I’m a long-time bear when it comes to talking about casual dining specialist The Restaurant Group. A mix of intense competition in this particular leisure segment and the impact of tense Brexit negotiations on broad consumer spending habits means that the profits (and thus dividend) outlook is fraught with danger, both in the long term and beyond.
Latest retail data from retail research house Springboard provided a useful insight into one of The Restaurant Group’s biggest problems — a steady decline in the number of British shoppers visiting bricks-and-mortar shops because of the rise of e-commerce.
According to the body total Black Friday spending this year is expected to rise 2% to £4.3bn. However, the number of citizens flocking to high street stores, shopping centres and retail parks is predicted to slip 4.5% year on year.
Why is this a problem for The Restaurant Group, you might ask? Well the steady decline in people visiting retail parks in particular is a huge issue as the majority of the company’s eateries are situated in or around these sites. Revenues at these businesses are already suffering as tough economic conditions in the UK mean that shoppers are more reluctant to grab a quick bite during or after their trip to the shops.
You wouldn’t think that conditions at the Frankie and Benny’s and Wagamama owner are that tough given City forecasts for 2020, though. Consensus suggests that earnings will slip 18% in 2019 but that they’ll break 16% higher next year.
More bad news for this outgoing year is that the number crunchers predict that the full-year dividend will be cut back again, this time to 6.05p per share from 8.27p per share in 2018. But those bubbly growth projections mean that payouts are tipped to get back on the front foot, too, to a 4.7%-yielding figure of 7p.
But forget about this market-beating yield, I say, one which trashes the UK mid-cap forward average of 3.3%. And take little notice of a low P/E ratio of 10.6 times, one which sits in and around the widely-accepted bargain benchmark of 10 times. The Restaurant Group is cheap because the chances of it experiencing another year of turmoil are extremely high.
Use Your Noodle And Stay Away
The company certainly got investor nerves jangling earlier this week with some shocking trading news for its Wagamama chain. Sure, its noodle bars might be outperforming the wider casual eating market but like-for-like revenue growth at its British stores is starting to collapse. For the second quarter (spanning the 13 weeks to September 29) these rose 6.3%, more than halving from the 12.9% rise printed for the previous three-month period.
It’s not just that The Restaurant Group’s Asia-inspired chain is the only troubled part of the business, of course, as consumer spending in the UK remains under pressure and competition in the casual dining space hots up.
Across the group like-for-like revenues rose 3.7% in the first 34 weeks of this year, though this was thanks in large part to soft comparatives following the FIFA World Cup and bad weather of 2018. They also revealed a sharp slowdown more recently, with underlying sales creeping just 0.2% higher in the final six weeks of the stated period, with like-for-like sales of its Leisure brands like Frankie & Benny’s and Chiquito all moving back into contraction.
Take those predictions of earnings and dividend rises in 2020 with a pinch of salt, then, I say. And particularly in terms of the latter as the The Restaurant Group languishes under a growing net debt pile (of £316.8m as of June), too.