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Is Restaurant Group a turnaround stock for 2020?

Michael Taylor
A golden egg in a nest

Restaurant Group (LSE: RTN) has been billed as a turnaround stock for years. The company has been hit by the storm of the casual dining crisis, which has seem many ‘me-too’ businesses and copycats crushed in the consumer-driven slaughter. The credit boom years allowed the growth of many chains and even more competitors, which unfortunately were hit hard by the well-known woes of the high street in recent years.

Many retailers have seen the pressure here as declining footfall and reluctance to spend has claiming many victims, and the casual dining sector hasn’t been able to escape.

Restaurant Group has been a market leader for many years, but fell into trouble a few years ago. However, could it now be turning around?

Fatigued brands 

Ultimately, consumers vote with their wallets, and one of the problems with this sector is that trends change and brands can go from hero to zero in just a few months. Frankie & Benny’s is an Italian-American themed restaurant chain that was rolled out nationwide, but has struggled in recent years. A stagnant menu offering, and extreme discounting led to the brand becoming tired. Chiquito is also looking weathered, another brand suffering from the discounting problems the plc itself has created.

Extreme discounting

Many businesses succumb to the short-term seduction of discounting — but this is problematic, because once fed, consumers crave more discounts. More discounts means more markdown expectation is created, and it becomes incredibly difficult to sell something at full price when consumers are used to money-off. Weaning customers off these discounts can prove tough and even fatal to some businesses. 

Chiquito experienced success with Taco Tuesday — a promotion whereby tacos are only £1. However, the company then decided to run the same promotion on Thursday! Why would anyone pay full price for tacos now when two days a week they can get more than 50% off the listed price?

Signs of a turnaround

However, there are signs of a turnaround. Last year, the company bought Wagamama — a chain targeted at affluent consumers serving Asian food based on Japanese cuisine. No doubt shareholders were hoping that the company wouldn’t start discounting — and it hasn’t. Wagamama is growing and is outperforming the market as detailed by the CEO in the interim results. 

Restaurant Group has also delivered positive like-for-like growth. This is important, because the company’s operating cash inflow was teetering on becoming an outflow. In the interim results, operating cash flow more than doubled to £52.3m from £25.6m. 

The debt is a concern with pro-forma net debt at 2.3x EBITDA — however, the company should in theory be able to manage this now it is growing like-for-likes and increasing its cash flow.

Money will need to be spent on refurbishing many units — and there is still a lot of work to be done, but I think this could be the beginning of a turnaround in The Restaurant Group’s fortunes.

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Michael Taylor has no position Restaurant Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020