Famous Brands 6M numbers - hurt by GBK

02-NOV-17

On Monday Famous Brands released their 6-month results, which we already knew weren't going to be pretty reading. Year to date the stock is down 34%, reflecting lower consumer spend locally and the struggles they have had with their GBK acquisition in the UK.

The purchase of GBK has made a significant change to the companies profile. The first impact has been on their gearing, the balance sheet went from having no gearing and debt, to having R2.9 billion in debt. Having some gearing is arguably a good thing, when management doesn't have debt on the books, analysts start to criticise saying the company has a 'lazy balance sheet'. Famous Brands still has a strong balance sheet but to get debt down to a level that management feel more comfortable with, they have suspended the dividend until at least next year. In years gone by, one of the reasons for buying Famous Brands was for their yield.

Over the last few years, their operating margins have steadily been falling from around 20% to the last period's 11.9%. The reason for their falling margins is mostly due to top line growth coming from low margin divisions. Over the last few years they have been growing the supply chain part of the business, where logistics has minute margins and high volume. The purchase of GBK put further pressure on margins due to margins in the developed world being lower than South Africa in general.

The biggest problem currently facing the group is foot traffic, over the last 6-months there was a 16% drop in foot traffic to their Casual Dining and Quick service offerings. The rise of UberEats and similar delivery services is a game changer for the industry. Customers are increasingly opting for the easier option of having food come to them instead of having to go to the outlet, how management handle this change will either make or break the company.

Their UK division has had a rough time, in September they closed the last Steers store and GBK made a GBP 872 000 loss. Management expects GBK to swing into profit during the next financial year.

An exciting launch next year is their Word of Mouth division, which will be launching 'Frozen for you' in early 2018; it will be home meal replacements, sold in store and online. Think Woolies food blended with UberEats. If they can get the value for money and quality/ healthy mix right, this division could be huge in the future.

In the short term, the share price will probably be volatile as management tries to turn around GBK and as the RSA consumer braces for the potential of a credit rating downgrade. There is no doubting the quality of their brands and the excellent job management have done in building a vertically integrated company. As a shareholder though you will have to ride through these bumps.