The Company Voluntary Arrangement (CVA) proposal for Carluccio’s has shown how a lack of investment in its existing sites has impacted trading at the company, with like-for-like covers down 6% in its current financial year.
The document, a copy of which MCA has seen, states that the company’s like-for-like sales figures tracked at an average of minus 6.7% in FY17, with a low point of minus 10.9% recorded in September 2017. It is understood that like-for-like sales are currently tracking at c-1%.
In addition to the decline in sales, the business has also been adversely impacted by rising costs of labour, product, rent and business rates. As a result, almost a third of the company’s sites are now loss-making at restaurant EBITDA level.
As a result of the impairments to asset values and the decline in trading performance, owner Landmark Group wrote down the value of its loan notes in the business at the end of FY17 from £153.3m (FY16) to £35.7m.
It states that trading has continued to deteriorate in the first half of FY18, with last-12-month EBITDA falling to £4.8m by March 2018 compared to £7.5m as at August 2017.
Since then, underlying profits have continued to decline and if the current trajectory continues, EBITDA will fall below £3m by the end of this calendar year, which is “insufficient to meet minimal maintenance capital requirements across the estate as well the financing charges”.
The document states: “Currently, the reduced EBITDA has been sufficient to cover debt financing, exceptional costs and minimal levels of capital expenditure. However it has been insufficient to allow the Company to invest in the refurbishment of its estate.”
Of the 62 sites opened by the company since 2009, only two have been refurbished, and only six of the brand’s top performing 15 sites have been refurbished since 2012.
Management, led since January by Mark Jones, believe that lack of investment in the company’s estate has contributed to the continuing decline in like-for-like covers, down 6% in the first half of FY18.
The document states: “Loss making sites have been subjected to intense operational oversight to drive performance improvements. Where these efforts have not been successful, steps have been taken to secure consensual exits. Whilst this has been possible in a few instances, interest from potential tenants has fallen away as interest in the restaurant sector cools and more sites come onto the market. Landlords have therefore found it difficult to support these efforts given the uncertainty around re -letting the sites.”
The new management’s forecasts indicated that the company would be unable to trade within the limits of its banking facilities in the medium term without significant new investment.
The new team therefore put forward a new business plan focused on restoring profitability by investing in the core estate of the business and exiting loss-making sites on a consensual basis. The funding requirement of the business plan was estimated to be £13m.
However, in March 2018, a large trade credit insurer gave notice to the company of the withdrawal of cover. The company has subsequently received requests from suppliers to provide security totalling £3m either by way of a cash deposit or a parent company guarantee. Further suppliers have also made contact with the company as a result of the cover being withdrawn, but are yet to request additional security.
The document states: “The business does not have the cash resources to fund the security deposits requested. The RCF is fully drawn and the overdraft facility is now regularly being fully utilised. Whilst the Secured Lender is supportive of this CVA Proposal and has waived the event of default under the facility agreement that would be triggered by the proposal of the CVA, it has stated that it is not prepared to increase the level of facilities. The Directors therefore made a request to Landmark to provide guarantees in the form of standby letters of credit. Without such guarantees, the Company would have had insufficient cash to meet the revised supplier terms and would therefore have been unable to secure necessary supplies and to continue to trade.”
Against this background, Landmark, which acquired the business in 2010 in a deal valued at c£90m, indicated that it was unwilling to fund management’s turnaround plan or to provide open-ended supplier guarantees unless the Directors proposed, and the company’s creditors approved, a CVA to address the company’s underperforming premises and the profitability of the business.
If the CVA is approved, the company intends to deliver a “comprehensive turnaround” based on the following initiatives some of which have been developed in response to customer feedback: significant capital investment of up to £250,000 per site, principally to enhance the quality of the assets through the implementation of a new format called ‘Fresca’ (initial trials of which have been encouraging), and also to address catch up maintenance issues.
“Fresca” involves refreshing the look and feel of the restaurants, improving outdoor terraces and installing small bar areas and open kitchens to help highlight the freshness of the menu.
The additional investment will also allow for increasing the number of available covers where appropriate; operational initiatives including improvements to customer service, labour optimisation and procurement streamlining; the launch of new online management training schemes; developing the customer proposition to enhance the dining experience and better integrating the retail and deli offering; further development of an omni-channel marketing strategy, to better leverage social media and online effectiveness; and investment in core systems to improve resilience and enhance the customer experience.
In addition, the company has commenced the process of restructuring central overheads in order to reduce costs and to reflect the proposed reduction of the size of the company’s restaurant portfolio. This restructuring will unfortunately involve reductions in staff numbers at head office.
Yesterday, Carluccio’s confirmed its intention to launch a CVA which will see it exit a number of lossmaking sites out of its 103-strong UK estate.
The proposal is a ‘landlord-only’ CVA, which will impact 34 of the group’s restaurants. It will be voted on by the end of May and, if approved by at least 75% of creditors, will be followed by an investment programme seeing Landmark Group, which acquired Carluccio’s in 2010 for c£90m, putting in £10m of fresh funding to fuel an investment and growth plan. The investment is conditional on approval of the CVA.
The sites covered are:
Mermaid Quay, Cardiff