The two-year anniversary of the insolvency of your most expensive purchase ever is an unlikely milestone to celebrate.
But the way Famous Brands CEO Darren Hele tells it, had the company tried to recapitalise and resuscitate Gourmet Burger Kitchen (GBK) — the ill-fated UK venture that it bought for £120m in 2016 — the group’s post-pandemic recovery might not have been nearly as swift.
“In the depths of that tumultuous time, we took a decision not to recapitalise but rather to place the business in administration. We took this decision in the best interests of the entire [group],” says Hele. “The core Famous Brands operation has significant inherent strength, and the business model is structured for growth.”
That’s evident in the company’s latest numbers. Headline earnings per share jumped 11% to R2.15 for the six months ended August from a year ago. This was driven mainly by increased revenue across the business, which grew 19% to R3.5bn, while operating profit shot up 77% to R393m. Once laden with debt due to GBK, Famous Brands has more than halved its ratio of debt to earnings before interest, tax, depreciation and amortisation to 1.98 from 4.4 a year ago, while free cash is up 73%, to R552m. It means Famous Brands is back to paying dividends — 130c a share in this half.
Was the company at that stage close to imploding? No, says Hele. It had a friendly banker in Nedbank and “we didn’t recapitalise GBK, so the rest is history”.
South Africa’s hospitality industry was among the hardest hit by lockdown restrictions, which included closures and bans on alcohol sales. Hele says the business has recovered by focusing on what it could control, working closely with franchise partners and key stakeholders. Key to the group’s recovery, he says, included “being brutally honest with ourselves in our assessment of the business and what was important to us, being transparent, and setting short-term, manageable, bite-size goals”.
To slash debt, the group cut back on discretionary and nonessential capital expenditure, halted the dividend and sold some noncore assets.
It’s seen its leading brands (like Steers and Wimpy) deliver strong results. Revenue in the core segment was up 25% to R431m. The revenue of the more niche signature brands (such as Turn ’n Tender, Vovo Telo and Mythos) jumped 68% to R103m, but still lag pre-pandemic levels. The segment managed to scrape together a profit of R7m — a distinct improvement, however, on last year’s R11m loss.
And while healthy eating continues to gain prominence (the group bought 51% in Lexi’s Healthy Eatery earlier this year), consumers have been opting for their fair share of indulgence.
“We believe our recovery is complete. The balance sheet at end-August clearly indicates this, and we started the second half with no Covid restrictions in place,” says Hele.
Famous Brands retains an interest in the UK through Wimpy, which is now taking strain from Britain’s cost of living crisis.
We believe our recovery is complete. The balance sheet at end-August clearly indicates this, and we started the second half with no Covid restrictions in place
— Darren Hele
The division made a loss of R20m due in large part to an impairment of R31m. Without it, the unit would have earned R11m in profit.
Hele was instrumental in managing Wimpy when the group bought it out in the UK in 2007, and says that country’s market is the toughest he’s ever seen, characterised by low consumer confidence and low spending. Consumers switched from home delivery to sit-down eating, which tends to be more profitable, but the group expects a tough January and February, with consumers facing rising energy bills in the UK.
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, says there was at one stage huge uncertainty about whether Famous Brands would pull through the onslaught of GBK and Covid. “We maintained at the time of the GBK acquisition that this [purchase] was not just in a foreign country where demographics are different but also of a different business model to what Famous Brands was accustomed to. On top of that it was simply too big for Famous Brands at that point, and presented a huge risk to shareholders.”
Certainly, the group has already taken plenty of pain: Famous Brands shares have delivered a negative total return of 43% over five years. This year alone they’ve dropped 28%. But Treurnicht says the group’s shares are relatively well priced, and have the potential to grow margins, “though churning out more profit will be much harder to achieve in the current environment. Input costs are on the rise, the consumer is more depressed every day and competition from existing and new entrants is increasing. Burger King, for example, seems very aggressive nowadays.”
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