Famous Brands: uncertainty around earnings

Famous Brands, purveyor of fine calories in the form of burgers, pizzas and many other types of yumminess, has given a voluntary update for the year ended February 2022. The share price dropped nearly 8% in response but managed to claw it back in late trade to close 3.2% down on the day.

The take-away brands you know and love are grouped under the Leading segment (as in, Leading brands) and increased system-wide sales by 35.8%. Famous Brands is a franchisor and wholesaler, so system-wide sales (the actual restaurant sales through the till) is an important measure but not necessarily a perfect indication of revenue growth for the listed company. More on that to follow.

The fancier restaurants (like Turn ‘n Tender, Salsa and others) increased system-wide sales by around 55.1%. One would expect to see a sharper recovery in those restaurants than the take-away formats as they took a much harder hit from alcohol restrictions over the pandemic. You can’t buy a beer at Steers (perhaps unfortunately).

The AME region (rest of Africa and Middle-East) had less stringent trading restrictions during the pandemic. System-wide sales increased by 19.8%, a reflection of a less volatile trading period under those lockdown rules.

Wimpy UK revenue has increased by around 19.5% in this period.

Moving on to the core revenue of Famous Brands as a listed company, manufacturing revenue (the products supplied to the restaurant) increased by 30.8% and logistics revenue (effectively a food service business) increased by 35.3%. The retail division supplies products for third-party retailers (like a Steers sauce in the supermarket) and grew revenue by 46.9%, a really strong result.

The board isn’t sure yet whether a trading statement would be required for the year ended February 2022. This would be triggered by a 20% jump in earnings, so it’s a bit surprising to see that such an earnings increase is in doubt despite such significant increases in revenue.

This may be why the market reacted in this way to the announcement, with a sharp drop that improved towards the end of the session. Another risk I’m keeping in mind is related to fuel price and soft commodity price shocks, which would cause substantial input cost pressures for Famous Brands.

Can those pressures be passed on to consumers? Do you want a King Steer burger that badly?

As investors, these are the questions we need to ask. Trading at around R60, Famous Brands has dropped back to where it was in April 2021 and would need to climb 30% to get back to pre-pandemic levels.