Shareholders in Retail Food Group Limited (ASX: RFG) have seen the value of their shares slump by over 30% from their yearly high of $8 to now trade around $5.75. Although the shares were already trending down after peaking, the market update in early June caused the majority of the decline. The share price has since stabilised and now looks like it might begin trending back towards $6.
Retail Food Group has been a strong performer over the last five years and easily outperformed the broader market over this time. Even taking into account the recent share price fall, shareholders have received an average total shareholder return (dividends + capital gains) of 22.7% each year over the past five years.
There were some interesting points raised in the market update which I think investors should take into account when thinking about investing in Retail Food Group:
Pros:
- Retail Food Group is Australia's largest owner, developer and manager of retail food franchise systems with a network of around 2,450 outlets. This network is forecast to grow to 3,500 outlets by 2018.
- The company is rapidly expanding into international territories and this has been fast tracked through the recent Gloria Jean's acquisition. The group expects international outlet commissions to represent about 70% of new outlet growth by the end of FY18.
- The earnings outlook is positive and management have re-affirmed underlying earnings guidance of around 50% profit growth this year and underlying earnings-per-share (EPS) growth at around 35%.
- Dividends have nearly doubled in the last five years and this is forecast to grow even further. At the current share price investors are expected to receive a fully franked dividend yield of more than 4%.
- There has been a record number of new outlet commissions in FY15 and the company has a pipeline of more then 250 new stores to be commissioned in FY16.
- It is well placed to take advantage of the growing coffee market in Australia and abroad through its roasting and distribution operations.
- Retail Food Group has a three-year plan that hopes to establish multiple annuity style revenue streams which should provide revenues that are consistent and predicatable.
Cons:
- Retail Food Group announced a $3.3 million increase in short term cash costs to allow for annual operating cost savings of $16 million. This will impact short term profits but will be beneficial to investors in the long term.
- The company will also incur a $18.5 million non-cash write-down which will impact the actual results for FY15. The write-downs are the result of impairments taken on lower performing brands and increased provisions for outlet conversions to better performing brands.
- Retail Food Group needs to keep opening new outlets to maintain earnings growth as same store sales have increased by only 2.9% for the year-to-date. There is a challenge of balancing merger and acquisition activity while still being able to invest in organic growth opportunities to maintain and/or increase same store sales.
- Head office costs are likely to increase as the company is undertaking board and executive management expansion as a result of the rapid growth into more territories.
- Increasing competition from Domino's Pizza Enterprises Ltd. (ASX: DMP) and other fast food outlets means Retail Food Group needs to continually innovate and evolve to meet consumer trends.
After reviewing the various points made in the market update I believe the market has over-reacted to the one-off non-cash impairments. Retail Food Group has a positive outlook with a huge opportunity to expand into more territories internationally. The stock price looks like it may have stabilised and the negative sentiment seems to be improving.
With the shares trading on a price-to-earnings ratio of around 16 times, there is good value for investors while the share price remains below $6. Only time will tell, but now may be a good opportunity to pick up this fast growing business.
