A New Dawn For Retail Food Group

This story features RETAIL FOOD GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: RFG

New research highlights Retail Food Group’s resilience to a consumer downturn and several capital-light growth opportunities.

-Brokers see significant upside for shares of Retail Food Group
-Focus on international expansion, particularly in the US
-Capital-light growth opportunities and structural tailwinds 
-Resilience to a soft consumer via low transaction value

By Mark Woodruff

Brokers feel legacy issues are now in the rear-view mirror for Retail Food Group ((RFG)) and its business should remain relatively resilient in the face of the current consumer spending slowdown.

New research by Bell Potter highlights the company has undergone a significant transformation over the last five years and is now focusing on capital-light growth initiatives, while also benefiting from structural tailwinds.

The company franchises and operates stores in mass brands such as Gloria Jeans and Donut King (which also specialises in coffee), along with other mid-market brands like Crust Pizza in A&NZ, the US and the EMEA region. Other brands include Brumby’s Bakery, Di Bella Coffee and Michel’s Patisserie.

The combination of a business-wide review, begun in FY18, and a challenging covid period, has served as an opportunity to distinguish the robust, enduring brands and store locations from those with inherent weaknesses, according to Bell Potter. As a result, several stores were closed and entire brands wound up, with the group now focusing on three key brands; Gloria Jeans, Donut King and Crust Pizza.

Management expects to return to net growth in its overall store count in FY24 and Bell Potter suggests certain growth initiatives should also drive growth over the next few years. 

Capital-light strategies include add-on revenues from quick service restaurants (QSR) and the ramp-up in organic growth planned for the US market, which the broker forecasts will result in underlying earnings growth of 11% per year over the next five years.

Following first half results in mid-June, Shaw and Partners highlighted all brands were earnings positive.

QSRs are a rapidly growing segment of the Australian foodservice industry, driven by changing consumer preferences and lifestyles, and Bell Potter notes Retail Food Group is Australia’s largest multi-brand retail food franchise owner for both QSR and coffee.

While the covid pandemic initially impacted on foot traffic and dine-in services for QSRs in Australia, it also accelerated certain structural trends that were already emerging within the industry, explains the broker. These include a shift to online ordering, delivery services and drive-thru facilities. In the US, the QSR market more than doubled during covid.

The food delivery industry alone has become a global market in excess of U$150bn, having more than tripled since 2017.

Retail food Group is now focusing on international expansion, particularly in the United States, one of the largest coffee markets in world.

American consumers are inclined to travel more by car compared to Australians, explains Bell Potter, making the drive-thru business model exceptionally viable. Gloria Jeans has already witnessed remarkable revenue generating potential from their existing drive-thru stores in the North American region, explains the broker, where there are currently around 42 stores.

The investment case

Petra Capital likes the group's undemanding investment fundamentals, strong balance sheet and the capital-light growth initiatives previously highlighted by Bell Potter.

In a mid-June trading update, management kept FY23 earnings guidance of $26-$29m, though the expectation was reduced to the lower end of the range from the mid-to-high end. 

While the broker lowered its FY23 profit estimate by -8.3% in reaction, the update illustrated the resilience of the group’s low average transaction value (ATV), which is below $9.00 ex pizza.

The analyst highlighted far greater profit forecast consequences for retailers with higher ATVs by citing recent profit guidance downgrades by Baby Bunting ((BBN)), Best & Less ((BST)) and Dusk Group ((DSK)), of -37%, -42% and -38%, respectively.

Shaw and Partners also lowered its underlying earnings forecast for FY23 by -9% after the trading update, though noted the group was still generating positive like-for-like sales growth at a time when growth for peers was turning negative. It was felt earnings had stabilised and were beginning to grow.

Moreover, this analyst suggested the health of the network was in its best shape for many years and agreed with Bell Potter all legacy issues (legal and ACCC) were finished.

The real kicker: the valuation was considered “super cheap” by Shaw and Partners, with a “massive” -60% discount to discretionary peers on a FY24 price earnings valuation.

This discount is available, despite various indicators pointing to continued positive operational momentum, explained the broker, as the business emerges from covid headwinds.

FNArena's daily monitoring consists of Buy-rated Bell Potter and Shaw and Partners which actively cover Retail Food Group. The average target price is 12.5c, which suggests 150% upside to the latest share price.

Buy-rated Petra Capital is not monitored daily and has a target of 9.5c.

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