Why the Retail Food Group Limited share price fell 5% after another downgrade

The Retail Food Group Limited (ASX:RFG) share price fell 5% to $2.35 after the company released what looked like another downgrade this morning.

Retail Food Group (“RFG”) announced another revision to its first half 2018 guidance, stating that its recent forecasts of $22 million in net profit after tax (NPAT) were now unlikely to be met due to recent variations in its contracts that occurred after 31 December (the date when first half 2018 finishes). As a result, first half profit is now expected to be below $22 million.

The full benefit of the licenses is expected be recorded in the second half and will positively contribute to the full-year result.

This is the second time that Retail Food Group has amended its guidance in the past month, with the company previously announcing a downgrade from around $35 million in forecast NPAT to $22 million in December 2017.

On the face of it, this particular change in guidance does not look overly concerning, as it seems to reflect revenue from the licenses falling into the second half of the year instead of the first half. A bigger concern however is the “recent variation to an element of the commercial terms thereof (of the license) which contained very little detail.

I’m not surprised at all to see some contracts being renegotiated following the recent negative media coverage, but Retail Food Group was not forthcoming with information about whether the actual value of the contract would be lower. For example – irrespective of which half the license sale occurred in – are the commercial terms now less favourable to RFG than they were previously?

That would seem to me to be the key concern here. The overall question raised by the Fairfax media coverage is “Is Retail Food Group’s business predatory and unfair to franchisees, and is the media coverage likely to force the company to revise its terms, thus reducing its earnings power?”

It’s not an easy question to answer – especially since Retail Food Group isn’t talking –  but it’s far more relevant than whatever first half profit will come in at. While the company maintains its policy of silence on the matter, I continue to avoid it at least until the half-year earnings when management should provide a full commentary.

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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.

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