Mon 30th Oct 2017 - Famous Brands reports ‘underperforming’ GBK in UK weighs on profits, Wimpy business ‘satisfactory’ Famous Brands reports ‘underperforming’ GBK in UK weighs on profits, Wimpy business ‘satisfactory’: Famous Brands has reported a 59% drop in earnings for the six months ending 31 August 2017 as the “underperformance” of Gourmet Burger Kitchen in the UK weighed on profits. South Africa-based Famous Brands, which also operates Wimpy in the UK, said the “adverse economic and socio-political environment in Britain continued to impact negatively on the operation results” of the company. Headline earnings per share fell 59% to 170 cents compared with 411 cents a year ago. Of its UK business, Famous Brands stated: “While the Wimpy business delivered a satisfactory performance in sterling terms, the Gourmet Burger Kitchen business underperformed management’s expectations. As noted in the voluntary performance update and trading statement published on 16 August and 9 October respectively, the integration of Gourmet Burger Kitchen is on track and management remains optimistic about the medium-term potential of the business. In the review period, like-for-like sales across the industry remained flat, failing to offset increased input costs. Over the past three months, food cost inflation accelerated from 2% to 8%, exceeding projections, and combined with higher labour and business rates, continued to pressure margins. Market experts opine that current industry like-for-like sales growth will probably be insufficient to deliver neutral margins in the year ahead, suggesting that growth in sales of between 3% and 6% will be required. In this environment, several under-capitalised competitors have already exited the market and it is anticipated that further consolidation in the industry is likely.” Of Gourmet Burger Kitchen in the UK, Famous Brands said: “During the review period, Gourmet Burger Kitchen’s high-end consumer market shifted from dining casually and often to formally and occasionally, impacting negatively on sales. Furthermore, in the business’ niche category, the range of burger and non-burger offerings increased notably, affording consumers far wider choice than in the previous period. While this best-in-class brand continues to lead the premium burger category and grew system-wide sales, like-for-like sales declined, reflecting the difficult trading conditions experienced in the period. For the 26 weeks to 27 August 2017, Gourmet Burger Kitchen’s system-wide sales were 11.1% higher and like-for-like sales 3.2% lower (in sterling terms) compared with the prior comparable period. Disappointingly, the business recorded a loss before interest and tax of £872,000 for the period. Higher input costs, significant store pre-opening costs and intensified price competition in the sector resulted in a decline in operating margin from 3.6% in the prior period to minus 2.1%. While this poor result is primarily attributable to the prevailing economic and socio-political environment in the UK, a range of interventions are currently being implemented in the business that are anticipated to have a positive impact on future performance. These include intensified focus on the management of new restaurants opened, improved operational efficiencies and enhanced cost controls. As at 31 August, Gourmet Burger Kitchen’s footprint comprised 103 restaurants, with seven restaurants opened during the review period. A flagship restaurant will open in December in Meadowhall Shopping Centre, Sheffield, and management is optimistic the offering is optimally aligned to the site and target market. In the current economic climate, the board has resolved to curtail the opening of further restaurants in the short term given the high pre-opening capital costs, averaging £1m per restaurant. Gourmet Burger Kitchen’s operation in Ireland, which comprises five restaurants, continued to gain traction following two revamps during the period, while the addition of a new offering to the delivery platform served to grow online sales.” Of Wimpy, Famous Brands stated: “Revenue in rand terms reported for the period declined to 49 million rand (2016: 58 million rand), as a function of foreign currency translation. Operating profit decreased by 17% to eight million rand (2016: ten million rand), and the operating margin declined to 17.2% (2016:17.6%). While system-wide sales decreased due to the closure of two restaurants, the business reported like-for-like growth. The introduction of a new restaurant design is anticipated to have a positive impact on the brand as it is rolled out, with five stores scheduled to undergo a comprehensive revamp over the next two quarters. To date, the first recently revamped restaurant continues to achieve significantly improved sales growth. Store openings for the period were behind budget, however new site prospecting is under way and discussions with existing franchise partners have been fruitful and augur well for growth prospects in the year ahead.” Famous Brands reported group revenue in the period increased 39% to 3.4 billion rand. Operating margin, before non-operational items, decreased to 11.9% in the first compared with 16.5% the previous year, owing to a higher percentage of company-owned restaurants in the UK. Famous Brands acquired Gourmet Burger Kitchen from Capricorn Ventures for 2.1 billion rand (£109m) in October last year.