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The combined effects of the Sars-CoV-2 pandemic and sustained high level of loadshedding have resulted in changes to eating habits among South Africans. Famous Brands and other Quick Service Restaurant (QSR) and fast food operators have adapted to this changing situation very well and as a result have managed to turn the business around remarkably quickly. And yet as recently as three years ago, Famous Brands’ continued existence was threatened by strict lockdowns. It is testament to the resilience of the business case, coupled with the tenacity of management that this company has come roaring back with a vengeance. Over time, if loadshedding ever moderates in intensity, there remains the prospect of more people choosing to use casual dining in the evening again. But while loadshedding remains at such a high intensity, even with greater alternative energy sources for Famous Brands’ outlets, the likelihood is that people will elect not to eat out as often as they used to when loadshedding was not so intense.
One of the biggest changes in eating habits in recent years has been a far greater reliance on takeaway food. This is good for the low-end, QSR part of Famous Brands’ portfolio, as it has meant that more people are ordering takeaway food from the likes of Steers and Debonairs but fewer people are electing to eat at casual dining outlets such as Wimpy and the niche operations in the group. This can be seen in recent releases of retail sales data from Statistics SA, where food retailers are experiencing lower volumes due to the indirect consequences of loadshedding. In other words, rather than attempting to cook and then have to stop when the power gets cut, more and more consumers are buying takeaways. And to satisfy demand, Famous Brands has had to spend a lot of money on diesel to keep its generators supplying electricity to its outlets. In 2023, the group consumed 648 000 litres of diesel compared with 87 000 in 2022.
For the year to end February 2023, group revenue rose by 15% to R7.4 billion, while operating profit rose by 37% to R861 million. Headline earnings per share (HEPS) rose by 37% to 488c and the dividend was increased by 82% to 363c/share.
Famous Brands’ franchise portfolio can conveniently be viewed in two elements; Leading Brands and Signature Brands. Leading Brands includes the long-established, iconic brands such as Steers, Debonairs, Wimpy, Mugg & Bean, Milky Lane and Fishaways. Signature Brands are more niche and include Mythos, Lupa Osteria, Turn n Tender Steakhouse, Salse Mexican Grilll, Vovo Telo, Paul, Europa, House of Coffees, Coffee Couture and NetCafe. It also includes the recently-acquired Lexi’s, the plant-based restaurant brand. But while customers have largely returned to casual dining in the leading brands environment, Signature Brands have struggled to attract enhanced spending and management has found difficulty in attracting new franchise partners. During the last financial year, 14 Signature Brand restaurants were opened, 4 were revamped and 20 were closed.
Signature Brands only contributed 2% of operating profit last year. Operating profit margin at Leading Brands in 51% , while operating margin at Signature Brands was only 4%. Management is seriously considering its options with respect to this division and will “assess the continued relevance of Signature Brands”.
Another operation they might want to reconsider is Wimpy in the UK, a serial under-performer. Like Signature Brands, it only contributed 2% of profits last year. Five restaurants were opened last year, 2 revamped and seven closed down. Wimpy UK is basically the rump of the much larger Wimpy which was sold off in a management buyout in 1990. They tend to be located in less desirable parts of towns and cities where rentals are lower. It’s not clear what Wimpy UK’s competitive advantage is, if any indeed exists.
While the Famous Brands share price has recovered strongly from the dark days of 2020, it is still a long way off its peak of R166 achieved in October 2016. On a PE ratio of 12.9x at the current share price of 6272c, it’s not especially cheap.
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