Profit Downgrade Continues to Bite Retail Food Group Share Price

Retail Food Group Ltd [ASX:RFG] shares fell 25% yesterday after the company issued a profit downgrade and revealed some of its franchises were leaving its network. The fall followed a 7% drop on Monday. Today, RFG’s shares continued the downward trend, falling 7% to $1.84.

What Caused the Drop?

RFG downgraded its first-half statutory net profit to $22 million, down from $33.5 million in the same period last year. RFG’s stock has fallen 55% in 10 days, stripping close to $460 million from its market capitalisation, which has fallen to $334 million.

The company says that negative publicity in the media is affecting their ability to attract new franchisees and hold on to existing ones. The media claims include extensive underpayment of employees and a flawed business model. Fairfax Media also reported that up to 200 stores across RFG’s brands were up for sale. This included 17% of Gloria Jean’s stores and 25% of Pizza Capers stores.

What’s next for Retail Food Group?

In a recent market update, RFG said that Crust Pizza and Donut King were meeting expectations, but that its Michel’s Patisserie, Brumby’s and Gloria Jean’s chains were underperforming. Interestingly, RFG also admitted that their profit outlook relied on $5 million in new international licence sales, which it hoped to secure by 31 December.

This is a concern for investors, as is the company’s level of debt. RFG stated that it was consulting with banks to extend a current loan deadline of December 2018 for $150 million.

RFG have launched an advertising campaign in the hope of attracting new franchisees but the wave of recent criticism may limit the campaign’s effectiveness. RFG needs to work harder to restore shareholder confidence and reward franchisees who have placed their trust in the RFG network.

Cheers,

Craig Henderson

Junior Analyst, Markets & Money


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