. We have, however, over-priced the offer, removed some of their favourite dishes from the menu and lost focus on operational execution.
The review has helped us to achieve a much better understanding of our target customer: families who are “out and about”, who are celebrating a specific family occasion or simply having a treat. Although it is clear that we also have wider appeal, the target market of families is very distinct and is the primary focus of our efforts as we rejuvenate the brand.
We are now clear about where we want to focus, who we want to measure ourselves against and how we will deliver. We have a detailed action plan, with many actions already underway.
- We have taken decisive action on those sites that don’t meet the Frankie & Benny’s positioning or returns criteria, with a number now set for closure, as set out earlier in this statement.
- We will look at the pricing architecture of the menu, re-invigorate the value offer and seek to understand how we can use our supply chain relationships to price engineer more effectively. We have already launched a series of pricing tests and menu trials, supported by local marketing initiatives in order to re-price for growth.
- We have appointed a new leader for the Frankie & Benny’s brand, who started in June, and we are investing in our systems to improve the consistency of our operational execution. Although we have slowed down the current restaurant roll out programme, the review indicates that once we have resolved these internal issues, there will be scope for further roll out of the Frankie & Benny’s estate. This will be done in conjunction with a more disciplined framework for assessing each investment case.
Ongoing review
The next phase of our operating strategic review will focus on our remaining Leisure brands: Chiquito, Coast to Coast, Joe’s Kitchen and Garfunkel’s.
From some initial diagnostic work undertaken, it is evident that some of the issues identified in Frankie & Benny’s are also apparent in these brands. We will therefore be undertaking a thorough review of their propositions, pricing structure and menu architecture.
While our Pubs and Concessions are performing well, we also intend to examine these businesses and evaluate what we can do better.
Current trading and outlook
Trading has improved slightly in recent weeks, with like-for-like sales for the 34 weeks to 21 August down 3.7%.
Despite the continued challenging trading environment, we are confident that a strong focus on execution and careful cost control will result in an outcome for the full year in line with our previous guidance (adjusted PBT of £74 to £80m for 52 week year).
Our 2016 financial year will contain 53 weeks and we shall be reporting our preliminary results for the full year on this basis. The marketplace in which we operate is growing. Our priority must be and is to improve our main propositions in terms of price, menu and service.
We now expect to open 24 to 28 new sites for 2016 as a whole (2015: 44). With the review of operating strategy continuing, the opening programme for 2017 remains under consideration but at this stage and subject to the ongoing review, we currently expect to open around 30 restaurants next year.
On behalf of the Board, I’d like to thank all of the Group’s employees for their hard work and dedication during this challenging trading period. The conclusion of this first phase of our review of operating strategy and the appointment of a new Chief Executive Officer will enable the Board to complete and implement the review and return the Group to long-term, sustainable and profitable growth.