With its balance sheet in good shape and sales and profits on the rise, The Restaurant Group is well-placed to increase the pace at which it rolls out new restaurants and kitchens. FEJ explores the financial model behind its blueprint for growth.
When The Restaurant Group — owner of established restaurant brands such as Frankie & Benny’s, Garfunkel’s and Coast to Coast — says it is accelerating new site development, it is not exaggerating. The chain, which now totals 480 stores nationwide, has opened 20 new sites in the first eight months of this year. By the end of 2015 it expects to complete between 43 and 48 new-build projects — and with it the same number of kitchen schemes.
The expansion —almost the equivalent of a store opening a week — puts TRG right at the top of the charts as far as volume of branded foodsevrice restaurants goes. Financial results for the first six months of the year suggest its formula of building new sites, growing sales and reinvesting its profits back into opening more sites is working out exactly as the company planned.
During the first half, capital expenditure totalled £21.2m, comprising £14.4m on developing new sites and £6.8m on maintenance and refurbishment investment. By year end, capital expenditure will be in the range of £75m to £80m, which represents an increase on the year before.
It comes as TRG revealed that sales for the first six months of the year increased 2.5% on a like-for-like basis to £334m but 8% with new openings factored in. Pre-tax profits soared a healthy 10% to £36.9m, while earnings per share crept up 12% to 14.3p.
The group is well-positioned to deliver on the strategy of doubling in size with a more balanced portfiolio over the next eight to 10 years”
The most formidable part of TRG’s portfolio remains Frankie & Benny’s, which at 251 stores and rising accounts for more than half of its total store tally. The chain traded well during the first half of the year, delivering solid growth in turnover and profits coupled with improved margins. The brand is benefitting from its broad appeal, particularly among families, and new initiatives, such as its ‘Family Matters’ programme — which represents a step change in service culture — and its ‘Red Sauce Revolution’ menu, have only reinforced this position.
Alan Jackson, chairman of TRG, says the group is expanding Frankie & Benny’s at a rapid rate. “During the first half we opened four new Frankie & Benny’s restaurants, with a further two opening since the end of June,” he reveals. “These new sites are all performing well and are set to deliver strong returns. We expect to open a total of 13 to 15 new Frankie & Benny’s restaurants in the full year.”
TRG did not make any reference to Garfunkel’s in its latest results, but confirmed that Mexican grill concept Chiquito, like Frankie & Benny’s, is in the midst of an intense store expansion programme (see panel opposite) which is driving growth. Elsewhere, there have been no new Coast to Coast restaurants opened this year, although in Aberdeen, Chester and Northampton it is now trading from new locations.
“We believe Coast to Coast has the diversity of appeal to operate in multiple location types, as evidenced by the successful Birmingham city opening last year,” continues Jackson. “The strong performance of our openings gives us great confidence in the future of this brand and that Coast to Coast will become an increasingly significant part of The Restaurant Group’s success and diversification over time.”
TRG also runs separate pub restaurant and concession businesses, which presently boast 53 and 60 units respectively. In the first half of 2015 it opened one new pub and expects to unveil a total of three to four in the full year.
Jackson says the company has beefed up resources in the pub division to accelerate the pace of new openings in the next few years. “Over the last nine months we have deliberately strengthened the team in several areas to support the acceleration of new pub openings. We have a well-established model for the business, which is scalable and capable of delivering sustained high levels of return on investment.”
The concessions business, meanwhile, continues to be a “real success story” for TRG, according to Jackson, who reveald that it has opened five new units in the first half, including three outlets in the redeveloped Stansted departures lounge and its first airside unit at Birmimngham Airport.
It all points to a business that is gathering more and more market momentum. The company is on the verge of 500 stores but it is shooting towards a much higher target over the next decade, reveals Jackson.
“We have an impressive pipeline of new sites in terms of both quality and quantity. We also have a focused senior management team which has been strengthened and re-energised over the last 12 months. All of these factors mean the group is now well-positioned to deliver on the strategy of doubling in size with a more balanced portfiolio over the next eight to 10 years.” You certainly wouldn’t bet against it.
Strong cash flow powers store opening programme
The Restaurant Group’s aggressive store expansion programme is being fuelled by strong cash flow, its balance sheet reveals. Increasing levels of new site openings and dividend have been entirely financed out of internally generated cash flow in recent years, and it remained that way in the first half of 2015.
Cash generation during the first six months of the year was extremely strong, with net cash flow from operations of £60m. Free cash flow (after interest, tax and maintenance expenditure) of £44m represented an increase of more than 20% versus the comparable period last year.
“The strong conversion of operating profits into cash, combined with high returns on investment from new openings, means we can open an increasing number of new sites while at the same time continuing to increase the level of dividend payment each year,” explains TRG chairman Alan Jackson.