You've probably heard of discretionary retailers Donut King, Brumby's Bakery, Pizza Capers and Gloria Jean's. What you might not know is that they, and others, are franchise brands owned and managed by listed conglomerate Retail Food Group Limited (ASX: RFG). The franchisor's share price has increased over 600% since 2006.
What started out in 1989 operating 50 Donut King stores has grown into a $1 billion dollar public company with over 2,500 outlets throughout Australia, Asia, Europe and the United States. The franchising business generates a reliable stream of earnings and the company is intent on further global expansion. That sounds all well and good, but it's not what I find most attractive about Retail Food Group.
For me, I'm much more interested in their coffee.
Through the end of 2014 and start of 2015, Retail Food Group transformed the organisation when they acquired Gloria Jean's Coffee and wholesaler Di Bella Coffee. Already, coffee and allied beverage operations contributed 38% to total company earnings in 2016, of which wholesale coffee earnings were up 83% on the previous year. Further growth is expected as the Di Bella Coffee label increases its international presence.
Then in August 2016 the company acquired Hudson Pacific Corporation – a food product procurement, manufacturing, warehousing, and distribution business with a long history of providing goods and services to Retail Food Group franchisees. The integration of Hudson Pacific was immediate and increases market penetration of the group's coffee products through their vast network of franchises and wholesale customers.
As part of its continued search for growth, Retail Food Group announced in November 2016 it had entered into an arrangement with BP to explore opportunities in fresh food and coffee throughout their 1,300 service stations. It will be interesting to see what, if anything, comes from the deal.
Of note, supermarket giant Woolworths Limited (ASX: WOW) declared the very next month that it intended to sell its fuel business to BP with plans to establish a "long-term strategic partnership" once the sale is complete.
One of my main concerns for Retail Food Group is the large amount of debt it's accumulated as a result of the transformation from domestic franchisor to global food and beverage company. I'd like to see further organic growth and reduction in debt before another large-scale acquisition.
Having said that, the group has established an impressive track record so far. Net profit after tax has increased every year since listing in 2006 at a compound annual growth rate (CAGR) of 27.4%. Furthermore, management has shown a willingness to retain significant earnings in order to manage debt.
Retail Food Group currently trades on an undemanding trailing price/earnings ratio of 17 with a fully-franked dividend around 4%. A drop in share price below $6 could present an excellent buying opportunity for long-term investors.
