Taste 6 month numbers - set up costs weighing down earnings

Yesterday we had the 6 month results from Taste. While not a core holding, they do have the master franchise of one of our US core holdings Starbucks. Onto the numbers quickly, revenue is up 9% to R529 million for the period and core headline loss of R23 million or 6c a share.

When talking about Taste, the fist thing that comes to mind is Starbucks and Dominos because of how massive those brands are globally. However as it stands at the moment, the jewellery division is making profits and the food division is making losses due to the huge cost outlay to open new stores. The growth in revenue also came from the jewellery devision, same-store sales are up 25%. This division used to be their NWJ brand but since last year it now includes Arthur Kaplan which operates in the premium jewellery category, which I feel makes this division look very attractive to investors. Arthur Kaplan has also become custodian to Cartier and Montblanc in selected stores.

On the Starbucks front, South Africans love for international brands has been ahead of their (Taste management) best forecasts & expectations. From a profitability perspective the current stores are EBITDA positive, but as a collective still loss making. It is expected that after the opening of 5 stores the segment will be EBITDA positive. One of the biggest costs to launching new stores is the training of staff. The training costs are paying dividends though:

"On the opening week in Menlyn Maine our partners processed just 3% less transactions than the opening week of Rosebank, with almost no queues. Already in all three stores we are transacting more than three times faster than when we launched."

Over the long run, having the company owning more stores instead of franchising them out, particularly in key locations will be a good thing (in the case of Starbucks, they aren't allowed to franchise any stores). Having more company owned stores does mean more capital costs up front and slower store roll outs, which probably means the share price is not going to shoot the lights out in the near term. All in all, the company operates in two good sectors and are gathering an attractive stable of brands