Retail Food Group shutting stores and slashing costs on heavy losses

Retail Food Group shutting stores and slashing costs on heavy losses

Under siege fast food franchise operator Retail Food Group (ASX: RFG) has closed 93 of its stores in the first half of the financial year and plans to shutter more as it revealed a loss of $111 million.

RFG, which operates Donut King, Gloria Jeans, Michel's Patisserie, Brumby's and Crust Gourmet Pizza says it will continue to slash costs and sell off stores and other assets as it also recorded a drop in sales of 1.8 per cent to $192 million. Gloria Jeans and Michel's posted the biggest fall in sales.

Restructuring costs totalled $13.5 million for the December half as it wrote down assets by a further $123.7 million after a $138 million writedown in the prior corresponding period.

The Gold Coast-based company has been on the receiving end of negative media coverage over the past 12 months with claims of financial ruin amongst its franchisees, many of whom have taken up class actions against RFG.

The allegations from disgruntled franchisees include claims that RFG charges excessively high fees along with marketing and food costs. It has also been accused of operating questionable business practices, including its level of disclosure to new franchisees.

Last week, a Brisbane court ruled RFG breached Australian consumer law when it made misleading representations to a couple who opened a Michel's in Townsville about the quality range and frequency of product delivery from Brisbane to Townsville. The couple abandoned the store within 12 months in July 2013 amid trading losses of more than $37,000.

RFG has conceded the negative publicity has affected its sales while its bottom line is also being impacted by higher rents and difficulties in securing new franchisees.

"Persistent challenging retail trading conditions, increasing occupancy costs imposed by store landlords, and ongoing negative sentiment in connection with franchising and RFG, continue to place pressure on both the company and its franchise partners," the company says in its ASX statement.

Total revenue fell 3.4 per cent to $170 million and RFG says its full-year earnings are expected to drop by at least a 32 per cent.

RFG capped off FY18 with a $306 million bottom-line loss, its first annual loss in 12 years as an ASX-listed company. That result came on the back of $402.9 million in impairments related to goodwill and store closures.

The group had a market capitalisation of more than $1 billion at the end of 2016 but is now languishing with a value of under $50 million.

During the first half, RFG underwent a major restructuring and brought in turnaround specialist Peter George as executive chairman. George has previously worked on transforming Optus and Asciano.

"The 1H19 results show that the Group has gone some way towards clearing the decks and stabilising the performance of continuing operations, although a lot of work remains to be done to resurrect the financial health and performance of the business," George says.

"As we progress restructuring activity, we will be focusing on the delivery of enhanced product innovation and brand system marketing strategies."We remain committed to equipping our franchisees with the best possible products and support to enhance their own profitability and expect these benefits to start materialising in the first quarter of FY20.

"The major restructuring and 'right sizing' of our shared services is an immediate priority for the group, and is expected to deliver cost savings as well as an agile, more efficient operating model.

"The removal of surplus and duplicate full-time roles and reductions in costs pending non-core business divestments or discontinuation of operations, are targeted to deliver significant annualised cost savings of approximately $20 million," he says.

Along with its store closures, RFG also announced it would close its Bakery Fresh wholesale bakery business and it is believed the company is in talks to sell its Donut King and pizza businesses.

George says RFG's turnaround will be driven by successful implementation of a six point plan that will focus on business stabilisation, debt reduction and operational improvement amongst the company's business units.

"A number of measures have been implemented to support the Six Point Plan and stabilise RFG's performance, however, the Company anticipates that future results will remain subdued whilst retail market conditions remain challenging and the Company executes on its restructuring program," George says

At around midday (AEDT) RFG shares were trading down just over 5 percent at 25 cents, down from a four-year peak of $7.28 in September 2016. The company will not pay an interim dividend.

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