RFG - Retail Food Group

[galumay]

Additionally, the value of the capital loss for tax purposes is not to be overlooked.

I have never really understood that justification for losing capital! (plus I have enough of a capital loss with SGH thanks very much!)

 

[VSntchr]

I have never really understood that justification for losing capital! (plus I have enough of a capital loss with SGH thanks very much!)

Well it is not so much a justification, in my mind it is more around making a decision to optimise your situation from a financial perspective.

If you sell (legitimately! - rather than for blatant tax wash purposes), you can make the decision about whether or not you really want your capital exposed to this investment without the sunken cost bias.

If you decide that you do see the ability for this franchise to create surplus cash flows over and above other researched opportunities - then you can re-purchase your shares. Until your operating with market moving size - you really don't have to consider your transactions market impact

It only takes a short time with a spreadsheet and all of the relevant personal and investment details to figure out the relative worth of the tax asset, brokerage implications etc etc.

Or you may decide after selling that there are far better investment opportunities elsewhere and you've avoided potentially wasting precious compounding time sitting in a very slow-to-turn turnaround.

 

[galumay]

Well it is not so much a justification, in my mind it is more around making a decision to optimise your situation from a financial perspective.

Thanks mate, i guess I just dont get it. Its simply not how I think about investment. Thats ok, we cant all be thinking and doing the same thing!

 

[Value Hunter]

The problem still remains that there is no conceivable pathway to a turnaround on the horizon. Even leaving aside the issues of incompetent and dishonest board and management, not being able to recruit new franchisees or the class action or the stretched balance sheet, all of which are problems that are solvable (albeit difficult), the real problem is that the underlying business itself is a lemon.

Most of the brands are old tired concepts and aren't in on the right food trends such as cheap e.g. Dominos, or healthy e.g. SumoSalad and T2, or premium fast food e.g. Grill'd and Nandos, etc.

Better to sell at $1.00 then wait until it goes to zero.

 

[sptrawler]

You're right VSntchr, I've ridden a few into the ground, now I look at a share and say to myself "would you buy more"?
If the answer is no, then why am I hanging on, if the share price is sliding? You really have to be honest with yourself, at that point and decide if the business model is worth it, channel 10 was a perfect example.
Just my opinion.

 

[galumay]

The problem still remains that there is no conceivable pathway to a turnaround on the horizon. ...

Most of the brands are old tired concepts and aren't in on the right food trends such as cheap e.g. Dominos, or healthy e.g. SumoSalad and T2, or premium fast food e.g. Grill'd and Nandos, etc.

Better to sell at $1.00 then wait until it goes to zero.

The only possible scenario I see for a turnaround is to trim back the franchises to which ever if any are still profitable and focus on the coffee (which should be the best part of the business, and the reason I stayed in when they ran up.), and the distribution business. Whether that company would be worth any more than $1 is debatable anyway!

 

[galumay]

Sold my RFG today, the more I analysed it the less certain I was that the company would ever be worth more than $1 again. The debt was the killer for me, if I put that aside there is a profitable, smaller business left, but the debt is just too huge to see them being able to deal with it, I can also see massive writedowns in the intangibles coming which will destroy equity.

A salutory lesson for me, its the second time that I have held companies when they were way past IV and I had a paper double bagger, RFG & SGH were both positions I could have massively profited from and instead have booked massive losses.

 

[Toyota Lexcen]

terrible situation for you galumay

 

[galumay]

terrible situation for you galumay

Thanks mate, but thats only true if I dont learn from it! An expensive lesson, but a valuable one about following strategies and having clear decision making processes. Overall my returns in my SMSF and personal portfolio are in line with my absolute goals so that makes the losses more bearable!

 

[Miner]

who were the smart traders who bought at $1.1 at least and bailed out. Needed lots of gutts however.
Lucky to sell at average $2 between 22 to 26 February.

If I could correct /edit my this posting, then I would say who are the unfortunate holders of RFG who still holding RFG on the next business day when market returns.
Another feather on the ill fated cap of RFG
http://www.abc.net.au/news/2018-03-...stop-bad-franchisors/9601204?section=business

 

[Wolfofwilliamst]

Even our beloved Scott Pape 'the Barefoot Investor' got burnt by RFG. I think now that the dust has settled from the H1 results and the huge write-downs, and the Fairfax report of franchisee pain.....this company is finally in BUY territory.
It isn't without risk however, as geopolitocal market events and panicky investors may still cause further falls - that i beleive would be external to RFG value.
Some of the numbers:

Share Price – $0.93
Book Value Ratio – 0.35
Net Profit 2017 – $62m
Net Profit Margin 2017 – 21.35%
Debt – $250m

Net Profit H1 2018 (Before Intangible Writedowns and Closure Costs) – $24.7m.
Net Profit Margin H1 2018 – 14.5%

Pros
* They have a decent enough trailing profit margin, so there is room to take a hit and restructure further.

