JSE-listed franchiser Famous Brands on Monday reported strong organic growth by its brands in the South Africa and Africa and Middle East (AME) regions during the six months to August 31.
Operating profit for the first half of the financial year was up 3.9%, at R421.8-million, compared with R406-million in the six months ended August 31, 2017.
Headline earnings a share were up 10.6% year-on-year to 188c apiece, but the company recorded a loss a share of 572c, compared with earnings a share of 171c in the prior comparable period.
Group revenue increased by 5.4% year-on-year to R3.58-billion.
Famous Brands did not declare a dividend for the period, following a capital structure review to ensure appropriate levels of debt and prudent capital allocation practices.
“Future dividends will be triggered when the short- to medium-term gross debt ratio to earnings before taxation, interest, depreciation and amortisation reaches two times. The ratio at August 31 was 2.49 times, and the ratio in the comparable period of 2017 was 2.66 times,” the company said in a statement on Monday.
The company said that, while the influx of new international operators had slowed, the competitive landscape remained intense in South Africa and the AME region, with industry participants under pressure to innovate on menu offerings and price ladders to retain market share and generate viable margins in the current price-sensitive environment.
Famous Brands stated that South African consumers faced sustained financial hardship and sociopolitical uncertainty, while businesses across the economy were affected by service delivery protests, industrial action and civil unrest, which was exacerbated by local administration inefficiencies and disruption caused by water shortages and cable theft.
Despite this operating context, Famous Brands noted that segments of the South African consumer base showed early indications of optimism and improved confidence in the wake of government leadership developments.
The company averred that across all its markets, delivery and online ordering remained key drivers of growth in the industry.
“Notably, fast casual and quick service offerings continued to outperform casual dining establishments, largely owing to their perceived appeal as convenient and cheaper, in a constrained disposable income environment.”
During the reporting period, Famous Brands started implementation of a ten-year logistics programme called Project Decade that is aimed at steadily building capacity and catering for planned longer-term growth.
The company also launched a plant-wide efficiencies programme called Manufacturing Way, and established new partnerships in its general food service supply and fruit juice businesses, namely FoodConnect and TruBev and expects these to deliver good results in future.
Meanwhile, the company’s struggling Gourmet Burger Kitchen (GBK) brand in the UK continued to incur losses of £2.6-million in the reporting period.
Famous Brands has assured shareholders that, through a voluntary arrangement process, the core leadership team at GBK has been strengthened. GBK has also re-established and leveraged its brand assets, started a targeted refurbishment brand facelift programme, simplified its supply chain and started a targeted closure programme for distressed sites, with the closure of six stores planned.
The Famous Brands board remains convinced that the brand will, in time, add value to the group again, since it remains a leader in the premium burger category in the UK in terms of consumer sentiment, and management’s focus on re-establishing the gold standard across the entire value chain and consumer journey to leverage that position.
In South Africa, the Coega Concentrate tomato paste plant incurred an operating loss of R17.8-million for the period, owing to underuse of capacity, resulting in severe inefficiencies. In light of the failure to secure an adequate, consistent supply of high volumes of tomatoes, and in anticipation of ongoing losses, management elected to cease operations until further notice.
Famous Brands’ portfolio comprises 25 restaurant brands, represented by a network of 2 874 restaurants across South Africa, the AME region and the UK.
During the period, the company opened 79 restaurants across its operating regions, of which 16 had been in the AME region, which comprises 15 countries.
The company’s portfolio is segmented into leading (mainstream) brands and signature (niche) brands, to appeal to a range of consumers across the income and demographic spectrum, as well as across meal preferences and value propositions.
Famous Brands said consumer disposable income remained under pressure in this category; however, Debonairs Pizza continued to gain share in existing and new markets, while Wimpy, Steers, Mugg & Bean and Fishaways retained market share.
Solid system-wide and positive like-for-like growth was reported by all these brands, albeit partly supported by below-inflation menu price increases.
Fego Caffe and Milky Lane both recorded like-for-like turnover growth, although Fego’s system-wide turnover declined marginally, owing to the closure of five stores in the period under review.
Spend in the premium segment of the casual dining consumer market remained constrained, and in this weak demand environment, the portfolio’s growth was largely underpinned by new restaurant openings, including Salsa Mexican Grill, Lupa Osteria and Turn ‘n Tender opening three new restaurants.
Since 2014, Famous Brands has had a premium retail offering brand called Thrupps that was in operation at Total petrol stations; however, Total has elected to terminate the offering and Famous Brands will withdraw these stores in November, concluding the relationship with Thrupps, while maintaining strategic partnership with Total.
Despite challenging local and global trading conditions, the board and management of Famous Brands are satisfied that the group’s growth agenda and strategies are clear. The focus will remain on the fundamentals and prioritising allocation of capital and resources on growth projects going forward.