The brutal and sustained decline in consumer spending across almost all categories that fast food and luxury goods company Taste Holdings trades in has overshadowed operational gains made during the six months ended August 31, Taste Holdings CEO Carlo Gonzaga said in a statement on Thursday.
The group posted an operating loss of R65.91-million for the six-month period, compared with an operating loss of R34.36-million in the first half of the prior financial year, and reported a headline loss a share of 15.9c.
The improvements in labour, margin and costs were not enough to counter the decline in sales, especially in the first quarter of the current period, noted Gonzaga.
Group revenue decreased by 9% to R483-million, while gross margin increased 5% owing to having more corporate-owned stores in the food division than in the prior period. Gross margin was largely unchanged in the luxury goods division. Expenses in the luxury goods and food divisions increased by 3.5% and 3.6% respectively.
Total operating costs increased by 16%, or R36-million, to R262.214-million. R28-million of these costs related to owning more corporate stores.
“We expected sales in the luxury goods division to decline. Luxury goods are cyclical and follow consumer sentiment, the exchange rate and disposable income trends reasonably predictably.
“What we did not expect was the extent and the speed of the decline in the first quarter of the current period. However, having responded with increased marketing spend and even tighter controls, the second quarter of the current period showed materially better sales and profit performance in this division, which has continued into September,” said Gonzaga.
The group recorded a loss before interest, taxes, depreciation and amortisation of R54-million and noted that it had anticipated the loss in the food division, but not in the luxury goods division.
“Our luxury goods division, after multiple years of record financial performance, had its toughest six months in recent history. Although first-quarter same-store sales declined by 19%, this decline slowed in the second quarter to 11%, with the last three months decline from July to September further improving to 3.4%,” said Gonzaga.
Costs increased by 3.6%, well below rental and salary increases, while gross margin remained largely unchanged.
“As part of our intention to separate the food and luxury goods divisions in the future, the divisions have been ‘ring-fenced’, with each having access to their own appropriate funding.”
Meanwhile, the group has concluded that there is an element of cyclicality to the quick service restaurants segment, which also follows consumer sentiment and disposable income.
Brands trading in the lower-income consumer segment have borne the brunt of the sales decline.
“Our efforts to improve the value proposition, combined with increased marketing spending, have been met with limited success and certainly have not been enough to counter the current sales cycle. Although not immune from the cycle, Dominos and Starbucks performed acceptably during the period, with Dominos posting a 1% increase in same-store sales.
“Despite improvements in sales in the most recent quarter, the group remains bearish with regard to a material sales recovery in the next six months. As appropriate, we will continue to invest in marketing expenditure, enhancing the customer value proposition and building on the operational improvements made to date,” said Gonzaga.
The group announced in September that it was evaluating a capital restructure that would see its long term debt of R225-million materially reduced and a combination of debt and equity raised to fund future Starbucks and Dominos stores.
On the assumption that this restructure is successful and, assuming a moderate consumer recovery next year, the food division will reach a cash breakeven during the second half of next year.
“The next six months will continue to test the fortitude of South African consumers. We are, however, confident that the strength of our brands across our divisions will see the group well placed to capitalise on consumer spending as the cycles turn,” concluded Gonzaga.