Retail Food Group: Value through the haze

Historical profit growth has been impressive

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In times of economic uncertainty, investors tend to shun risk, turning instead to consumer staples businesses that have lower prices and repeat purchases. While IT managers might put off the multi-million dollar computer upgrade, consumers are less likely to forgo their daily coffee.

If you walk through your local suburban shopping centre, you'll likely never come across the name Retail Food Group (ASX: RFG), but you are exceedingly likely to notice the company's brands.

Coffee, cake, donuts and pizza

Retail Fool Group is the brand owner, manager and franchisor of some of the most popular and ubiquitous tenants in our malls, including Michel's Patisserie, Brumby's Bakeries, Donut King and bb's cafes.

The company has also pushed hard into the gourmet pizza market, with its ownership of the Pizza Capers brand and recent acquisition of Crust Pizza.

RFG's core skill is brand and franchise management. It has around 1,150 stores in its various franchised retail brands in Australia, 87 in New Zealand and a handful in Asia and elsewhere, including 14 Donut King stores in China.

The company has hit on what is so far a winning formula, growing net profit almost four-fold in the last five years. Revenue growth hasn't been as strong, however, continuing to be relatively flat over that time, with margin improvement doing all of the heavy lifting to improve profits.

Adjusting the adjustments

RFG's financial statements are somewhat cloudy, with management making use of multiple adjustments when presenting its results. 'Adjusted revenue' and 'Core earnings' both make an appearance. The adjustments look reasonable to more accurately reflect the reality of the business.

However, the arbitrary removal of Queensland sales for Michel's Patisserie so the company can say that sales for all brands (excluding that state) are positive, is a little too much spin. After all, all of the shares I've ever bought have gone up (except for the ones that are down).

It's not a huge red flag, but at The Motley Fool, we'd prefer that management not sugar coat their commentary.

It also carries a fair swag of debt. For a repeat-purchase business selling low-priced items, the cash flow is likely to be regular and predictable enough to meet its obligations, but we'd be nervous about any significant further borrowings.

Value through the haze

Perhaps because of its debt load, Retail Food Group's shares have continued to trade on a relatively low price/earnings multiple, currently sitting at just under 10 times consensus 2013 earnings. The company also carries a trailing 5.7% fully-franked dividend yield, making it an interesting candidate for income investors.

RFG has a lot of moving parts – quite a few franchise brands, and an acquisition that needs to be bedded down. We'd also want to see significant revenue and profit growth, given the amount of debt the company has on its books – you can grow your sales and earnings by acquisition, but if they're not carefully handled, that debt can come back to bite a company.

On the other hand, a cheap price (based on earnings) and an attractive dividend yield help to make up for a number of sins, and the historical profit growth has been impressive, if not stellar.

Foolish takeaway

RFG is a good business that seems to be heading in the right direction.

We'll want to see how well it can bed down the Crust acquisition, and measure its desire for more debt-fuelled acquisitions in the coming months, but if it can successfully integrate the new business and make low-risk capital allocation decisions or if the price were to drop further, RFG could be a tasty addition to your portfolio.

In the market for high yielding ASX shares? Get three "Rock-Solid Dividend Stocks" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »