Report Card

Friday 16th March 2001

One of the most useful pieces of information about Restaurant Brands in the past has been its same-store performance. That's because the company opens new outlets regularly, which gives it the appearance of sales and profit growth while underlying performance is usually much less strong.

Shockingly, this information has been removed from its latest annual report. Readers could be forgiven for jumping to the conclusion that those figures were so unattractive they had to be banished.

In last year's report, the same-store figures were given on page two of the chairman's report.

It showed that group sales rose 4.4% to $215.1 million while same-store sales rose a more modest 0.7%. This was achieved by strong sales growth from KFC stores, making up for a 0.4% decline in sales from the group's other main asset, Pizza Hut.

However, this year there is no mention in the report of same-store sales, with the exception of newish coffee shop chain Starbucks, up an impressive 9%.

Apart from that, most references are to the increase in sales from $215.1 million to $234.1 million, up 8.8%, and gross earnings, up 4.3%.

Sales growth was assisted by contributions from one new KFC outlet, 39 extra Pizza Hut stores (thanks to the takeover of rival chain Eagle Boys during the year) and seven more Starbucks shops. Earnings figures have also been boosted by accounting for a 53-week year in 2000 against 52 weeks in 1999. The report describes this as an occasional "leap year" in response to the company's normal use of a 364-day year.

Without same-store figures, it is hard to tell how the company has performed in relative terms. Dividing sales by the number of stores shows a decline from $1.5 million to $1.2 million per outlet, down 20%. Earnings before interest, tax, depreciation and amortisation (ebitda) fell from $282,000 per store to $220,000, down 22%. However, these figures don't allow for the new outlets operating for less than a year. Eagle Boys, for example, was acquired only in May.

Gross margin may give a better idea. The report helpfully gives a figure for surplus before tax and "excluding Eagles Boys' costs." In 2000 it made $18.8 million on operating revenue of $237 million, a gross profit of 7.9%. In 1999 it made $18.6 million from $217 million, a margin of 8.6%.

This is despite the company closing 16 Pizza Hut stores described as "poorer performing" or duplicated by an Eagle Boys outlet.

That strikes me as a poor performance that is not reflected in the reported revenue growth of 8.8% and the rise in gross earnings of 4.3%.

The obvious excuse, that the company is spending now to achieve greater profits in the future, is wearing thin considering it has been rolling out new stores ever since it floated in 1997.

This report looks as if it has been hijacked by public relations advisers, with an emphasis on putting a positive spin on information rather than maintaining open communications with stakeholders. Instead of saying the company had yet another ordinary year, with "normalised" profit down on 1999, the report describes it as a year of "transformation" - a word used ad nauseum in the document.

This seems to be overstating the situation considering its biggest asset, KFC, representing 75% of sales, has done very little and Starbucks merely opened a few more stores.

To find something nice to say about this report, I have to turn to the company's corporate governance statement. Most reports carry a pretty dry, routine description of how the company is controlled and by whom but Restaurant Brands starts off with a paragraph that is clear, emotive and thus powerful.

"The board of Restaurant Brands New Zealand Limited is committed to the guiding values of the company: integrity, respect, continuous improvement and service. It expects that management and staff ultimately subscribe to these values and use them as a guide to making decisions."

The only improvement I could see would be the addition of a new value: straight talking.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. <www.mcewen.co.nz> Email: davidm@mcewen.co.nz

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