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Restaurant Group slumps as 'unattractive' diner chains undermine Wagamama boost

Like-for-like sales grew 4% in the first half, with last year’s acquisition of Wagamama growing at 10.6%, but group sales have slowed in recent weeks

Restaurant Group PLC - fly in the donburi soup
Donburi soup as served by Wagamama's

Restaurant Group PLC (LON:RTN) swung to a first-half loss as it aggressively wrote down the value of many of its underperforming eateries and like-for-like sales have been distinctly mixed. 

The FTSE 250 group lost £87.7mln before tax in the 26 weeks ended 30 June, compared to a statutory profit before tax of £12.2mln a year ago.

This fly in the group’s donburi soup was an exceptional charge of £115.7mln, of which £100.2mln was an impairment charge across ‘Leisure’ restaurant sites that have been identified as “structurally unattractive”, such as those Frankie & Benny's and Chiquito that are located in retail parks.

New boss Andy Hornby and chair Debbie Hewitt have acknowledged the “well documented over capacity and continued like-for-like sales decline in the casual dining market” and so the impairments reflect a more cautious medium-term outlook.

“We are mindful of the headwinds in the casual dining sector and the meaningful uncertainties created by the potential of a 'no-deal Brexit' and are planning with this in mind,” said Hewitt.

“However, our business is now better diversified and purposefully positioned to benefit from multiple opportunities for growth.”

Hornby, whose name may trigger a form of post-traumatic stress disorder for some investors from his time as boss of HBOS and its catalytic role in the financial crisis, pointed to three growth businesses of Wagamama, Concessions and Pubs that were out-performing the market in terms of sales growth.

Boosted by last year’s £550mln acquisition of Wagamama growing at 10.6%, LFL sales were up 4.0% for the half, accelerating from 2.8% in the first quarter. Total sales were up 58.2% to £515.9mln.

Adjusted for the impairments and other one-offs, adjusted PBT was up 36% to £28.1mln, in line with analyst forecasts.

Second half trading has been slower, however, with group LFL sales growth of just 0.2% as Leisure sites slump back into negative growth.

Expectations re-set?

Shares in Restaurant Group, which had been on the up since hitting around a decade low earlier this year, slumped 12% to 135.4p on Tuesday morning.

“Expectations have been fairly high for Restaurant Group’s recovery after the market had time to digest the (expensive) purchase of Wagamama and how it might actually help to revive the group,” said Russ Mould, investment director at AJ Bell, with the market feeling that management had finally got a grasp on the problems with the Leisure brands.

“Unfortunately its half-year results don’t quite live up to the hype around its recovery efforts. Yes, Wagamama is doing well and there are signs of progress with repairing its other interests. But there are a few items on the menu which leave investors with a stomach ache.”

He acknowledged that there are “a lot of moving parts with the business and it will take a lot longer to get each one running smoothly”, with positives from much-improved operating cash flow offset by a continued weak consumer backdrop, intense competition in the casual dining sector and uncertainties about Brexit.

Broker Liberum noted that the legacy Leisure brands, which still make up 55% of sites trading, were slipped back into decline despite favourable comparatives in the second half of the year.

"The company is seeking to exit at least 50% of these sites at the first available opportunity," analysts observed, which could take up to six years, and while there was progress on Wagamama synergies and conversions, the second half will be "a period of more challenging comparatives and Brexit uncertainty".

Analysts said while the stock looks cheap at 12 times full year earnings with a free cash flow yield of 10.8% and dividend yield of 4.1%, leverage "is high for the restaurant sector with earnings risk still very firmly to the downside".

Quick facts: Restaurant Group PLC

Price: 142.5 GBX

LSE:RTN
Market: LSE
Market Cap: £700.38 m
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