Medium rare for Spur

Spur, which listed in 1987, has fortunately been through tough times (many) times before, and has shown an ability to thrive when the economy is looking lean.

On Thursday, Spur CEO Pierre van Tonder said trading had turned tough with food inflation squeezing margins in the central kitchen/wholesale division.

A divisional breakdown shows operating profit in the central kitchen/wholesale dropping to R13.8m from R17.7m last year.

Van Tonder said: "We took a look at franchisee profitability and decided we could not continue passing on price increases. It's squeezed our trading margins, but it is a decision we are comfortable with."

He explained that not passing on cost increases to franchisees would ensure both good value for customers and sustain franchisee profitability. "We are confident that this strategy will have a positive effect on the group's franchisee fee income and profitability in the medium to long term."

Margin squeeze

Trading margins dropped to 34.5% in the interim period ending December 2007 - markedly off the 42% seen in the corresponding interim period last year. Bottom line earnings edged up to 39.56c/share (from 38.1c), but directors showed some confidence in second half trading by upping the distribution to shareholders by nearly 8% to 28c/share.

Cash flow was a reassuring R53m for the interim period. Top line growth was more meaningful with revenue shunting up over 30% to R145m on the back off the opening of new international restaurants - including two Spur outlets in London in June last year.

While Spur's international base is growing encouragingly, Van Tonder indicated that locally operations had been hampered by multiple interest rate increases, high fuel prices, rising food costs and the introduction of the new credit legislation in 2007.

Restaurant turnover locally increased only 7%, with turnover of existing restaurants (excluding new outlets) only managing revenue growth of 6%.

Asked whether tougher conditions in SA could shake-out the family restaurant market, Van Tonder noted that the subject had been raised at a recent exco meeting.

"We've seen a bit of a mortality rate amongst some of our competitors in the last two to three months. There is big pressure being brought to bear on some of our competitors."

Cost minimisation

Looking ahead, Van Tonder said Spur was focusing on creating efficiencies through cost control in the procurement process - as well as leveraging the group's buying power to ensure the success of franchisees.

"We are also trying to minimise cost increases to our customers and franchisees through product innovation, menu engineering and broader local and international product sourcing.

Van Tonder said Spur would also continue with its aggressive marketing campaigns to enhance customer loyalty and drive restaurant foot traffic.

He said the group still planned 12 new restaurants openings in SA in the second half of the year and three internationally (Ireland, Australia and Zambia).

While the second half will undoubtedly be challenging for Spur, the group's balance sheet shows net cash sitting at nearly R60m (equivalent to 68c/share).

*The writer, the father of two "excitable" children that cannot be taken to most restaurants, holds shares in Spur.

- Fin24