Embattled franchise operator Retail Food Group (ASX:RFG) capped off a horror year by posting a $306.7 million bottom-line loss and revealing it remains at 'significant risk' of breaching debt covenants over the next 12 months.
The loss, the first time the Gold Coast-based company has plunged into the red in any financial year as a listed company, builds on the $87.8 million blowout recorded in the first half of FY18.
It comes on the back of a massive $402.9 million in impairments, related largely to the closure of loss-making stores and to writedowns in the value of goodwill.
The latest result compares with a $61.9 million profit in FY17 and highlights the full extent of the company's woes that were initially triggered by damning media coverage of disgruntled franchisees, some of whom have lost their life savings after buying into the group's brands.
RFG, which owns Donut King, Brumby's Bakeries, Crust Pizza, Gloria Jean's Coffees and Di Bella Coffee, closed 305 stores last financial year, which was offset by 101 new store openings.
RFG has also upgraded total planned store closures from 200 to 250 as part of its restructure and turnaround strategy to be completed in FY19.
The company says the business remains challenged and it is expecting subdued conditions to continue in the near term.
"The financial performance of the group was significantly impacted in FY18 by challenging retail market trading conditions, especially within increasingly competitive shopping centre locations, negative market sentiment towards franchising, and RFG in particular, the cumulative impact of outlet closures, and internal challenges in the management of RFG's business model," the company says in notes accompanying the profit result.
Despite the restructure currently under way, RFG managed to lift revenue by 7 per cent to $374 million. The underlying net profit after tax was down 56 per cent to $33.3m.
Newly appointed group CEO Richard Hinson remains upbeat, although there was no hiding his disappointment in the latest results.
"While RFG's performance in FY18 has been disappointing for the company and its shareholders, we are beginning to realise opportunities to better capitalise on the scale and scope of our operations, to support a more sustainable business model for the group and our franchise customers," he says.
"These initiatives include streamlining our organisation and supply chain so that we deliver quality products for our franchisee customers at prices that better allow them to compete successfully and profitably in challenging retail trading conditions."
Hinson came face to face with about 700 franchisees at a recent roadshow aimed at improving head office relations with the business's store owners.
However, in a cautionary note, RFG is mindful that the business remains in peril at the back end by revealing it is at significant risk of falling foul of debt covenants over the next year.
"A breach of one or more of these financial covenants may result in all the syndicated debt becoming due and payable," says the company.
"The continuing viability of the group and its ability to continue as a going concern is dependent upon the group maintaining the continuing support of the syndicated lenders, and managing the covenants and the terms of the renegotiated (debt) facility."
It says support by its financiers has been secured and that the group will be measuring debt covenants quarterly from September.
RFG says it is confident that its brand systems will stabilise over FY19 to 'a core of profitable, well-run franchise stores'.
It sees Di Bella Coffee penetrating further into non-RFG franchise coffee channels, including independent cafés, grocery outlets and through online sales.
"Our focus in the current financial year is to stabilise the business and return it to a profitable platform, and optimise our core operations so that we enhance profitability and returns for both our franchisee customers and RFG," says Hinson.
He says debt reduction through asset sales is also being considered. RFG may also consider a recapitalisation once the business has stabilised, although that is likely to be dependent on the share price recovering.
RFG is not paying a final dividend.
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