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[TOP STORY] Famous Brands revenue, profits ahead of pre-pandemic numbers

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SIMON BROWN: I’m chatting with Darren Hele, CEO of Famous Brands [about] the results for the six months ending August 2022. Revenue up 19%, headline earnings up 121%. That’s largely base effect. A dividend of R1.30/share. Darren, I appreciate the time. Your revenue, your profits – you are ahead of where you were pre-pandemic, if I go back to the August 2019 numbers.

DARREN HELE: Yes. Particularly if you strip out GBK [Gourmet Burger Kitchen, UK], Simon. At the time it was a bit confusing, but yes, we are not where we’d like to be, but we’re certainly back to those kind of levels. Given the inflation effect we are probably not quite there in real terms, but we will take it right now.

SIMON BROWN: Absolutely. You do comment on the results [that] you’ve seen consumers returning. I know, I go out there, I go and get a burger, I go get a dinner. It is filling up again, although you do comment that price increases have been a reality so far this year and probably more [are] coming.

DARREN HELE: Yes, there’s no doubt that’s going to kind of make things a little more difficult, and people will look at the total bill. We are seeing people sort of trading down, and so we are going to have a bit of headwind. But I think that there is momentum and people will just shop slightly differently but still try and get out and use what they can in terms of their budget.

SIMON BROWN: That’s my sense. Perhaps you still go to whichever it might be, but maybe [take] a smaller fries or maybe less wine with the meal or something like that. We still want that experience, and in many cases with some of your QSRs [quick-service restaurants] it’s about the pressed-for-time consumer.

DARREN HELE: Yes. It’s the balance of both. I think people want quality in terms of getting out and doing a bit of shopping and having the time to do it. But also, in terms of people under pressure, we are still seeing QSRs filling as a home meal replacement, which is a nice space for us. The price point is right. So people are starting to get busy again, and time-poor and cash-rich.

SIMON BROWN:. Yes, absolutely. I’m imagining you’re probably expecting a fairly good year-end season. I’ve spoken to some of the car-hire companies, and we can see what’s happening with airline prices. People are going to be out over December.

DARREN HELE: Yes. Given the suppressed 2020 and 2021 seasons, we are optimistic. I think the only challenge may well be fuel prices and ticket prices. But we think that the road-traffic size is going to definitely pick up, so we are well positioned to capitalise on that.

SIMON BROWN: One of the issues that we are experiencing, of course, is load shedding. How many of your sites have backup power and at what sort of cost?

DARREN HELE: We’ve around 62% of sites that are covered. That’s backup power, and that may well be from the facility they’re in or their own power. Some are just pretty impractical to be able to do; given the environment it will just do not justify it. So we are pretty well covered in that respect. We’d love it to be better. I think as the pressure builds we’re going to have to crank up that coverage now because in Stage 2 or Stage 3 you can get away with it, but with the severity of what we experienced in September there’s been another wake-up call.

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SIMON BROWN: Yes, [with] that severity and duration and frequency. Your signature brands, which are [for] slightly fancier sit-down dining, are the ones that seem to be perhaps lagging over your other brands.

DARREN HELE: Yes, we’ve seen a nice recovery, though, in terms of revenue. We’ve just got to get our profitability model right for ourselves as the franchisor. We’re still probably investing ahead of the curve there, which has been made difficult through the Covid period with not having the kind of volume we require. So yes, we’re still cautiously optimistic. We’ve got work to do and we need to get to critical mass there to get some kind of decent margin. The current margin is just too low to be sustainable for us.

SIMON BROWN: Your group margin overall is 11%, although you make the point that there was a slight benefit because you picked up – what did you call it? – a sort of a payment out of the Gourmet Burger Kitchen bankruptcy there in the UK. Is there scope to push that higher? I’m going back a decade now when your margin was maybe close to double that, or maybe in the high teens if my memory’s correct.

DARREN HELE: Yes, you are correct, Simon. That was at a point in time. I don’t think we’ll get there. I think the mix in the business is very different, and I think the pressures on the supply chain are quite different. In those days that was quite a big contributor and we didn’t really have signature brands then. So yes.

But look, we are certainly under-indexing where we are now, so we know that that margin is going to grow.

I think getting back to levels of around where we were in 2016 is probably a bit of a way off, but certainly a lot better than where we are now. So the lower teens is probably more the number.

SIMON BROWN: Okay, lower teens. A last question. I walk through shopping malls and I’m seeing a lot of empty sites and the like. Are you maybe finding some great locations, perhaps even at decent prices, suddenly available for some of your brands?

DARREN HELE: Yes, [there are] definitely opportunities. I wouldn’t say ‘decent prices’. I’d say probably at more reasonable prices than they were. The landlords haven’t softened that much, but there’s more of a realistic conversation taking place. So definitely we are quite excited about that aspect and we are seeing some nice prospects coming down the line. The conversations are a lot more realistic – and it’s creating opportunity.

SIMON BROWN: I imagine, however, across the range of brands that you have, you’re not quite an anchor tenant like a Woolies or a Checkers, perhaps, but having a food court and having maybe a Mugg & Bean, a Wimpy, a Steers, whatever it might be is important to a shopping centre. It’s part of what they need to have.

DARREN HELE: Definitely. Look, landlords are spoilt for choice, so they have a repertoire of brands. But certainly our brands come up high on consumer research so it’s to the landlord’s benefit to have us there in terms of satisfying those needs and obviously wanting a tenant that’s going to be able to pay the rent to sustain the revenues over time, and able to sustain any downturn, as well as keep up with the standards.

I think that landlords are seeing that we bring that to the party. We give them the consistency they require around food safety and customer service, and anything else that is required in an ever-changing legislative environment.

SIMON BROWN: We’ll leave it there. That’s Darren Hele, who is CEO of Famous Brands, with results for the six months ending August. Darren, I appreciate the time, as always.

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