The Retail Food Group Limited (ASX: RFG) share price dived 7% to $2.43 this morning after a surprise downgrade that appeared to revise previous guidance.
On 7 December 2017, Retail Food Group announced:
"As advised at its AGM, RFG retains an optimistic outlook despite the challenging domestic retail market and maintains its FY18 guidance of c.6% underlying NPAT growth."
This morning, the company declared that its statutory net profit after tax ('statutory NPAT', which is different to underlying NPAT) would be around $22 million, down nearly 40% from last year's figure of $33.5 million. The statutory result includes $7 million of costs associated with the ongoing corporate review.
Notably management declined to state their expected underlying profit result, but adding back the one-off costs suggests that underlying profit could be $29 million, a 10% reduction compared to the $32.1 million in underlying NPAT recorded in the first half last year. If so, this would indicate a 16% reversal from the 6% growth that was forecast less than two weeks ago.
I also found the company's announcements to be somewhat incoherent as they state: "we remain focused on responding to this challenge through delivering franchisee support initiatives and reducing corporate costs".
For example, it is difficult to see how the company will achieve an overall reduction in its cost base if it is required to step up support to franchisees.
Additionally, Retail Food Group blamed: "Recent negative media coverage about franchising, retail and RFG in particular has also contributed to a noticeable decline in momentum in new and renewing franchise sales."
That sounds like a bit of a stretch because a) franchisees usually have multi-year agreements, b) it is a big commitment to buy into a franchise (takes a lot of time to make a decision), and c) it's only been 7 business days since the big Fairfax hit piece.
There would surely only have been a small % of the network come up for renewal over the past few months. As to new sales, Retail Food Group opened just over 200 new franchise outlets last year (excluding closures) which is less than 1 per day.
I commented just a few days ago on the lack of disclosure from Retail Food Group regarding its problems, a criticism that was strengthened when the company made its two responses to media coverage over the past week. Following today's surprise downgrade, as far as I'm concerned the company has lost all credibility.
Shareholders still lack the information they need regarding the health of the franchise base in order to make an informed decision about the business. Here are six questions over the business I'd like answered.
How many outlets are profitable for their franchisee?
How many outlets generate a living wage for their franchisee?
Is the business model a win-win for franchisee and RFG, or lose-win?
Why are there reports of, for example, franchisees being forced to pay more for coffee when RFG is selling an identical product on the supermarket shelf for lower prices?
How much of a decline in momentum in new and renewing franchise sales has been experienced?
Why is the decline noticeable enough to report to the market, but not noticeable enough to quantify it for shareholders?
Retail Food Group's responses have been opaque and it has tried to dance around these core issues, in my opinion.
Today's announcement smacks of a company that is slow to realise that it has a problem, and I have doubt that it is being frank with shareholders. I'd find it very difficult to consider buying shares in this company, almost irrespective of price. As a result I continue to avoid it.
