Taste Holdings interim results reveal sales increase of 54%

Carlo Gonzaga

The new depots distributed directly to about 450 of the over 500 food outlets across the group's Scooters, Maxi's, St Elmo's Woodfired Pizza and The Fish & Chip Co brands. KwaZulu-Natal is scheduled to come on-stream in March 2013. The move was in line with the stated vertical integration strategy and saw the food division terminate its third-party distribution contract in August.

The group had signed a management contract whereby it did not own the delivery vehicles, effectively mitigating the capital expenditure and management requirements during the set-up phase. The half-year figures included R2 million in once-off costs with management anticipating another R1.5 million in set-up costs in the next six months.

Capital expenditure for the initiative was R5 million, funded from internal cash resources. Gonzaga believed bringing the warehousing and distribution in-house would directly benefit franchisees through a leaner, more efficient supply chain management.

The food division also houses Buon Gusto Food Services, manufacturing specialised sauces, spices, dough pre-mixes and added-value meat products for the food brands.

Glittering performance

Commenting on the results, he also highlighted the stellar year-on-year performance of jewellery chain NWJ, specifically the impressive performance of corporate-owned stores. "Same-store sales in the corporate-owned stores increased 13.4% on last year. This is especially significant given that last year the increase was 14%, so it is 13% on 14%."

Operating profit for NWJ rose 26%, driven by strong sales performances; a 6.2% cost increase and a sale mix yielding improved gross margins. While franchise stores declined 1.5%, the initiatives to replicate corporate performance were gaining traction. The division ended the period with three fewer stores than at year-end.

Gonzaga said the market had welcomed the NWJ branded credit card, introduced in June and credit sales now constituted 8% of total sales against 2% previously. Underwritten by a third party, the card enabled NWJ to broaden its market by giving credit-based consumers access to the brand without exposing it to a bad debt risk.

"This innovation will provide a low-risk but robust growth path," he said.

Profits up, costs down

In the review period, system-wide sales rose 54% to R641 million and the group commenced integrating The Fish & Chip Co business. The continued focus on leveraging economies of scale saw costs as a percentage of revenue drop for the fourth consecutive reporting period.

Consequently, revenue rose to R176 million (2011: R113 million), translating into a 65% hike in profit before tax to R13.4 million, despite lower gross margins from the larger contribution of the lower-margin food services division.

Headline earnings a share rose to 4.5c from 3.1c and the company pays an annual dividend. Notwithstanding the results, he said the group was "acutely focused" on improving franchisee profitability.

"The four consumer brands are underpinned by strong value-for-money propositions and The Fish & Chip Co. has extended the group's consumer reach from the traditional LSM 7-10 levels to a larger, diverse universe of LSM 4-10 consumers," he added.

Growth of franchises

The food franchise division ended the period with 498 outlets (246) with The Fish & Chip Co opening 54 new outlets in line with its target. System-wide sales soared 74% to R534 million, but comparable store openings in the other three brands were lower given the higher-than-normal new stores opened.

Gonzaga anticipated opening 65 new food outlets in the second half-year. In the near-term, management would roll out the re-branded Scooters image; capitalise on The Fish & Chip Co growth and bed down the distribution business, as these areas offered "a substantial runway for growth".

Counterclaim to be lodged

Referring to the dispute between Taste and The Fish & Chip Co sellers, he dismissed the claims as "baseless", indicating management was launching various applications to protect its right and would soon file a counterclaim.

In August, the sellers indicated certain suspensive conditions had not been fulfilled, including that the Taste board did not grant approval for the acquisition; shareholders had not approved the move and Competition Commission approval had not been obtained.

He confirmed the board had approved the transaction and communicated this in writing to the sellers. The transaction also fell below the Competition Act threshold, meaning its approval was not required.

Food inflation challenging

Looking ahead, he said the recent violent strike action had negatively affected consumer confidence.

"This, with forecast rising food inflation, will ensure the next period remains challenging. However, the group's brands have enjoyed recent positive same-store sales growth, highlighting their brand strength based on strong value propositions," concluded Gonzaga.