Franchisor Retail Food Group Limited (ASX: RFG) updated the market this morning to confess it would deliver lower profit growth this year than was previously forecast.
The company now expects full-year underlying net profit after tax (NPAT) to be up 15% compared to last year, a decline from previous forecasts of 20% profit growth. The growth is expected to deliver an 8% increase in earnings per share, and excludes a non-cash write-off. Shares fell 8% to $4.66 at the time of writing.
44% of operating profits are expected to come from domestic operations, with the balance coming from overseas. Retail Food Group reported that the number of overseas territories covered by franchise agreements has grown from 46 to 80 over the past 3 years, suggesting the potential for further overseas growth.
Unfortunately, the downgrade was tainted further by the news that $22 million in advances to Michel's Patisserie and Pizza Capers marketing funds was deemed unrecoverable and would be written off. It seems this is at least partly due to a large number of closures of Michel's outlets:
"As a consequence of the lower outlet population, full recoverability of the Group's advances is no longer certain…"
According to the 2016 report, around $17 million of advances were to the Michel's marketing fund so it seems a fair bet to assume Michel's underperformance is behind some of the recent struggles. Retail Foods has long struggled with the Michel's franchise, and the implication that outlet numbers have fallen substantially suggests that this franchise is behind the recent downgrade.
It's unwelcome news, although the fall in shares over the past few months suggests that it was largely priced in by the market beforehand. If you take the view that the domestic operations will become increasingly less relevant over time and take a long term view, it is possible to be more sanguine about the downgrade. However, it is not good news and given the bearishness surrounding Australian retail shares at the moment, Retail Food shares could head even lower in the near term.
