The Restaurant Group plc (LON:RTN), the owner of Frankie & Benny's and Garfunkel’s restaurants, has served up a better-than-expected decline in annual pre-tax profit following a major overhaul of the business.
Adjusted pre-tax profit fell to £77.1mln in the 53 weeks to 1 January 2017 from £86.8mln in the 52 weeks to 27 December, slightly ahead of the consensus forecast of £75mln but at the lower end of management's guidance of £77mln to £83mln set in April 2016.
The decline reflected an exceptional charge of £116.7mln in relation to the closure of 33 sites, asset value impairments and provision for onerous leases as the company restructured the business.
Total revenue rose 3.7% to £710.7mln from £685.4mln, though on a like-for-like sales fell 3.9%.
The company said it experienced a "challenging" trading year across its leisure brands - including Coast to Coast, Frankie & Benny's and Chiquito - offset by a strong performance in pubs and concessions businesses.
“We have taken decisive action by implementing a strategy review across all of our leisure brands,” said chair Debbie Hewitt.
“It is clear that we had added an unsustainable premium to pricing in our Leisure businesses and that changes to our menus had been insufficiently tested with our customers.”
The group ended the year with free cash flow of £78.9mln, compared to £95.3mln the prior year.
The full year dividend was maintained at 17.4p per share
Current trading is in line with management’s expectations and the group said 2017 will be a “transitional year” with significant changes underway with investment in price and marketing.
The Restaurant Group sees momentum improving towards the end of the year and expects to open between 16 to 20 units with associated capital expenditure between £16mln-£20mln. Refurbishment and maintenance capital expenditure is pegged between £20mln-£25mln.
Numis reiterated a 'buy' rating and target price of 430p, saying: "We are reassured by the depth of the strategic review and confident message from a maintained dividend. Clearly the turnaround will not be immediate and an inflection point in like-for-like sales may be several quarters away. Nonetheless, the 5.4% dividend yield and credible management team present an equally compelling near term investment case."
Peel Hunt raised its rating to 'add' from 'hold' to reflect the dividend and the company's planned cost savings. The pre-tax profit also beat the broker's forecast of £74.7mln.
"Management is clearly trying to reinvigorate the business, with initiatives that will take time to drive more regular customer visits," Peel Hunt said.
"Core menu price reductions should materially undermine profits in 2017E, but this was already in forecasts; now management has the opportunity to show why the dividend, yielding over 5%, is being held, and how it plans to drive cost savings and the customer proposition."
Shares rose 8.33% to 355.0p in morning trading.
-- Adds broker comment, updates share price --