Restaurant Brands - no hype, looks good

Friday 26th April 2002

A year ago in this column I lambasted Restaurant Brands for ceasing to disclose its same-store earnings figures in its annual report and for overdoing the marketing spin on its content.

Its latest report disappoints by again withholding the highly useful store figures but at least it has slashed the hype.

One example of this impressive development is the use of "normalised" figures to show the company's performance over the 12 months to November 30 despite a balance sheet change to February 28. This allows some comparison to be made with the previous year's results.

Most companies don't do this, leading to confusion among investors without sufficient information to make the necessary adjustments themselves.

That Restaurant Brands has taken upon itself to offer such information is laudable and hopefully will set a precedent to other companies that tinker with their balance dates.

Chairman Bill Falconer and chief executive Jim Collier also give their reviews in a more straightforward manner, overcoming the dominance that style has had over content in the past.

As someone with a marketing background, Mr Collier can't resist the occasional lapse into overkill, such as a particularly prominent comment that, "Our strategy is to drive growth in KFC while aggressively expanding the other brands in our portfolio."

This is over the top considering the fried chicken chain didn't increase the number of outlets last year and its sales have gone up by less than 3% in the past five.

The translation seems to be that KFC is the company's cash cow and almost all growth is going to come from its Pizza Hut and Starbucks chains.

That's nothing to be ashamed of. Every good company has its cash cow, whose stable earnings and cashflows give the rest of the group a platform from which to grow.

Even on the 12-month figures, Restaurant Brands showed excellent growth, increasing net profit to $20.7 million from $9.8 million the previous year. Revenue was up $30 million to $264 million.

However, these figures are distorted by the sale and leaseback of KFC's outlets around the country.

A more accurate picture comes from a measure described in notes to the accounts as "ebita excluding strategic initiatives." This shows that in the first 12 months of its 2002 financial year, the company made $26.7 million against $25.6 million in the previous year. That is much more modest growth.

Such inability to deliver attractive growth has disenchanted investors over a long period.

As Mr Falconer states in his review, "This is the first occasion on which the directors have been able to report to shareholders with the company's share price above the 1997 issue level of $2.04 [$2.20 adjusted to take account of the bonus issue in 2000.]"

KFC has been a major chain dragger on the group and it has been no secret that the company is working to reduce the chicken chain's influence. Segmental figures show KFC's sales as a percentage of the group total have fallen to 67% from 80.4% in 1998.

This figure will continue to fall as the company expands its Pizza Hut business (which it did in 2000 by buying rival chain Eagle Boys and again after balance date this year in acquiring 51 stores in Victoria, Australia).

Also, the Starbucks chain of fast-coffee outlets is burgeoning, boosting earnings in the latest comparable 12 months by 71% and its profit by 260%. Its contribution is still insignificant relative to the other divisions but Restaurant Brands is making confident noises about significantly growing both revenue and profit margins.

Confident noises are something the company, particularly its chief executive, has made a lot of over the years. Reality has rarely kept up.

Ironically, the relative lack of hype in this year's report increases the feeling that this time the optimism is justified.

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

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