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Here’s why Retail Food Group shares are surging 10% higher today

The Retail Food Group Limited (ASX: RFG) share price is up by 9.7% so far today after the market reacted favourably to the food and beverage company’s 1H20 results.

Significantly improved underlying results

Retail Food Group reported 1H20 underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $31.7 million. This represents a very healthy 32.6% increase on the previous corresponding period (pcp) of 1H19.

Statutory EBITDA came in at $50.1 million which was a significant improvement of 144.5% on the pcp. However, the company pointed out that this result recognises a $71.8 million gain on debt as part of its recent recapitalisation.

Meanwhile, Retail Food Group reported statutory net profit after tax (NPAT) of $14.3 million. This was a big turnaround from the $111.1 million loss the company reported in 1H19.

Strategy update to improve franchisee performance

Retail Food Group commented that this strong 1H20 result reflected growing traction from turnaround initiatives that commenced during FY19. In particular, the company noted it has addressed the debt burden which represented a major threat to its future. This was achieved through a company-wide capital restructure that was completed at the end of last year.

The group has been maintaining an ongoing focus on improving its domestic franchise business performance. This has included maintaining targeted $30 million gross margin generation at the franchisee level.

Retail Food Group has also reported early success from targeted marketing and product initiatives, including reductions in cost of goods and lease negotiation assistance provided to franchisees.

In addition, the group has been driving franchisee engagement and support. Retail Food Group has also made a number of key executive appointments to drive initiatives and improve its franchisee performance.

FY20 outlook

Retail Food Group has maintained its guidance of FY20 underlying EBITDA in the range of $42 million to $46 million. This guidance assumes full-year contributions from all continuing operations and excludes the impact of AASB 15 and 16 accounting changes.

The group also stated that its FY20 cost out plan is on track which is targeting around $8 million to $9 million per annum cost savings.

Commenting on the group’s 1H20 results, Executive Chairman Peter George said:

“The Company remains focused on achieving its vision of becoming a respected leader in both the domestic and international retail food and beverage arenas.”

“Central to that goal is an unwavering commitment to our franchisees, and providing them, along with our internal teams, with the tools to better support them in more strategic, long term ways,” he added.

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Motley Fool contributor Phil Harpur has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.