Famous Brands Delivers Strong Results
REVENUE: Up 17% to R1 184 million
OPERATING PROFIT: Up 12% to R207 million
HEADLINE EARNINGS PER SHARE: Up 20% to 150 cents
INTERIM DIVIDED PER SHARE: Up 35 % to 108 cents
“Famous Brands has reported strong results for the six months ended 31 August 2012 in an environment of continued subdued consumer spend and intense margin pressure across the retail landscape,” says CEO, Kevin Hedderwick.
“Trading conditions remained competitive but stable, with the key driving forces in the industry being the unrelenting demand from consumers for a convenient value proposition, and their gravitation to tried-and-tested brands in the context of constrained disposable income,” he notes.
Hedderwick comments, “Our solid results are attributable to continuous innovation at the front end of the business, represented by the Group’s extensive brand portfolio, and enhancements at the back end of the business, comprising the backward integrated supply chain, which served to drive growth in the review period.”
Group revenue increased by 17% to R1.18 billion (2011: R 1.01 billion) while operating profit rose by 12% to R207 million (2011: R184 million), reflecting the greater contribution of the disproportionately lower-margin Logistics business. In line with this changed mix in relative profit contribution, the operating margin declined to 17.5% (2011: 18.1%).
Basic earnings per share (“EPS”) and headline earnings per share (“HEPS”) both increased by 20% to 150 cents per share (2011: 125 cents per share), while diluted EPS and HEPS increased by 22% to 147 cents per share (2011: 120 cents per share).
Cash generated from operations before changes in working capital rose 10% to R223 million (2011: R203 million). Net cash flow from operating activities of R157 million was more than sufficient to service a greater dividend yield, totalling R118 million and net capital expenditure of R22 million, which included R7.3 million incurred on the acquisition of Java Lava Beverage Manufacturers (Pty) Ltd (“Java Lava”) and other fleet and manufacturing plant expansions. Borrowings of R37 million, net of cash and bank balances of R32 million, represent a mere 4% of equity (2011: 25%).
In light of the Group’s healthy cash position, the board has declared an interim dividend of 108 cents per share (2011: 80 cents), an increase of 35%.
FRANCHISING DIVISION – LOCAL: This division reported an increase in both revenue and operating profit of 12%, to R234 million (2011: R209 million) and R138 million (2011: R123 million) respectively. The operating margin remained virtually unchanged at 58.8% (2011: 58.9%).
“The solid 10.1 % system-wide sales growth reported in South Africa was boosted by an increase in turnover of 33.3% in the Group’s African markets north of the border. Revenue contribution from these territories now comprises 7.3% of total sales (2011: 6.1%),” comments Hedderwick.
Like-on-like sales across the Group’s network improved 7.1% (2011: 4.1%) with encouraging growth reported by both established and new brands.
Hedderwick says, “Central to this pleasing performance is Famous Brands’ portfolio of high profile aspirational brands which are relevant, contemporary and innovative, being underpinned via a strong market presence, compelling consumer value propositions and exceptional product quality.”
The Group’s footprint as at 31 August 2012 comprised 2 048 restaurants across South and Southern Africa and the United Kingdom (“UK”). During the review period 51 new restaurants (2011: 50) were opened across the Southern African network, and 65 were revamped. Development activity typically peaks in the second half of the calendar year; accordingly, a further 134 restaurants will be opened in the next six months, which will equate to 185 new restaurants opened for the full year.
In South Africa, previously under-serviced rural areas continue to offer robust expansion opportunities for the Group’s brands, whilst heightened interest from prospective franchisees continues to be experienced in the rest of Africa.
FRANCHISING DIVISION – INTERNATIONAL: This business, which comprises Wimpy UK, contributes only 3.7% to Group revenue and is scaled in accordance with the adverse trading conditions prevalent in the UK market. Revenue in Rand terms increased 6% to R44 million up from R42 million in the prior comparative period. In the context of severe inflationary pressure and the Group’s deliberate decision to withhold menu price increases, operating profit declined 22% to R2.7 million; the operating margin decreased to 6.1% from 8.4%. Development activity included the opening of two new restaurants and the revamp of three existing restaurants. Two additional restaurants will be opened in the forthcoming period.
SUPPLY CHAIN: This division, comprising the Group’s Manufacturing and Logistics operations reported pleasing results, reflected by an increase in consolidated revenue of 19% to R897 million (2011: R755 million) and an improvement in operating profit of 17% to R67 million (2011: R57 million).
“Key to this improved performance was first-time revenue contribution from the Group’s Nelspruit distribution centre commissioned in April 2012, improved turnover from the chicken fillet manufacturing plant, and two month’s income from the recently acquired Java Lava coffee roasting business,” elaborates Hedderwick. He adds, “Despite intense margin pressure resulting from increased input and utilities costs, the operating margin declined only very slightly to 7.42% from 7.54%.”
MANUFACTURING: Revenue generated from this division increased by 17% to R313 million (2011: R268 million), whilst operating profit grew by 14% to R41 million (2011: R36 million). The operating margin of 13.0% is in line with the Group’s best-practice target.
LOGISTICS: This division reported robust revenue growth, up 21% to R852 million from R702 million in the prior comparable period. Operating profit rose 22% to R26 million (2011: R21 million), producing an operating margin of 3.1% up from 3.0% in 2011.
Aimed at underpinning the Group’s ambition to be a lowest-cost producer, R10.1 million has been budgeted for capital expenditure to further enhance manufacturing capacity in the Ice-Cream plant, Sauce and Spice operation, and Meat Processing plants in Midrand and the Western Cape. The Bloemfontein distribution centre will be relocated and extensively upgraded in October 2012 and is expected to promote increased franchisee loyalty and deliver strong results in line with the newly commissioned Nelspruit depot. Furthermore, Famous Brands Coffee Company is expected to add material volume and value at the back end of the business.
Hedderwick concludes, “There is little to suggest that relief from prevailing trading conditions is imminent. It is anticipated that consumer spend will remain under pressure, which together with hyper-inflation in diesel and utility prices, will serve to impact negatively on the Group’s margins.” However, he says, “Notwithstanding this environment, management is optimistic that the business is well positioned to capitalise on growth opportunities. Additionally, the latter half of the calendar year incorporating the peak holiday season traditionally affords good growth for the Group. Famous Brands’ extensive brand network catering to consumers across the income spectrum and situated in a wide variety of destinations ensures that the offering is accessible and top of mind at all times.”