Shares in coffee and fast food outlet franchisor Retail Food Group Limited (ASX: RFG) moved 3% higher this afternoon after the Gold Coast-based business provided the market a trading update.
The group stated that for the first 18 weeks of fiscal 2018 total same-store sales growth for its domestic franchises was up 0.7% with actual transaction value up 1.7%. The performance of its Crust Pizza brand being the highlight with same-store sales up 2.7%.
The group acknowledged that its domestic franchise business had performed below expectations overall due to tough retail conditions with new outlet openings of around 70 over the period set to be offset by closures in a reflection of tough trading conditions.
Consequently the domestic franchise division is expected to deliver a lower profit contribution than the prior corresponding period last year.
The group is also continuing its efforts to franchise its Gloria Jean's and Donut King coffee and donut brands overseas to drive growth and help offset any potential weakness in the domestic division.
Notably, the group's chairman complained that the heavy shorting of the shares by speculators betting on the share price falling had adversely impacted the business and lead to an artificially low share price.
As at 24 November 12.4% or around 1 in 8 of RFG's shares on issue had been sold short and any rapid share price rise is likely to be the result of short sellers buying back shares to close out positions.
In October RFG also issued 4 million new shares at $4.40 a share to raise $22 million in a move also likely to place a weight around the share price over the short-term at least.
The group reconfirmed guidance for 6% underlying profit growth which is a target that is likely to involve the backing out of some one off costs. The target also apparently relies on a stronger second half to the fiscal year in what should sound a cautionary note to investors.
Still everything is relative and despite a rocky year (including the shocking re-stating of past EPS) RFG shares are arguably cheap on around 10.5x trailing earnings and a 6.6% dividend yield. Whether shares are cheap or a value trap will largely depend on the strength of its domestic franchising businesses over the years ahead. For now I would rate the shares a hold given some of the uncertainty around its outlook.
Others in the fast food franchising space to have suffered a tough year include Domino's Pizza Enterprises Ltd (ASX: DMP) and KFC merchant Collins Foods Ltd (ASX: CKF).
