RFG - Retail Food Group

[peter2]

Current Affair got stuck into RFG again tonight with lots of terrible stories of ruined franchisees.

 

[greggles]

Current Affair got stuck into RFG again tonight with lots of terrible stories of ruined franchisees.

Looks like the ACA episode had an impact on sentiment. The pre-open indicates that RFG is set to head south today, at least at the open.

 

[McLovin]

Business model looks busted to me. Rinsing franchisees with higher fees to keep profits rising, while SSS is negative. It needs a continuing supply of suckers and new (acquired) brands to keep profits ratcheting up. Unlikely they will be able to get either for the foreseeable future.

They've got $250m in debt and $670m of fairly worthless intangibles, given the performance of their acquired brands (I assume the intangibles overwhelmingly relate to acquisitions). Interesting timeline...19/12 trading update...27/12 debt refinance announcement...09/01 downgrade to guidance given on the 19/12. Anyone know what their debt covenants are?

Aside from all that, I'm not sure I'd want to own shares in a business that apparently hides behind contracts to send hard working people to the wall.

 

[greggles]

I think the only chance RFG has long term is for a complete management and business overhaul and while I think that is a likely outcome given the overwhelming negative sentiment surrounding the company, there will be a lot of short term pain while the company is reorganised and no guarantees about the eventual outcome.

I can't see any positives on the horizon in the short term. It all looks very bleak.

 

[greggles]

RFG bouncing back over the last week. Bit of a surprise.

 

[galumay]

I suspect its leading into the HY report, its likely to be significantly better than the sentiment and media speculation implies so not surprising to see traders load up a bit.

 

[greggles]

Intrepid Capital Management Inc. becomes a substantial shareholder of Retail Food Group Limited after buying 9,343,565 shares between 19 December 2017 and 16 February 2018 and acquiring a stake of 5.29% in RFG.

A big vote of confidence from the Florida based fund manager. This from their website:

PHILOSOPHY
If there is one thing to understand about how we do business at Intrepid Capital, it's this: we are committed to the constant pursuit of value. This means that we look for the best value investing ideas with the goal of participating in the upside when markets rise while seeking to protect capital on the downside. For our clients this strategy fosters the confidence of a financial partner that is dedicated to their long-term goals.

http://www.intrepidcapitalfunds.com

 

[greggles]

RFG suspended from trading for failure to lodge their half year report. The company said yesterday that they are awaiting the auditor's report, which is expected to be received tomorrow.

They also said the following:

As foreshadowed in the release made on 9 January 2018, RFG expects its statutory NPAT for 1H18 to be materially less than the result for the equivalent prior period. These results can only be finalised and released to the ASX once RFG’s financial statements for the period have been finalised. That can only occur once the auditor’s report has been issued which may not, RFG currently understands, be available to RFG until Friday 2 March 2018.

Sounds pretty grim.

 

[notting]

One suspect it will go from high yield to no yield and that Intrepid might seek to cut their losses quickly!
It's usually grim when they suddenly have counting problems and need a bit of extra time from the auditor.

 

[McLovin]

Ummm....On the 9th of January how many thought a statutory NPAT of less than $22m meant a statutory loss of $87m? How are those covenants? Two hundred stores closing, this sure looks busted to me.

They've done their best to ensure a class action.

 

[galumay]

Yep, covenants look like a Hulk Hogan choke hold. I think its F$%%$, I have made a fool of myself again, I should have sold when they were $7.50 or whatever they ran up to, it was way past my IV range and I only held because I really though the coffee business could be transformative for them, but they have stuffed that up as well. (scary, because as a commercial roaster I know how good the margins are and how easy it is to make money).

I thought about selling out a couple of times in the last 6 months, but I thought (and still believe) so much of the reporting of issues with the franchisees was largely sensationalised rubbish.

I will have to go back over all my notes and decide what I got wrong and why I got it wrong. I know anchoring bias is certainly part of it. I suspect ignoring the growing debt ratio was another.

The only glimmer long term is probably the wholesale side of the business, everything else is either rubbish or destroyed through mismanagement.

My only consolation is that my decision making is improving over time and I have only made really bad mistakes like this a small number of times compared to the businesses that have performed well for me.

