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Retail Food Group Limited (ASX:RFG) shares plummet on $300m loss

The bad news continues to pour in for Retail Food Group Limited (ASX: RFG) shareholders after the company announced disappointing FY 2018 results this afternoon. Here are the highlights:
  • Statutory loss of $307 million (down from a $62 million profit in FY 17)
  • Non-cash impairments and write downs of $403 million which it said were a reflection of its expected future earnings and the “risk profile inherent in current challenges”
  • 123 domestic stores closed in 2H18
  • Net debt of $259 million (compared to the company’s market cap of $103 million)

RFG shares were down 10% following the announcement.

What did management have to say?

Management said the result was “disappointing” and had been impacted by “a combination of factors including difficult retail trading conditions, the cumulative impact of domestic store closures; effectiveness of tactical initiatives; a decline in new store growth, resale and renewal activity; and investment in business turnaround initiatives”.

Those are a lot of factors and they reflect a business that is experiencing significant headwinds from every direction. Management also said that trading results would, “likely remain subdued” going forward.

What now?

RFG’s net debt position is still a cause for major concern and an area management are actively trying to find solutions to.

The company reached an agreement with its senior debt lenders to reset the debt covenants effective 31 August 2018 with the operating leverage ratio being increased from 3x to 5x up to December 2018 followed by reductions to 4.5x in March 2019 and 4x from 1 April 2019 onwards.

Existing senior debt facilities were reduced by $24 million to $285 million.

The company is also considering a sale of assets and a potential market recapitalisation to help pay off its debt. The former would reduce the company’s ability to earn income going forward and the latter would dilute existing shareholders but there isn’t much of a choice.

Foolish takeaway

I think the challenges at RFG will continue and the shares could drop further as investors get diluted in a potential recapitalisation. Investors might want to stay away and focus on other food shares such as Collins Foods Ltd (ASX: CKF)Domino’s Pizza Enterprises Ltd (ASX: DMP) and Freedom Foods Group Ltd (ASX: FNP).

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can find Kevin on Twitter @KevinGandiya.

The Motley Fool Australia has recommended Collins Foods Limited, Domino's Pizza Enterprises Limited, and Freedom Foods 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 Scott Phillips.

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