The Ardent Leisure Group (ASX:AAD) share price fell 25% over the past week, after the company's first half results revealed weaker revenues and sharply lower profits. Here are some of the things that jumped out at me:
- Revenue fell 5% to $317 million
- Net profit after tax (NPAT) was a loss of $49 million, compared to profit of $22 million in prior half
- Core earnings (a measure of ongoing profitability) fell 58% to $13 million
- Loss per share of 10.5 cents per share
- Dividends of 2 cents per share, down from 7 cents previously
- Outlook for continued Main Event rollout and continued single-digit revenue growth here
- Dreamworld expected to recover over time, while growth in bowling segment expected to continue
So What?
It was a tough six months for Ardent, with a mixed performance all around. A $90 million write-down of the value of Dreamworld dominated the results, partly offset by a $45 million profit on the sale of the Health Clubs segment. An agreement to sell the Marinas division was also struck during the half, and that sale is expected to finalise by June 2017.
Dreamworld revenues were, of course, heavily down following the tragic accident there late last year. The Australian bowling segment performed well, with constant-centre revenue rising 4.1% even though total earnings fell due to closure for refurbishment. Ardent's program of transitioning its Australian bowling alleys into multi-attraction entertainment centres, similar to its U.S. Main Event offering, appears to be working.
Unfortunately, the Main Event business itself doesn't appear to be performing so well, with same-centre revenues falling 2.9% during the half. Management attributed this to a weak casual dining environment, increased competition with mature centres, and the 'opening of new Main Event centres in existing core markets to dominate the territory'. The fact that these new openings impacted constant-centre sales presumably means that new centres are competing for business with existing ones, which is not ideal.
While Main Event centres appear an attractive investment, with an average Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) return of 30% after the first year, the initial signs of weak performance are concerning, given how important Main Event is to Ardent going forwards:
As we can see here, Main Event is now the biggest part of the Ardent business and will become even more important in the future. Also, management attributed the weak same-centre sales to a variety of external factors, not factors that are within the company's control. The impact of competition at this stage suggests Main Event doesn't have an offering that is unique.
Now What?
With the divestment of its Health Club and Marinas divisions, Ardent will have a much stronger balance sheet and the financial flexibility to pursue its Main Event rollout throughout the USA. Other businesses like Event Hospitality and Entertainment Ltd (ASX: EVT), and indeed Ardent itself, have shown in the past that well-managed yet low-margin entertainment businesses can deliver attractive returns to shareholders.
Yet with Ardent's wagon being pulled by Main Event and that business underperforming, it's not a surprise to see that shares have plunged over the past few days. At $1.60 however, Ardent shares are now below the $1.70 price where I told myself I would investigate the company closer – so you might read more from me on Ardent in the coming weeks. For now however, I don't think it is a standout business.
