The retail slowdown and the flooding has hit the first half profit expectations of Retail Food Group (RFG), the country’s leading coffee and pastry foods chain, and could have a bigger impact on the second half.
In fact given the uncertainty about the impact of the floods in much of coastal Queensland and northern NSW (the company seems to have escaped the current Victorian floods unscathed), there’s every chance RFG’s second half and full year earnings could take a hit.
The company says it’s too early to put any figures into the market, but from its detailed statement yesterday some of its franchises have been hit, with some more badly placed than others. At worst RFG will lose franchise fees and other income from affected outlets for a while.
The company told the market yesterday in an update filed with the ASX that earnings for the December half would be lower than previously expected, with a smaller rise now anticipated of around 10%.
The shares fell 4.5%, or 13c, to $2.75 as a result of the update.
"RFG announced during its 2010 Annual General Meeting that it anticipated 1H11 NPAT from Core Operations to be in the range of 10% to 15% over that reported in 1H10 (being $12.5 million)," the company said in yesterday’s statement.
"Based on unaudited management accounts the Company remains confident that the said guidance remains valid, however, 1H11 NPAT from Core Operations will likely fall within the lower part of the indicated range given the impacts arising from:
"• the significant number of franchisees who did not trade on some or all of the four designated or declared public holidays over Christmas as a result of the significantly increased wage cost brought about by the recently introduced Modern Awards under the FairWork Act; and
"• continued inclement weather in Queensland and New South Wales.
"Although RFG is not presently furnished with sufficient information and understanding of the flood impact on affected franchisees and the communities in which they conduct their retail operations, it is evident that there will be a consequential adverse impact on RFG revenues in the short to medium term.
"That reduced revenue, allied with the Company’s preparedness to financially assist distressed franchisees and their families, will result in a lower FY11 Net Profit after Tax (NPAT) than would otherwise have been anticipated had normal trading conditions applied.
"Given the continuing nature of the flood crisis, together with the prevailing volatile retail environment subsisting both prior to and post it, it would at this juncture be both premature and imprudent to provide full year guidance, or to quantify the likely extent of the affect the matters addressed herein will have on FY11 NPAT.
"That said, RFG remains committed to, and is confident of achieving, positive FY11 NPAT growth from Core Operations over that reported in FY10 (being $26.4 million).
"Ultimately, however, RFG’s likely FY11 NPAT result is a matter that will be influenced by unique and highly unusual circumstances whose full impact is not yet capable of assessment, the company said."
It revealed in the update that it has some 320 outlets situated within Queensland and Northern NSW.
"The vast majority of these outlets have or will be impacted in some measure by the recent and continuing flooding and its aftermath.
"Flood impacts vary considerably and range from stock shortages and staffing issues through to total store closure, and in limited cases, outlet destruction.
"To date, 108 outlets have been directly affected resulting in outlet closure, comprising:"
- 56 Brumby’s outlets (including Brumby’s Go! and 13 Big Dad’s Pies outlets);
- 31 Donut King outlets;
- 14 Michel’s Patisserie outlets; and
- 7 bb’s café outlets.
"Pleasingly, as of today there remains only 8 Brumby’s outlets (including 5 Big Dad’s Pies outlets) which remain closed:
- "6 outlets have sustained significant flood damage; and
- "2 outlets are inoperable due to shopping centre/site closure.
"Franchisees are obliged by their franchise agreements to maintain appropriate insurance coverage (including in respect to business interruption, flood and physical damage).
"It is understood that all affected franchisees maintain insurances, however, the Company appreciates that those policies may in many cases not provide sufficient or appropriate cover, or indeed, may be the subject of exclusionary clauses.
"Ultimately, the availability and sufficiency of insurance cover will be assessed on a case by case basis, but in any event, there will likely be delays in the claims process.
"A corporate level, RFG anticipates the loss of franchise service fee and other revenue in the immediate and medium term as a consequence of the floods and their affect on the Company’s franchise networks.
"Additionally, RFG does not discount the potential for:
- "Permanent outlet closures and latent lease and make good liabilities which may arise, particularly in circumstances where the franchisees concerned are incapable of meeting financial obligations otherwise owed by them;
- "Additional personnel and
