The Restaurant Group (LSE: OTC:RSTGF), listed on the London Stock Exchange, saw its shares jump 5% on October 6th following the release of its Interim Results. They presented a testing period for the company that has seen demand diminish inline with many other retailers and restaurants on the UK ‘high-street’. In the UK the ‘high-street’ is the name for the primary business street of a certain area.
The primary issue RTN faces is to do with how prolonged consumer uncertainty will be. As seen with many other retailers, RTN’s share price has struggled to really bounce back hard from the initial fall. Shares still stand down 40% since pre-COVID levels and 65% since January. More worryingly for investors is that RTN was actually already struggling before COVID, coming into the crisis with poor performance and a sizable debt pile following the Wagamama acquisition. I still believe current headwinds are too large to take a position in RTN currently due to the huge uncertainty that remains, but I do think that its Wagamama chain still could offer shareholders a recovery. I maintain a neutral stance for now.
Source: standard.co.uk – Inside a Wagamama restaurant.
Interim results
RTN’s numbers worsened heavily in the first half as losses fell to £234 million. This was down from the £87.7 million loss experienced in the previous year. RTN’s costs were nearly double that of sales. This highlighted the starvation of sales that RTN has experienced over the last half-year.
RTN also agreed on a CVA for its leisure business which mainly comprises of its Frankie and Benny’s estates. This allowed RTN to exit 128 underperforming trading sites. It also allowed for improved rental terms based on turnover for 83 sites in the remaining trading estate. The company also placed Chiquito, its Mexican Restaurant brand, into administration, allowing the company to exit a huge 454 underperforming trading sites without further liabilities. All of these actions were of course not taken lightly but completely necessary. I give credit to management for taking the necessary action to streamline the business and remove as much of the ‘deadwood’ sites as possible. By doing this RTN has become more versatile, but the company still has a long way to with an expected retained estate of around 400 – this is the company’s total location count.
RTN had around 90% of its sites open by the end of August. The company would have done this rather hastily in order to take advantage of the governments ‘eat out to help out‘ scheme which brought huge footfall to UK restaurants as consumers returned to sites to take advantage of half-priced food. Due to this, RTN has said that trading has been ‘very encouraging’ since sites have reopened. I believe investors have underestimated the long term influence this scheme has on consumer confidence. The scheme showed people that restaurants and food shops could welcome and take in customers in a safe manner. While the traction RTN is experiencing post scheme won’t be as sizable as now, the company will still be reaping the benefits of the improvement in consumer confidence it would have created. Particularly now that COVID continues to drag on and more people want to go out and enjoy themselves – restaurants are a way for people to unwind and achieve this.
The focus: Wagamama
Investors must focus on Wagamama as the source of recovery for RTN. Much of the company’s resources and focus is on this brand and the strong presence it has across the country. Wagamama has already started to experience some promising numbers since the reopening of sites. Sales were up 11% in the 11 weeks to 20 September. Wagamama was previously acquired for £560 million back in 2018, with large opposition from shareholders. The group is now keen to add a further 54 restaurants to its existing 146 Wagamama sites.
Wagamama is a purely British restaurant chain serving Asian food based on Japanese cuisine. What differentiates Wagamama from the rest of the company’s restaurant chains is the growth and the traction it is receiving among consumers. RTN has had a tough few years, the share price performance has shown this with shares down 75% over the last 2 years. Much of this was driven by poor performance in brands such as Frankie and Benny’s. Wagamama has brought a growth and excitement factor to RTN – a catalyst to turn things around. For these reasons, particularly through this testing period, it is becoming increasingly important that RTN continues its pivot more towards Wagamama and away from RTN’s tired Frankie and Benny’s business.
Currently, the company stands on net debt of £311 million, quite a sizable debt pile with the company experiencing large cash burn through this turbulent period. The company said this debt pile was ‘considerably better than expected’, which is true when considering the headwinds the company has faced and the actions they have been forced into taking. RTN relied on the lenience of lenders, and lenders have given the company this – the large restructuring of many of the company’s sites show this. The capital raise of £54.6 million back in April provided the company with a necessary liquidity boost and has given them cash runway.
Currently, analysts believe the company will fall to an adjusted pre-tax loss of £25.9 million for FY20, before recovering to pre-tax profits of £34 million in FY21. Of course, these are just forecasts and whilst quite bullish, the uncertain nature of these times makes them difficult to fully trust. For example, a second UK lockdown would mean the company would breach its covenants in Q1 2021, though I personally do not believe a second lockdown will come as the UK simply can’t afford it – the ‘eat out to help out’ scheme showed the Governments awareness of the needs of food businesses across the country.
Conclusion
RTN’s Wagamama acquisition is now starting to show its worth. I can’t imagine there would be much survival hopes for RTN without it now. Although the acquisition came at a huge expense at the time. The transition towards a greater focus on Wagamama will become necessary for RTN to survive. Wagamama has a strong position on the UK high street with a good brand presence – it even offers a potential opportunity for geographic expansion as well. But right now this shouldn’t be investors’ focus with RTN facing numerous headwinds in relation to COVID. Whilst I am not that concerned regarding a second lockdown, I am concerned about the slow pick-up in demand RTN will experience in general. Particularly in its less successful Frankie and Benny sites. For these reasons, I am watching on the sideline for now. The second half will have huge significance as to how strong the long-term viability of RTN will be. I believe it’s worth holding out to see more signs of recovery first, even if that means paying a higher price.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
