Why Retail Food Group Limited is planning a big U.S. growth push

Credit: zehhhra

The Retail Food Group Limited (ASX: RFG) share price has dived 30% over the course of 2017 on the back of substantial “share price target” downgrades from analysts at UBS and worries over upcoming accounting rule changes.

The big falls are despite the company forecasting that full year net profit growth should be around 20% after excluding acquisition costs related to the deal to acquire the Hudson Pacific food distribution business.

The guidance is skewed to a stronger second half ending June 30 2017 though and in Australia market commentators and research analysts have recently raised concerns about the operating performance of its fast-food franchisee businesses in particular.

The company itself is also looking to pivot earnings away from the Australian franchising business to grow its brands around the world including in Asia, Europe and the Middle East. Notably, New Zealand is its single largest overseas market with cities like Auckland full of relatively upmarket Gloria Jean’s coffee franchises catering to students and visitors in particular.

However, it’s the giant fast food and beverage market of the U.S. where RFG is now planning to grow its Gloria Jean’s (born in Chicago) and It’s A Grind coffee franchises in particular. The company reportedly already has 55 coffee shops across 21 U.S. states, alongside 18 It’s a Grind coffee businesses.

It also plans to introduce its Brumby’s Bakery, Donut King, Pizza Capers, Crust Gourmet Pizza and Michel’s Patisserie businesses into the US as well.

It’s no secret that RFG’s domestic franchises aren’t growing same-store sales or franchise store numbers as investors would like and that there maybe challenging times ahead.

However, the group’s growth strategy is largely now focused on international expansion, alongside wholesale coffee roasting and vertical integration thanks to its Hudson Pacific acquisition.

As such RFG shares could be a bargain medium-term opportunity at today’s prices of $4.95, but I would prefer to wait until the company provided a trading update as to the performance of its Australian operations in particular before taking a bite.

If I were hunting for bargains among beaten-down retail stocks I would prefer footwear retailer RCG Corporation Ltd (ASX: RCG) given its undervalued share price and my greater confidence it will meet its updated earnings guidance.

Just over a week ago I got a small parcel of shares for just 59.5 cents and expect the company could deliver at least 5 cents per share in dividends alone over the next 12 months.

In fact I would be shocked if the company does not deliver compounded annual returns of at least 20% over the next three years even from today’s share price of 66.5 cents per share. I rate the stock as a buy for dividends and growth.

The 1 Thing Every Investor Must Know About How You Can Grow Your Wealth Like Buffett

You've probably heard a lot about billionaire investor Warren Buffett. After all, a herd of analysts and journalists has tracked his every move - for decades. Yet here's something you may not know...

Simply click here to learn more.

Motley Fool contributor Tom Richardson owns shares of Retail Food Group Limited and RCG Corporation Ltd.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.