RFG is strong, cheap and high yielding, page-28

I think the question is whether RFG is actually strong or cheap. The share price has dropped substantially however if you look at some of the brands they are not doing well. A few people have raised the fact in this forum that this companies growth has largely come from acquisitions which if you look at the brands over time appears true.

I thought some information on the different brands would be useful so I have included tables for Dount King, Brumby's, Michels and Crust/Pizza Capers.

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8	Column 9	Column 10	Column 11
0	Donut King	H1FY13	FY13	H1FY14	FY14	H1FY15	FY15	H1FY16	FY16	H1FY17	FY17
1	Store Count	351	345	342	347	350	341	341	333	337	333
2	Outlets Opened	14	19	?	22	?	20	9	12	12	19
3	Outlets Closed	?	25	?	17	?	29	9	20	8	23
4	Network Sales (m) (NWS)	?	166.3	85.6	162.3	87.9	160.5	82.3	162.6	83.1	160.4
5	Gross Franchise Revenue (GFR)	?	18.4	9.3	18.7	10.3	19.4	10.1	20.2	10.5	?
6	GFS/NSW	?	11.1%	10.9%	11.5%	11.7%	12.1%	12.3%	12.4%	12.6%	?
7	Sales Per Store ('000s)	?	$482.0	$250.3	$467.7	$251.1	$470.7	$241.3	$488.3	$246.6	$481.7
8	Franchise Fees Per Store ('000s)	?	53.33	27.19	53.89	29.43	56.89	29.62	60.66	31.16	?

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8	Column 9	Column 10	Column 11
0	Brumby's	H1FY13	FY13	H1FY14	FY14	H1FY15	FY15	H1FY16	FY16	H1FY17	FY17
1	Store Count	310	296	285	279	277	250	256	252	262	246
2	Outlets Opened	?	4	?		8	10	10	16	15	20
3	Outlets Closed	?	18	?	6	10	37	4	20	5	36
4	Network Sales (m) (NWS)	?	198.3	98.3	186.2	93.7	164.4	88.8	160.9	79.2	153.3
5	Gross Franchise Revenue (GFR)	?	17.7	8.8	17.8	7.9	14.7	7.9	15.8	7.5	?
6	GFS/NSW	?	8.9%	9.0%	9.6%	8.4%	8.9%	8.9%	9.8%	9.5%	?
7	Sales Per Store ('000s)	?	$669.9	$344.9	$667.4	$338.3	$657.6	$346.9	$638.5	$302.3	$623.2
8	Franchise Fees Per Store ('000s)	?	59.80	30.88	63.80	28.52	58.80	30.86	62.70	28.63	?

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8	Column 9	Column 10	Column 11
0	Michel's	H1FY13	FY13	H1FY14	FY14	H1FY15	FY15	H1FY16	FY16	H1FY17	FY17
1	Store Count	325	317	314	316	317	294	281	275	260	240
2	Outlets Opened	?	7	8	18	12	16	11	15	2	2
3	Outlets Closed	?	15	11	16	11	39	24	21	17	22
4	Network Sales (m) (NWS)	?	170.4	85.3	173.7	86.3	161	73	142.5	64.3	120.2
5	Gross Franchise Revenue (GFR)	?	27.2	13.1	26.9	13.3	25.1	12.1	22.8	10.6	?
6	GFS/NSW	?	16.0%	15.4%	15.5%	15.4%	15.6%	16.6%	16.0%	16.5%	?
7	Sales Per Store ('000s)	?	$537.5	$271.7	$549.7	$272.2	$547.6	$259.8	$518.2	$247.3	$500.8
8	Franchise Fees Per Store ('000s)	?	85.80	41.72	85.13	41.96	85.37	43.06	82.91	40.77	?

