The Retail Food Group Limited (ASX:RFG) share price jumped 5% to $6.47 after its half year results this morning. Revenue growth was modest, although profits leapt 17% – here's what you need to know:
- Revenue rose 5% to $175 million
- Net profit after tax (NPAT) rose 17% to $33 million
- Earnings of 19.6 cents per share, up from 17.5 cents previously
- Dividends of 14.75 cents per share, up from 13 cents previously
- Completed acquisition of Hudson Pacific Corporation
- Outlook for underlying NPAT growth of 20% for the full year reaffirmed
So What?
Largely forecast already due to announcements made throughout the half, it was still a respectable performance from Retail Food Group, with tasty increases to earnings per share and dividends.
The company also reported modest increases to both Same Store Sales (SSS) and Average Transaction Value (ATV) across the portfolio, with the exception of Michel's Patisserie which continues to struggle and went backwards.
Management stated that the company will require a slightly stronger second half in order to reach its full-year guidance, but this should be achievable due to a full contribution from Hudson Pacific, which was only in the RFG stable for 14 weeks this half.
Elsewhere, I am growing concerned about RFG's treatment and the underlying profit of franchisees. Recent media coverage of Domino's Pizza Enterprises Ltd. (ASX: DMP) and the Australian 7-11 underpayment scandal have brought this concern to the forefront. I haven't got the slightest clue as to whether there are any underpayment issues at RFG's franchises. However, the growth in the number of RFG-branded franchises suggests that all is not well for franchisees.
Management reported 138 new outlets were commissioned during the half, yet "net outlet growth for 1H17 was 26 (PCP: 63)". I am not certain if I understand this statement correctly, but it suggests that 112 franchises – 4.4% of the total – closed down during the past six months.
In the 2015 annual report, Retail Food Group had 2,446 outlets. In the 2016 annual report, they had 2,530, a gain of 84, despite reporting 258 commissionings during the 2016 full year. So despite 396 commissionings over the past 18 months, the group has added just 110 outlets total, to get us to today's reported total of 2,556 outlets.
There could be multiple reasons for this, such as the closure of corporate outlets which was mentioned in the presentation. It's also uncertain of the average age of the franchises – it might reflect a high failure rate of brand new franchises. Either way, this is an item of concern.
Now What?
At approximately 16 times full-year earnings, Retail Food Group doesn't appear overly expensive. It has a promising dividend and a track record of growth. However, I was left with the perception that most of the company's growth is coming from acquisitions, and not the expansion of the franchisee network. Retail Food Group's growth could moderate in the near future, and I would be wary of paying too much for its shares.
