M&C Report takes a closer look at today’s full-year results announcement from The Restaurant Group (TRG), owner of the Frankie and Benny’s, Chiquito and Garfunkel’s brands: Current trading The group said it had a solid start to the current year, with sales growth of 3% (like-for-like sales of -2%) for the first eight weeks of the year. Chief executive Andrew Page told M&C Report that group’s performance at the start of the year was up “against a strong bounce back” in trading witnesses at the start of January 2011 after the adverse weather in December 2010. He said: “Up until the last week of that period we had been in positive territory but as with last year trading has been variable.” He also highlighted that the snow at the start of February and the lack of a blockbuster film also impacted trade. He said: “Last year the King’s Speech was in the cinema’s, which had a positive affect on our leisure park sites, we haven’t had a similar popular film this year, which added to the adverse weather also impacted our destination outlets.” Page said that central London continued to outperform the rest of the UK, but that the high cost of units meant the group was prepared to bide it times on expanding its portfolio in the capital. He said that due to the continuing uncertainty in the economy, he believed the second half of 2012 would be “much better than the first half” in line with an improvement in disposable household incomes. Costs Page said that cost inflation in 2011 proved to be a “somewhat more significant issue than anticipated” at the start of the year, particularly on food and beverage costs where the group saw average increases for the year of over 3%. Wage cost inflation was higher than in 2010, which the company said was principally due to the much higher level of minimum wage increase that was effective from October 2010 (an increase of 2.2% compared to 1.2% in October 2009). Page said that the outlook for 2012 in terms of cost inflation was uncertain at this stage. He said: “We think it unlikely that food and beverage cost inflation will be any less than that experienced in 2011. Although our strategy continues to be one of fixing costs where sensible, at present a larger proportion of our food and beverage input costs remain unfixed than would normally be the case. This is in anticipation of further softening in commodity prices during 2012.” Openings TRG expects to open between 25 and 30 new restaurants during 2012 and said it was also successfully adding to its potential pipeline for the next two to three years. Page said: “Visibility on our pipeline is better than it has ever been and we could possibly go over the 30-site mark going forward.” The openings this year will be spread across all the group’s brands. Brands The group said that its 203-strong Frankie & Benny’s estate performed well in 2011, increasing revenues and profits; margins were maintained at 2010 levels. It opened 16 new restaurants, of which nine were on non-cinema sites. It said that the new openings were trading “strongly” and are expected to deliver “excellent returns”. It anticipates opening between 14 and 18 new Frankie & Benny's restaurants in 2012. The 69-strong Chiquito estate delivered “a good performance in 2011 with increases in revenues, profits and margins”. Four new Chiquito restaurants opened during the year all of which are located alongside Frankie & Benny's. The group said that this dual roll out strategy was working well and is expected to continue this year. It said that the new Chiquito's were trading well and were expected to deliver strong returns. During 2012, it plans to open two to four new restaurants under the brand. The 23-strong Garfunkel's traded well during 2011 “delivering good levels of margins and profits”. During the year, TRG opened two new Garfunkel's restaurants - these are “trading well and are set to deliver strong returns”. It said it was building up a good pipeline of new Garfunkel's sites and currently expects to open two to four a year for the next few years. Pubs During 2011, the company completed the ex-Blubeckers conversion programme was completed. It said the portfolio was now operating in line with the Brunning & Price model and the results of the changes made over the past 18 months were “most encouraging”. Page said: “We opened one new pub restaurant, the Old Hall at Sandbach, which is trading superbly and is set to deliver strong returns. During 2012 we expect to open between three and five new pub restaurants.” The group is currently searching for a deputy managing director for its pubs division. Page said that this succession planning would bring the pub division in line with the rest of the group’s sectors. He also said he expected managing director Graham Price to remain with the group for the foreseeable future. Concessions The group’s 58-strong concessions business “traded superbly” during 2011 with “strong increases in revenues, margins and profits”. Page said that an absence of disruptions, as experienced during 2010, certainly helped the performance but, “even adjusting for this, the underlying trend was one of good improvements across all of the key metrics”. During the year TRG opened two new restaurants at Gatwick airport – Page: “these are trading well and are set to deliver excellent returns”. It expects to open two or three new restaurants in the division this year. Analyst reaction Douglas Jack at Numis said: “On average, the other quoted operators are trading 2% above full year like-for-like sales forecasts, allowing for tougher conditions ahead. In contrast, TRG’s like-for-like sales are 3.5% below consensus forecasts (we downgrade to £62.5m PBT, from £66.5m; consensus guidance to £64-64.5m, from £66.2m). The 13x P/E (6.5x EV/EBITDA) valuation is in line with the historic average, but the downside risk to forecasts is still above-average. We are cutting our forecasts by 6%; management is guiding consensus forecasts down 3%, which is insufficient in our view.” Simon French at Panmure said: “We anticipate consensus estimates to be trimmed 1-2% to c£64-65m PBT (from £65.6m PBT currently). The group comments that once economic conditions improve it will review its capital structure to determine what, if any, adjustments are appropriate. On our revised estimates the stock trades on a 2012E adj EV/EBITDAR of 7.0x, a P/E of 12.2x and yields 4.0%. We reiterate our Buy recommendation but trim our TP from 365p to 355p (7.7x 2012E adj EV/EBITDAR) implying c22% upside potential.” Wayne Collins at Collins Stewart said: “Today’s announcement re-confirms the strengths of the TRG business model but current trading is likely to disappoint. However one needs to acknowledge that this period only relates to 8 weeks and profits for Jan + Feb equate to less than 10% of FY profits. At first glance we intend to reduce our forecasts from a 2012E PBT of £67m to £65m which are couched upon 1% like-for-like sales growth and 26 new openings in 2012 (will update post the analyst meeting). TRG is forecast to be cash neutral/positive within 18-24 months. Our Buy stance is couched upon its strong cash flow profile: In the four years since 2007, net debt has reduced from £77m to £42m, investment in expansion of £106m (108 new restaurants), £48m in maintenance capex and returned £67m to shareholders in dividends.”