Famous Brands results

This morning we had results from Famous Brands which came pretty much in line with the trading update they released on the 7th of May. Revenue was up 15% to R2.15bn while operating profits also increased 15% to R423mil. Headline earnings per share were up 15% to 278c while a very handsome dividend of 200c is being paid. Wow that is a cover of 1.39. With a share price of R52.46 we get a historic valuation of 18.8 and a dividend yield of 3.8%. That is a great yield for a stock that is actually quite 'expensive'.



The group has had a busy year acquiring Milky Lane and Juicy Lucy whilst opening up 146 new restaurants, 113 of them in South Africa and 33 North of our border. This is why the business grows so quick. Not only are same store sales growing but there is still so much room for new stores. And the best thing about it is that franchisers take on the risks and spot the opportunities. Their whole livelihood relies on the success of the franchise so you would imagine they are run efficiently.



There are two parts to this business. The franchising division which is responsible for R440 million of revenues (20%) and R265 million of profits (63%). And then the supply chain which is responsible for R1.7bn of revenues (80%) and R158 million in profits (37%). See the differences in margins? Well that makes perfect sense, once a franchise is sold not much costs are needed going forward other than collecting their percentage of the revenues. It's the manufacture and logistics where all the hard work is done and where Famous Brands have been so efficient. Costs have been cut and margins have increased.



But we know how this business model works, I have discussed it many times. How is the economic environment? For such good results they seem quite cautious on the economy, but most retailers are.



"Despite talk of early signs of economic recovery in the country, the period under review remained challenging for retailers. Pessimistic consumer sentiment prevailed in an environment featuring continued high levels of unemployment and indebtedness, limited real wage increases, and consumer spend pressured by rising power and fuel costs and widespread food inflation. Notwithstanding these testing conditions, Famous Brands has delivered creditable results for the year ended 29 February 2012, achieved through intensified focus and improvements in the front and back ends of the business."




I've vented my frustration about this kind of commentary before. All the retailers love blowing their own horn about good results in tough conditions but I just cannot find out who is losing allthis market share? So what about the future? I think the company is very well positioned to benefit from the African growth story. Their brands are fantastic and they have a well balanced consumer base from all ranges of incomes. I still like the long term story. I will leave you with what they say about their outlook, remember it's very fashionable to be cautious and then beat expectations.



"Consumer disposable income will remain pressured by escalating electricity tariffs, fuel costs and general food inflation. The bulk of consumers in payment arrears are middle-class earners, the traditional target market for food services operators. To entice them to resume previous levels of spending will demand intensified innovation, particularly should interest rates increase and economic uncertainty persist. Despite the negative effect which these factors will have on the industry, the Group's all-encompassing business model, exceptional personnel and best- in-class leisure brands position Famous Brands for continued growth. In this regard, the Group will undertake a range of initiatives in the period ahead aimed at unlocking further value for shareholders. This will include centralising the Group's procurement function enabling Famous Brands to become an even lower cost producer; extending the Group's presence in market segments where it currently has no representation, including identifying new joint venture partnerships; and continuing to explore opportunities to leverage the synergies afforded by Famous Brands' supply chain."