Back in 2015, Restaurant Group was flying high. Shares in the company, which owns the Frankie & Benny’s and Chiquito brands, were in high demand. They hit an all-time high of 720p at the beginning of 2015 off the back of surging earnings expectations.
Between 2012 and 2016, earnings per share more than doubled. Unfortunately, this turned out to be a high point for the company. Profit warning after profit warning has since followed, and after falling 51% in 2017 analysts expect earnings per share to decline by another 12% this year. In other words, in the space of just one year, four years of growth has been wiped out.
Like many of other high street restaurant brands, the group’s Frankie & Benny’s and Chiquito eateries have been hammered by a combination of weak consumer confidence, rising wage costs and higher business rates.
The company isn’t the only one suffering. Burger chain Byron and celebrity chef Jamie Oliver’s Jamie’s Italian chain have also been forced to restructure operations thanks to similar pressures.
The big question is, after falling in value by more than 50% over the past three years, are shares in Restaurant Group worth buying today?
The answer isn’t simple. Even though the stock looks attractive based on forward earnings estimates, (which are calling for earnings per share of 22.4p in 2019, giving a forward P/E of 13.4) the company’s ability to be able to hit this target depends greatly on the success of its cost-saving initiatives and consumer spending.
So far, changes brought about by management have not reignited growth. In the half-year to July, Restaurant Group’s like-for-like sales fell 3.7% on the same period last year. The company reported a similar decline in the same period of 2017. Pre-tax profit for the half-year was £11.7m, down from £12.6m a year earlier. For some comparison as to just how badly the business is faring in the current environment: In 2015 it reported a net profit of £69m for the year as a whole.
Without a doubt, there is a huge amount of uncertainty overhanging the company’s outlook. The dividend of 5.5% looks attractive, but with earnings falling, the sustainability of this dividend payout is questionable.
Last year, dividends consumed £35m compared to free cash flow approximately £40m. This does not give the company much room if sales fall further. One group of analysts believe costs will rise by £18m during 2018, offsetting £9m of planned cost savings and eroding the gap between free cash flow and the dividend payout. Based on these numbers alone, I wouldn’t rule out a dividend cut over the next 12 months.
Overall, with costs increasing and sales stagnating, the outlook for Restaurant Group is uncertain. With this being the case, I do not believe that the shares look cheap at current prices. If anything, you could argue that the stock actually looks expensive and deserved to trade at a high single-digit earnings multiple considering the uncertainty surrounding the business.
Disclosure: The author owns no share mentioned.