Shareholders of Retail Food Group Limited (ASX: RFG) would be forgiven for asking why the stock has been punished so severely recently, even after it provided a positive market update on Tuesday morning.
Retail Food Group, which is Australia's largest multi-brand franchisor and the owner of brands such as Gloria Jean's, Donut King and Pizza Capers, to name just a few, yesterday confirmed that it was on track to post a full-year underlying profit of $55 million whilst also providing an in-depth plan to continue growing through to the 2018 financial year (FY18). You can read more about its update, here.
Retail Food Group is a remarkable company, and one that has rewarded shareholders handsomely over the last few years thanks to its acquisitive growth, together with reasonable organic growth. Earnings have grown strongly over the years, as have its dividends, which has seen the stock surge 42% over the last 12 months (compared to a 2% rise for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO)), and 594% since mid-2006.
But since peaking at $8.00 a share in March, the stock has retreated more than 25% while it is down nearly 12% over the last week, including a 6.3% drop today. The shares now trade for just $5.96 per unit.
What's really going on?
Although management reaffirmed guidance, there are a number of factors that could be impacting the market's confidence.
First and foremost, the company announced a $3.3 million increase in cash costs in order to achieve annual operating cost savings of $16 million. This is good news for long-term investors, but will obviously impact the company's near-term earnings.
At the same time, it also booked an $18.5 million non-cash write-down on underperforming brands, most of which will be recognised in this year's earnings results. As a result, actual earnings could be considerably less than the underlying earnings forecast by management.
Investors may also be concerned about the current state of the economy. Consumers remain conservative which could act as a restraint on same-store sales, which the company said had only grown by 2.9%. Given that the stock had been trading on a high trailing price-earnings ratio, investors may have been thrown off by this number.
