6 questions for Retail Food Group Limited management to answer

The Retail Food Group Limited (ASX:RFG) share price fell 7% after a surprise downgrade today.

| More on:
a woman

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

The Retail Food Group Limited (ASX: RFG) share price dived 7% to $2.43 this morning after a surprise downgrade that appeared to revise previous guidance.

On 7 December 2017, Retail Food Group announced:

"As advised at its AGM, RFG retains an optimistic outlook despite the challenging domestic retail market and maintains its FY18 guidance of c.6% underlying NPAT growth."

This morning, the company declared that its statutory net profit after tax ('statutory NPAT', which is different to underlying NPAT) would be around $22 million, down nearly 40% from last year's figure of $33.5 million. The statutory result includes $7 million of costs associated with the ongoing corporate review.

Notably management declined to state their expected underlying profit result, but adding back the one-off costs suggests that underlying profit could be $29 million, a 10% reduction compared to the $32.1 million in underlying NPAT recorded in the first half last year. If so, this would indicate a 16% reversal from the 6% growth that was forecast less than two weeks ago.

I also found the company's announcements to be somewhat incoherent as they state: "we remain focused on responding to this challenge through delivering franchisee support initiatives and reducing corporate costs".

For example, it is difficult to see how the company will achieve an overall reduction in its cost base if it is required to step up support to franchisees.

Additionally, Retail Food Group blamed: "Recent negative media coverage about franchising, retail and RFG in particular has also contributed to a noticeable decline in momentum in new and renewing franchise sales." 

That sounds like a bit of a stretch because a) franchisees usually have multi-year agreements, b) it is a big commitment to buy into a franchise (takes a lot of time to make a decision), and c) it's only been 7 business days since the big Fairfax hit piece.

There would surely only have been a small % of the network come up for renewal over the past few months. As to new sales, Retail Food Group opened just over 200 new franchise outlets last year (excluding closures) which is less than 1 per day.

I commented just a few days ago on the lack of disclosure from Retail Food Group regarding its problems, a criticism that was strengthened when the company made its two responses to media coverage over the past week. Following today's surprise downgrade, as far as I'm concerned the company has lost all credibility.

Shareholders still lack the information they need regarding the health of the franchise base in order to make an informed decision about the business. Here are six questions over the business I'd like answered.

How many outlets are profitable for their franchisee?

How many outlets generate a living wage for their franchisee?

Is the business model a win-win for franchisee and RFG, or lose-win?

Why are there reports of, for example, franchisees being forced to pay more for coffee when RFG is selling an identical product on the supermarket shelf for lower prices?

How much of a decline in momentum in new and renewing franchise sales has been experienced?

Why is the decline noticeable enough to report to the market, but not noticeable enough to quantify it for shareholders?

Retail Food Group's responses have been opaque and it has tried to dance around these core issues, in my opinion.

Today's announcement smacks of a company that is slow to realise that it has a problem, and I have doubt that it is being frank with shareholders. I'd find it very difficult to consider buying shares in this company, almost irrespective of price. As a result I continue to avoid it.

Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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.

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 »