Peel Hunt analysts Douglas Jack and Ivor Jones reflect on Andy McCue’s decision to step down from The Restaurant Group, and what it means for the company. They warn that “although restaurant supply has finally started to fall, declining in-store demand and rising costs point to years of correction”.

The note says: “Although RTN’s share price has fallen by 75% over the last three years and restaurant supply managed to fall by 2.1% in 2018, we are cutting our target price rather than turning positive. There are many reasons for this, of which too many objectives, higher gearing, the loss of the CEO, rising costs and demand shifting away from destination mid-market casual dining are just some.

“Restaurant sector managed like-for-like sales fell 1.2% in 2018 despite the benefit of a rising number of closures (1,934) exceeding openings (1,373). Pubs continue to outperform, benefiting from 12 years of supply reduction.

“As pubs, concessions and Wagamama generate circa 70% of Ebitda, it is clear leisure/retail park Ebitda per site has fallen 48% to £152,000 pre-central costs over the past seven years but with the declines heavily weighted to the past three. The bulls claim The Restaurant Group will not own these assets in three years. How? They account for circa 360 of 590 of the company’s leases, bringing a £0.7bn lease commitment (larger than the market cap) out of The Restaurant Group’s £1.2bn.

“The combination of falling leisure like-for-like sales and rising labour costs took the group labour ratio to 35% in 2017, the worst in the quoted leisure sector (with the exception of Wagamama, at 38.6% in 2018).

“Lfl sales are becoming more dependent on discounting and delivery, which 82% of restaurants claim is unprofitable (source: haysmacintyre).

“Although we believe in the long-term growth in the foodservice market, it should continue to gravitate from drive-to, mid-market casual dining to convenience (home delivery, quick service restaurants and fast casual), competitive socialising (pubs, bowling centres et al) and the third place (where Loungers is the leader). Although restaurant supply has finally started to fall, declining in-store demand and rising costs point to years of correction. The 60% of The Restaurant Group shareholder base that backed the Wagamama deal were sold a package of Wagamama expansion in the UK and US, franchise expansion, delivery growth, strong like-for-like sales from Wagamama, and a turnaround in the retail/leisure parks. This is all in the forecasts, yet the planner and skipper is leaving. We would recommend patience before jumping on this ship.”