Famous Brands expects earnings shock

Food services franchisor share price dropped over 5% to R46.05 by 3:10 pm on Friday when it reported that earnings are expected to be at least lower 20% than those reported for the six months ended August 31, 2019.

The expected drop reflects the impact of the Covid-19 crisis in its South African, UK, and rest of Africa and the Middle East (AME) markets.

The group, which operates the Wimpy, FEGO, Mugg & Bean, Turn n Tender, Lupa, and Salsa Mexican Grill chains said the: “resultant national lockdowns and trading restrictions has been extremely severe.”

This can be seen in South Africa, for example, where restaurants were restricted for five weeks from the end of March, during the hard lockdown.

“Prescribed restrictions in the AME region were slightly less onerous, affording some trading activity,” it said in a trading statement.

“The gradual easing of restrictions in SA and the UK in the second half of the review period enabled us to reopen parts of the business in compliance with regulations, however, significant components remained in hibernation until July.”

Right-sizing the business

The impact of the pandemic has forced it to accelerate its three-year plan to is “right-size” its business operations. This has seen it commit to reducing costs and preserve cash to facilitate balance sheet flexibility.

Famous Brands says it has had some success in achieving these goals as it has not had to use the R300 million contingency facility raised during the period.

Even so, the impact of the Covid-19 crisis hurt earnings.

In SA, mainstream system-wide sales declined 48.%, while like-for-like sales fell  48.7%. Niche brands’ system-wide sales deteriorated 70.1%, while like-for-like sales collapsed by 70.4%. The group announced a few weeks it will be selling its 51% stake in the Tashas café chain back to the Sideris family.

It said though its AME operations delivered a solid result in less stringent trading restrictions, system-wide sales in this region still declined 30.1%.

Its manufacturing and logistics divisions were also hurt by the lockdown as only one of its manufacturing plants, Lamberts Bay Foods, was permitted to operate given its essential service provider status.

For its part, its UK operations saw system-wide sales drop 66.2%.

It expects the basic loss per share is to be within the range of 1 382 to 1 689 cents per share, compared to the prior comparable period’s basic earnings of 159 cents per share.

This loss will include a R1.3 billion impairment on its investment in the GBK UK business.

This impairment means that GBK UK has now been impaired in full at Famous Brands Group level.