* Book value is high and has grown over the last 10 years.

* Restaurants are diversified and coffee services are robust.

* Dividends have been suspended. A big negative on the surface, but as 2017 was a distribution of $52m to shareholders….this can now be saved to pay down debt and destress franchisees.

* $10m has been flagged as costs savings moving forward.

Cons
* High debt load considering the now depressed market cap. Although trailing sales of $349m and an EBIT of $108m give Retail Food Group some power to repay.

* Uncertainty to the number of store closures. Will it be 200 or much higher?

* Debt covenant to maintain over $90m in EBIT for 2018 is worrying.

* Book value may reduce if further intangible value writedowns are pushed through.

This should be a wake up call to Mr Nell and RFG directors, to realise that they have to look after their people – because it is the people running the restaurants that make the bottom line happen. Stop milking the cows so hard and put a bit back into the franchisee pockets and the organic growth will take care of the rest.

Only a few months back Retail Food Group was $4.50 a share, it now sits at less than $1. It's making 30% less profit since the Half 1 results and will most likely report lower earnings again in Half 2....so lets call its 40% less profit with a purchase discount of 85%. Not bad.

A bit more info on how i would scale into this as a medium term investment and some further numbers here.
Cheers, welcome any feedback.

 

[galumay]

I would be very wary about putting much confidence in the book value, there is a lot of dubious value in the non-current assets. I think profit this year is difficult to forecast, debt is the catostrophic risk IMO. RFG will probably need a CR to survive and even then its marginal. I know when I sold out (much too late), i did some calculations on the expectancy and it wasnt good, my back of the envelope number was 90c. The debt and the intangible assets were too higher risk for my appetite!

Of course having sold, my biases are to confirm my view as being correct, so....

 

[greggles]

Retail Food Group to open 40 new Gloria Jeans Coffee franchises in Germany?

http://crweworld.com/article/news-p...a-jeans-coffee-outlets-set-to-open-in-germany

This hasn't been announced by RFG yet but it seems like a strange development. Is sentiment surrounding the company so bad now in Australia that they have to go overseas to open new franchises?

Will this kind of business model work in Europe, especially for something like coffee? There are already 161 Starbucks outlets in Germany so there is already plenty of competition. Seems like a desperate move to me.

 

[Knobby22]

Retail Food Group to open 40 new Gloria Jeans Coffee franchises in Germany?

http://crweworld.com/article/news-p...a-jeans-coffee-outlets-set-to-open-in-germany

This hasn't been announced by RFG yet but it seems like a strange development. Is sentiment surrounding the company so bad now in Australia that they have to go overseas to open new franchises?

Will this kind of business model work in Europe, especially for something like coffee? There are already 161 Starbucks outlets in Germany so there is already plenty of competition. Seems like a desperate move to me.

Gloria Jean is quite popular in Asia.

 

[greggles]

One month later and RFG has continued to drift south on low volume. It's currently at 80.5c.

The company has been deathly silent for two and a half months with no announcements of note since the business-wide review update of 2 March.

Will this get cheap enough to tempt anyone or is there just too much risk involved given all that has happened in the last six months?

 

[galumay]

Too much risk as per my earlier post. The debt is the killer, doesnt matter what price it drops to IMO.

 

[McLovin]

Will this get cheap enough to tempt anyone or is there just too much risk involved given all that has happened in the last six months?

A bunch of busted brands inside a busted franchise model inside a company with high debt. Who wants that at any price?

 

[VSntchr]

A bunch of busted brands inside a busted franchise model inside a company with high debt. Who wants that at any price?

I actually feel sorry for the employees when I walk past a "Michelles Patisserie" or "Donut King".
It just feels like they are stuck in 1999

 

[greggles]

Busted brands is an apt way to put it McLovin. As for debt, I had forgotten how bad it is. More than a quarter of a billion dollars in debt. They are in it up to their eyeballs. I can't imagine the mood in at RFG corporate HQ at the moment. There must be a ton of pressure bearing down on them to pull something out of the bag.

Very grim indeed.

 

[McLovin]

I actually feel sorry for the employees when I walk past a "Michelles Patisserie" or "Donut King".
It just feels like they are stuck in 1999

Michel's is so bad. I can't see how the place still has customers. You're right, it belongs in a suburban strip mall in 1999. But RFG's MO seems to be to buy a decent brand and then get as much cash out of it as quickly as possible. And then keep it running on life support to keep enough suckers willing to pony up for a franchise.