Publications
Partners
IT’S not often I praise a set of company results, but there is a lovely sense of order about the latest income statement for fast food/restaurant franchisor Famous Brands.
Briefly, the company – which owns brands like Steers, Debonairs, the House of Coffees and Wimpy - saw turnover up a steady 8% to R1.67bn.
But it gets better: gross profits were up 13% to R713m and operating profits were hiked 17% to R305m – thanks to the increase in selling and administrative costs being restricted to under 10%. With a much reduced interest bill, pre-tax profits were up a heartening 30% to R283m.
In other words, it gets better as you move down the lines of Famous Brand’s income statement.
Now there are more than a few acquisitive growth companies that might report quite the opposite. Instead you will have a massive leap in turnover, followed by smaller increases in gross and operating profits. And then, if you are lucky, there is a smidgen of growth at bottom line (which may well be diluted at earnings level by additional shares issued to fund acquisitions).
Multi-brand businesses are not easy to run, especially when your brands may actually compete, albeit indirectly, with each other. A fine balance needs to be maintained, lest one slip sets off a chain of operational setbacks (remember O’Hagans?) that can quickly put a company under pressure or, worse still, deep in the red.
This, I assume, is why the ultra-conservative Spur Corporation has for so long been the default option for punters wanting exposure to the fast food-restaurant segment. Spur largely revolves around one very strong brand – which largely defines the concept of the South African family eatery (even though I’m miffed they saw fit to remove their Salad Valley option).
As such Famous Brands, with its aggressive expansion strategy over the last six years, has traditionally been viewed as the more adventurous (read: more risky) option for investors.
But if the Famous Brands income statement does one thing, it should be to reassure the market that there is a capable management team in place.
Viable balance
It’s very hard to fault a company that gets 8% top line growth in a fairly dour time for discretionary spending, and then is still able to tweak up its operating margin to 18% (previously 16.8%).
Management has struck a viable balance. They are reassuringly not chasing market share at all costs, but have built
a compelling brand portfolio that allows some pricing flexibility - even in these low inflationary times.
Arguably, management’s most important achievement is the remarkable cash conversion. Cash generated from operations was an astounding R346m, up a hefty 25% on the previous year.
Most investors would probably be fairly satisfied if a company converts around three-quarters of its profits into cash. Famous Brands generates more cash than the operating profits reflected in its income statement- no dividend worries here.
One other aspect of Famous Brands’ performance I’d like to highlight is the fact that the appetising profit growth was achieved despite a mediocre performance from the company’s UK operations.
Turnover from UK franchise operations dropped 23% to R138m, and operating profits were dragged down almost 20% to R14m.
What is fascinating is that Famous Brands more than covered its poor UK showing with a massive 52% leap in profits earned from “supply chain” services. At R94m, the profits generated by supply chain services – which comprise manufacturing and logistics – accounted for almost a third of the company’s operating profit.
With Famous Brands' footprint so much bigger, the logistics business is growing really well. In the year to end-February 2008 logistic services generated operating profits of R15m, which grew to R23m in the year to end-February 2009. In the past financial year the contribution from logistics services was more than R33m. Do I see a pattern emerging here?
- Fin24.com
