Famous Brands results for the full year to end March 2011

One of my favourite companies with full year results out this morning. Famous Brands, I like their products and I like their business model. Revenue was up 11% to R1.87bn while operating profits were up 16% to R358 million. Those don't sound like fantastic margins but there is a reason for that, more on it later. Headline earnings per share increased 17% to 242 cents while dividends were up 36% to a generous 155c a share.

The stock trades at R43.20, a historical PE of 17.8 but much is expected of this stock. Management are ambitious and very active in terms of acquisitions, buying KEG, McGinty's and O'Hagans and then 51% controlling stakes in Giramindo and Vovo Telo in this financial year. If you have not heard of these last two brands, I'm sure you will soon. Famous Brands are fantastic at marketing and getting their brands known. Expect more acquisitions in the future.

Let's look at their current business model. Within the company there are two very different businesses. There is the franchising and then there is the supply chain business. How do these businesses link? Individual businesses buy the franchise rights from Famous Brands and have to pay a percentage of revenues. That is the franchising segment. They are also obligated to use the Famous Brands supply business which delivers all their specific products. That is the supply business. So by signing up a new franchisee they are guaranteeing business for both divisions.

In this financial report the franchising division reported profits of R235 million from revenue of R386 million. That is 66% of all profits at a margin of 60%. You would imagine that the inputs for the franchising are not that high hence the high margin's. Other than marketing and administration the businesses pretty much runs themselves. A total of 111 new restaurants were opened now totalling 1861.

The supply chain division reported profits of R116 million from revenue of R1.4bn. So clearly the revenue driver in the business but margins are nowhere near that of the franchising. These two divisions do come hand in hand however and both rely on each other's success. The more franchises opened the more business there is for the supplier and the more efficient the suppliers are the more profits the franchisers make.

Where's the growth going to come from? I've mentioned this before. The demographics of our nation are changing in two ways. First, and the most obvious is the growth of an up and coming middle class. Such people will be direct customers of Famous Brands restaurants who will aspire to drink coffee at Mugg and Bean or grab a Wimpy breakfast on the way down to Durban for a family holiday. It's what the middle class do.

The second shift is the introduction of more and more woman into the working world. Households are now spending more time making money and outsourcing their cooking skills to the restaurants. Especially the quick ones. Time is of the essence these days. In this sphere I like the acquisition of Juicy Lucy which adds a health element to the equation. I think such shifts in demographics will happen off a low base throughout Africa so even more potential there. I expect the well regarded management team to benefit from such shifts going forward.