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8	Column 9	Column 10	Column 11
0	Crust & Pizza Capers	H1FY13	FY13	H1FY14	FY14	H1FY15	FY15	H1FY16	FY16	H1FY17	FY17
1	Store Count	252	270	312	342	354	333	335	329	316	311
2	Outlets Opened	?	37	49	48	22	32	16	20	4	10
3	Outlets Closed	?	19	7	18	10	53	14	26	17	15
4	Network Sales (m) (NWS)	?	158.3	103.8	200.2	112.7	205.1	102.9	201.9	94.3	182.9
5	Gross Franchise Revenue (GFR)	?	14.1	10	20.5	10.6	19.8	10.7	22	10.7	19.6
6	GFS/NSW	?	8.9%	9.6%	10.2%	9.4%	9.7%	10.4%	10.9%	11.3%	10.7%
7	Sales Per Store ('000s)	?	$586.3	$332.7	$585.4	$318.4	$615.9	$307.2	$613.7	$298.4	$588.1
8	Franchise Fees Per Store ('000s)	?	52.22	32.05	59.94	29.94	59.46	31.94	66.87	33.86	63.02

Notes
Franchise figures for Donut King, Michels and Brumbys are not available for FY17 as these are no longer reported separately

Conclusions

Brands Declining
The brands under RFG are virtually all smaller than they were 5 years ago which the exception of Crust/Pizza Capers however even this brand is now in decline after the momentum appears to have run out. (Crust was purchased during H1Fy13 can had a lot of growth in the early days). Not sure on regular franchise churn rates but some of these brands are experiencing periods of greater than 10% of their stores closing annually.

Store Sales
Again this paints a pretty grim picture and shows why there are probably so many struggling franchisee's. Donut King stores have average sales that are the same as they were 5 years ago at 482k per year. Brumby's average is actually down from 670k a year in 2013 to 623k a year in 2017. Michels are also down from 537k average to 500k and their Pizza brands have gone from 586k to 588k average so again virtually no growth in average sales. However in this time it is likely their wages, rent and utilities costs have increased substantially hence crunching their margins.

Franchise Fees
Whilst store numbers have been declining and average store sales have been flat you would suspect that franchise fees would have dropped in line however this has not been the case. In fact despite a fall in the number of Donut King operations and flat sales per store franchise revenue has gone from 18.4m annualised rate in Fy13 to 21m annualised rate by H1Fy17. The average stores paying just under 20% more in franchise fees than they were 5 years ago. The other brands have had falling franchise revenue over the last few years despite the company taking a higher percentage of their store sales in franchise fees. The figures seem to back up franchisee's claims that they are being squeezed especially in an environment where average store sales are not increasing.

Whats the likely outcome
How can the business turn around its falling fortunes, obviously steady as she goes looks to be a recipe for disaster and destruction of shareholder wealth as you can only squeeze the franchisee's for so long before you kill them off.

I suspect that many in the market are thinking that the franchise fees will ultimately have to come down to offer the franchisee's relief and keep them afloat. There is certainly room for these fee's to come down given the EBITDA margins they produce off their franchisee's at present but this would obviously hit the bottom line hard.

Alternatively they could try to drive sales up at their stores but they don't appear to have been able to achieve this to date on any of these brands.

I also find it worrying that their response to the ASX today was very light on details, they obviously knew the article was coming given their announcement to the market last week and yet despite having time to prepare a rebuttal basically left it with a 'fairfax is wrong and its a tough market at the moment'. Where are the numbers on the average profit per store, why not rattle off some initiatives being down to help franchisees on costs or to help grow sales, when Dominos went through similar scrutiny they were quick to mount their defence that it was a small number of franchisee's struggling and show some figures to back up their claims and talk about the success stories of their franchisee's.

Disclaimer
Just in case you are wondering, I do not have any position short or long. After reviewing the numbers again today I am not looking to take a position either way so not trying to talk down the shares to get in cheaper or make money shorting this. But given I spent the time looking back over it all I thought I would share the tables to help others with their own research.