Is Famous Brands about to give up on its R2bn GBK problem?

The situation at Famous Brands’ UK mess, Gourmet Burger Kitchen (GBK), is getting far worse, not better.

On Thursday after the market closed, the group published a “voluntary performance update” in which it revealed that like-for-like sales for the five months to end-July had plummeted by 10.6%. This was certainly not the plan. The group says GBK “underperformed the board and management’s expectations”.

On Friday morning, the group announced to the market that it “is giving consideration to strategic options relating to a subsidiary that may have a material impact on the company’s share price”.

There is no conceivable way that these two announcements are not linked.

Given how it has weighed on the share price since last year, GBK is the only subsidiary where ‘strategic options’ (read: sale?) could be material.

The 10.6% decline in like-for-like sales is stunning when looked at in context. Considering that the company had targeted six ‘distressed’ restaurants for closure this year, it means the stronger, established part of the portfolio is really struggling.

And, since acquisition (read: Famous Brands splashes R2.1bn on UK’s Gourmet Burger Kitchen), the like-for-like sales declines have been accelerating. Also, this period is the first since Famous Brands acquired the businesses where system-wide sales are also in decline – surely the result of a store rollout programme that has all but ground to a halt.

	Like-for-like sales	System-wide sales
22 weeks to July 29, 2018	-10.6%	-6.4%
52 weeks to February 25, 2018	-6.8%	+4.9%
26 weeks to August 27, 2017	-3.2%	+11.1%
22 weeks to July 30, 2017	-2.6%	+12.1%
20 weeks to February 28, 2017	Disclosed only as “positive”

Source: Famous Brands

In the performance update, Famous Brands says GBK posted an operating loss of £2.24 million in the 22 weeks. Last year, in the same period, the loss was £680 000, meaning the loss has more than tripled. At around R17:£1, the operating loss for the five months is nearly R40 million. This business is losing almost R2 million a week.

The update says: “We are mindful that GBK’s contribution to group profitability has taken longer than initially anticipated, hampered by the adverse trading environment.”

The situation is worse than ever.

Source: Famous Brands 2018 results presentation

The question that needs to be asked is whether Famous Brands now believes it has the skills and patience to fix what can only be described as a disaster. In May, it certainly believed it did when it talked tough about the turnaround.

Read: Can Famous Brands fix its R2bn problem?)

As recently as two months ago, Famous Brands CEO Darren Hele told the Financial Mail that “We are fighting it out”.

Read: Famous Brands bets the farm on UK burger restaurant recovery

The numbers released on Thursday tell another story altogether. How could the situation have changed so fundamentally in the past three months? That’s unlikely – meaning that management either didn’t understand the extent of the problem or how to fix it, or it talked tough while knowing that trading was busy deteriorating.

What seems to be happening here is that management is panicking into acting.

It’s unclear exactly what these ‘strategic options’ are, but you can be sure that there’ll be private equity vultures circling GBK’s carcass. It is not likely that Famous Brands will be able to find an equity partner willing to stomach anything less than 100% of the potential upside.

What investors need to ask is simply whether the current Famous Brands management team can be trusted to be good long-term allocators of capital?

One might argue that former CEO Kevin Hedderwick bought GBK and that Hele therefore cannot shoulder any blame. But Hele has been with the group for 15 years, and had been running the food services division from 2014. At some point, he was MD of Wimpy’s UK business as well as the SA one. (That group financial director Lebo Ntlha has resigned, effective November 30, 2018, after just two years in the role is not a good sign.)

Already practically all goodwill related to the GBK acquisition has been impaired, with just R40 million of the R364 million on acquisition remaining. There were impairments to property, plant and equipment too (total impairments of R406 million).   

In its 2018 integrated report, Famous Brands calculates a “fair value less cost to sell” for GBK of R1.9 billion. In the accompanying sensitivity analysis, it says “a decrease in the like-for-like growth of 1% in the forecast sales will result in a decrease in the recoverable amount of R637 million”.

We don’t know what the “forecast sales” were, but given that it has “underperformed management’s expectations”, one can imagine that the fair value of the GBK business is substantially less than R1.9 billion.

It is certainly less than the £120 million Famous Brands paid in October 2016. Could the group even get £50 million for a business in deep trouble? And, the two billion rand question: should it perhaps be considering throwing in the towel at this point?

Hilton Tarrant works at YFM. He can still be contacted at [email protected].