 

[notting]

You weren't alone plenty of analysts were into the model. Model always seemed extortionist to me, killing the middle guy and selling the carcass to the next sucker.
The most troubling thing regarding the future is the lower foot traffic in malls which is where the best business is although I heard today that Chadstone car parks are as full as ever so maybe that is an excuse.
A positive is that they are coming back to market and not declaring receivership!
If the foot traffic is still there then surely this would be a compelling thing for someone who really knows how to run a franchising business to turn around.
Coffee and bakeries are never going out of fashion, very different to say Myer which is an ugly old world dinosaur and has been for about 25 years, which has only really been recognized as such in the last 7 or so. I couldn't stand Myer 20 years ago and could see much better dynamics elsewhere in retail back then as a shopper.
If I was Solly Lew I'd be going for RFG not Myer. You could really do well out of it running it properly.
Didn't they get extensions on debts and they may do a raising to cover any immediate cash squeeze like the 7m which is all they have left! Although you'd think they would do that now if they were going to.

 

[galumay]

Yep, i expect a CR is the next thing. You are probably right, there is some sort of business in there, I am more angry at myself for not selling when they ran so far ahead of my range of IV.

 

[kid hustlr]

What a story. I spoke to my friend last week about this and he was still passionately bullish. Really interested to see where this goes from here

 

[Country Lad]

From SMH:

The company is now in a banker-enforced "step down program" to reduce its debt from $259.7 million, with 60 per cent of net proceeds of any asset disposal (unless agreed) earmarked to repay debt. RFG suspended dividends for the half to support its balance sheet.
Part of the impairments include a $45 million writedown on the value of Michel's Patisserie chain, and a $34.5 million charge on its retail coffee division, which includes Gloria Jean's and Cafe2U mobile networks.
The company also booked a $4.5 million writedown on the value of its Pizza Capers chain.
A further $35.7 million in charges have been booked as a result of the planned store closure program.

 

[McLovin]

Yep, covenants look like a Hulk Hogan choke hold. I think its F$%%$, I have made a fool of myself again, I should have sold when they were $7.50 or whatever they ran up to, it was way past my IV range and I only held because I really though the coffee business could be transformative for them, but they have stuffed that up as well.

I'm not in trying to ride your arse, Gal, but forget about $7.50, you need to ask yourself why didn't sell in the last couple of months. The writing was on the wall. You've got to pull yourself away from your opinion every now and then, hard as it may be (we all do it, which is why ventilating our opinion is so important). Whether or not you believed they'd recover you could have, and should have, sat it out. Remember that thing about Mr Market giving you a buy and sell price everyday? Go back to last week and tell me you would have bought RFG shares if you weren't already invested and were doing your initial research.

I'm 100% genuinely saying this in the most constructive way possible, please don't take this as a personal slight, it's not. I hate seeing people lose their hard earned.

 

[galumay]

I'm 100% genuinely saying this in the most constructive way possible, please don't take this as a personal slight, it's not.

Hell no, I totally appreciate the feedback. Not much point in posting here if its an echo chamber!

I didnt sell in the last couple of months because I had decided things were not nearly as bad as Mr Market thought. I went back over all my research and analysis and the IV range I had calculated for the business was much higher than its SP.

Interestingly when I go back through my decision journal I find that there is no mention of RFG at the various times when I was considering selling down postions. So I never got to the point of seriously considering selling.

Its probably worth noting that I also didnt consider buying more to average down seriously, as it would be recorded in my journal had I done so.

So all that aside, we are where we are, and now the decision to be made is whether to get out at any price or to hold on and see if RFG can rebuild a business somehow. I know some will believe its a no brainer and selling now is the only sensible option, but its not so simple for me. I have done very well a number of times by holding strong conviction positions and patiently waiting for the rewards. So the question for me is more about understanding my level of conviction about the ability of management to turn the business around and get it back on track.

Holding those sort of convictions in contrarian positions when almost no one is seeing the world the same way, for the same reasons, is challenging - and of course can still turn out to be wrong in the long term!.

 

[Country Lad]

I didnt sell in the last couple of months because I had decided things were not nearly as bad as Mr Market thought.

Holding those sort of convictions in contrarian positions when almost no one is seeing the world the same way, for the same reasons, is challenging - and of course can still turn out to be wrong in the long term!.

I am sure we have all done this. I certainly have in my early trading days, but the thing I learnt after a couple of bad trades that it didn't matter what I thought or what anybody else thought, the market is always right and it is not a good strategy to start arguing with the market.

 

[galumay]

the market is always right and it is not a good strategy to start arguing with the market.

Different horses for different courses, that view is diametrically opposed to my view, the market is often wrong and arguing with the market is how I make money.

I suspect the difference is partly due to you being a trader, I imagine you need a very different world view, strategy and psychology to be a trader.

Of course on a higher level these contradictory views are what creates a market, without them there would be no opportunity.

 

[greggles]

As expected, carnage this morning for RFG. It opened at $1.09, bottomed out at $1.03 and is currently trading around $1.40, so it has bounced back well from its low. Where it will finish the day is anyone's guess.