Looking Tasty?

Fast food has been in the news this week, with Famous Brands releasing their results on Monday, yesterday Taste saying that there has been a local objection to their agreement with Domino's and then this morning their full year results are out.


Let's start with the numbers, revenue is up 15% to R582 million, EPS is up 23% to 15.1c and the dividend per share is up 22% to 6.2c. The group is split between their food services business and their jewellery business, from when they bought NWJ in 2008. The revenue split is about 60/40 in favour of food, but the profit share is closer to 50/50 because of the better margins on jewellery.


Taste only has an operating margin of 8.5%, which compared to Famous Brands' 20% seems very low. Taste do say that their operating margins are not directly comparable to other franchise companies because of the way they treat marketing income and expenditure.


Their jewellery division is in the right sector and is able to cater for people moving into the middle class, so they should continue to see growth. From my experience there are multiple lower end jewellery stores in malls, which to me says there are low barriers to entry. For high end jewellery brands (which I wouldn't classify NWJ as) this is not a problem because they have decades/ centuries of history, making it very difficult for new comers to take market share. If I had the choice I would rather have a brand name, high margin business in my portfolio.


The reason that you would buy Taste Holdings is for their fast food division, and more particularly for the impact that Domino's is going to have on the group. I was watching the CEO on CNBC this morning, Carlo Gonzaga, where he was talking about how much he has learned from Domino's over the last two months. I think that this is the key, the skills that they will gain from Domino's they can use in their other brands. Having the Domino's brand also brings customers that they have not had in the past; when last did you eat from Scooters, for me it has been at least 6 years. In the center up the road from me the Scooters was replaced by a Debonairs, still early days for Debonairs but I think I have made my point.


Taste say that they expect Domino's to have a material impact on their results in two years' time. The reason for the delay is due to the cost of converting the existing stores. Some headwinds that might come up in the future would be if Yum brings back Pizza Hut, which they indicated they might do.


My money would still be in Famous Brands over Taste but the company (Taste) is growing off a vastly smaller base and as such looks attractive to have a punt on them doubling earnings in a short period of time. The Domino's deal is a catalyst for the company and their results will have to show it in years to come, if it comes off, I think there is good money to be made.