Taste Holdings recorded a 9% decrease in group revenue
Taste Holdings Limited released its unaudited condensed consolidated results for the six months ended 31 August 2017.
COMMENTS FROM THE CEO
Any operational gains made during the six months ended 31 August 2017 (“2017” or “the current year”) have been overshadowed by the brutal and sustained decline in consumer spending across almost all categories that the group trades in. The improvements in labour, margin and costs were not enough to counter the sales decline, especially in the first quarter of the current period.
We expected sales in the Luxury Goods division to decline. Luxury Goods are cyclical and follow consumer sentiment, the exchange rate and disposable income trends reasonably predictably. What we did not expect was the extent nor the speed of the decline in the first quarter of the current period. Having responded with increased marketing spend and even tighter controls, the second quarter of the current period showed materially better sales and profit performance in this division, which has
continued into September.
While we expected the Food division to post an EBITDA loss for the period we have also concluded that there is an element of cyclicality to the quick service restaurants (“QSR”) segment also following consumer sentiment and disposable income. Brands trading in the lower income consumer segment have borne the brunt of the sales decline. Our efforts to improve the value proposition, combined with increased marketing spending, have been met with limited success and certainly have not been enough
to counter the current sales cycle. Although not immune from the cycle, Domino’s and Starbucks performed acceptably during the period, with Dominos posting a 1% increase in same-store sales. Notwithstanding reported lower foot counts in malls Starbucks stores individually continue to perform above our 25% internal rate of return (“IRR”) hurdle.
In April this year the group took the strategic decision to separate the Food and Luxury Goods divisions in the future. Having initiated a sale process it was soon evident that the timing of concluding a sale was not ideal. The group has therefore stopped the sale process and is focussing its attention, across both divisions, on the operational and tactical responses this environment necessitates.
The board of directors of Taste (“the Board”) presents the unaudited condensed consolidated financial results for the six months ended 31 August 2017. Taste is a South African based management group that owns and licenses a portfolio of franchised and owned, category specialist and formula driven QSR’s, coffee and luxury retail brands currently housed within two divisions: food and luxury goods. The group is strategically focussed on  licensing leading global brands;  leveraging our scale among our owned food brands,  increasing ownership of corporate-owned stores across both divisions; and  supporting this growth through a leveraged shared resources and vertically integrated platform.
Group revenue decreased 9% to R483 million from the prior period, while gross margin increased five percentage points due to having more corporate-owned stores in the Food division than in the prior period. Gross margin was largely unchanged in the Luxury Goods division. Total operating costs increased 16%, or R36 million. R28 million of these costs related to owning more corporate stores. Excluding these non-comparable corporate stores, expenses in the Luxury Goods and Food divisions increased 3.5% and 3.6% respectively. The group recorded an EBITDA loss of R54 million (2016: R25 million). While an EBITDA loss was expected from the Food division, the extent of the decline in EBITDA in the Luxury Goods division was not. Finance costs increased to R23.3 million (2016: R16.1 million) as both the cost of borrowing and the quantum of borrowings increased.
An increase in equity raised the weighted average number of shares in issue to 410 million shares (2016: 375 million). The resultant headline loss was 15.9 cents per share (2016: loss of 9 cents per share). Consequent to the equity raised through a rights offer in the current period, cash and cash equivalents increased to R86 million (2016: R43 million) at the end of the current period.
The Food division licences the world’s leading coffee retailer and roaster – Starbucks; the world’s largest pizza delivery chain - Domino’s; and owns The Fish & Chip Co, Zebro’s Chicken and Maxi’s brands. Taste’s food brands are spread across a diversified portfolio of product categories (coffee, chicken, pizza, fish, burgers and breakfasts) that appeal to middle-and-upper income consumers (Starbucks, Domino’s, Maxi’s) as well as lower income consumers (The Fish & Chip Co, Zebro’s Chicken).
The Food division continues its metamorphosis from a fully franchised, owned brand business, to a mix of corporate and franchise-owned outlets, and owned and licenced brands. Same-store sales in Domino’s remained positive, albeit at 1% for the six months, while same-store sales across our owned brands declined 8.6%. The benefits of growing slowly in Starbucks are paying off with good controls being implemented in the business and tangible continuous operational improvements in labour, margin
and supply chain being achieved. Two further Starbucks stores were added in August 2017, and a further four openings by year end will bring the total trading outlets to ten. An immediate consequence of the restrained consumer environment is lower short-term sales forecasts in our new-store investment cases. These in turn impact the number of potential locations that meet our 25% internal rate of return hurdle (“IRR”) reducing new store growth numbers to the lower end of our estimated ranges. Having finalised its material investment in supply chain and human capital to support our licences brands, the focus of the division is to grow Starbucks and Domino’s stores to the point where their individual profit contributions exceed this support cost.
The division consists of retail outlets branded under NWJ, Arthur Kaplan and World’s Finest Watches. Through Arthur Kaplan and World’s Finest Watches, the division is the leading retailer (by number of outlets) of luxury Swiss watches in the region, with brands like Rolex, Cartier, IWC, Omega, Breitling, Hublot, Montblanc, TAG Heuer, Longines and Rado, among its custodian brands. Its brands appeal to a diversified customer base ranging from premium watch and jewellery buyers (Arthur Kaplan and World’s Finest Watches) to entry level jewellery and fashion watch buyers (NWJ).
Our Luxury Goods division, after multiple years of record financial performance, had its toughest six months in recent history. Although first quarter same-store sales declined 19%, this decline slowed in the second quarter to -11%, with the last three months decline from July to September further improving to -3.4%. Costs increased 3.6%, well below rental and salary increases, while gross margin remained largely unchanged. As part of our intention to separate the Food and Luxury Goods divisions in the future the divisions have been ‘ring-fenced’ with each having access to their own appropriate funding. Inventory was particularly well managed through the supply chain, without impacting customer facing inventory. The division is founded on good retail locations, world class quality brands and deep institutional knowledge within the business.
Despite improvements in sales in the most recent quarter the group remains bearish with regard to a material sales recovery in the next six months. As appropriate, we will continue to invest in marketing expenditure, enhancing the customer value proposition and building on the operational improvements made to date.
Shareholders’ attention is drawn to the cautionary announcement made on 29 September 2017 wherein the group announced it was evaluating a capital restructure that would see its long term debt of R225 million materially reduced and a combination of debt and equity raised to fund future Starbucks and Domino’s stores. On the basis that this restructure is successful and assuming a moderate consumer recovery next year, the Food division will reach a cash breakeven during the second half of next year.
The next six months will no doubt continue to test to the fortitude of South African consumers. We are however confident that the strength of our brands across our divisions will see the group well placed to capitalise on consumer spending as the cycles turn.