Leading analyst Douglas Jack has said that although he is cautiously trimming his 2014E forecasts for The Restaurant Group (TRG) on the back of its trading update this morning, prospects for 2015E remain strong and the company “should benefit from easy cinema, weather and sports-related comps and strong cinema releases”.
He said: “Total sales are up 10.3%, with LFL sales up 3.0%, after 45 weeks. Thus, LFL sales rose 1.6% over the last 11 weeks. Due to this recent slowdown, we have shaved 2% off our forecasts. Our recommendation remains Buy, reflecting increasing expansion and strong LFL trading prospects in 2015E.
“LFL sales rose 3.7% in Q3 (6% in July-August; 1.6% in September-October). This is a decent performance given that cinema attendance fell 7.1% during July-September, including a 13.8% decline in September.
“As restaurants that are co-located with cinemas generate half of group turnover, by our estimates, comps should be easy next year. We expect cinema attendance in 2014 to be 7-8% below 2009-12’s average level, with a strong film slate (arguably better than 2012’s) to look forward to in 2015E.”
24 new outlets opened during the first 45 weeks. A further 16 new sites are due to open during the final seven weeks of this year.
Jack said: “In addition, three new sites should open during the first ten days of next year. We are raising our expansion forecast to 45 from 43 new restaurants for next year.
“We are shaving our 2014E PBT forecast by £2m, to £78.6m from £80.5m (consensus: £80.4m), by cautiously assuming that LFL sales rise by 2.7% and that EBIT margins fall slightly (by 5bps). The margin slippage reflects higher pre-opening costs at the end of the year (with no time to generate offsetting revenues) and higher labour costs (up 3.0-3.5%). We forecast 13% earnings growth in 2015E. This is based on just 2.5% LFL sales, 10bps margin growth and no change in debt, despite our assumption of 45 restaurant openings.
“Although we are cautiously trimming 2014E forecasts, prospects for 2015E remain strong. RTN should benefit from easy cinema, weather and sports-related comps and strong cinema releases. Also, falling food and fuel costs are not only benefiting the company directly, but also through helping customers’ real incomes start to grow.”
