'Hands up, we got it wrong' is essentially the message from Restaurant Group's (RTN) half year results. Having replaced the chief executive and finance director, the FTSE 250 constituent now gets to work on making operational changes.
It will exit 33 restaurants including 14 Frankie & Benny's sites, 11 Chiquito's sites and one Garfunkel's. It will revamp menus and pricing for Frankie & Benny's and impair the asset value of a further 29 sites. This triggers an £59.1 million one-off charge in its accounts.
The company says the next phase of its operational review will look at its other restaurant brands including Chiquitos and Joe's Kitchen over the next six months.
It will spend £6 million on technology investments including new tills, ordering and workflow systems.
Investors have enjoyed a revival in the share price over the past few months following a gloomy period but today they suffer a small setback as the company has decided not to raise the dividend.
Profit and operating margins have declined in the half year period yet the business remains highly cash generative.
The big question now is whether the changes outlined in the interim results will be enough to sustain momentum in the share price? It trades on 14 times forecast earnings which looks high enough for a company in turnaround mode.
However, there are enough positive factors in the results to push up the shares today by 5.3% to 429p. In particular, some investors may be relieved the dividend wasn't cut and Restaurant Group also says trading has 'slightly improved' in recent weeks.
The valuation may now be too high to warrant a takeover bid as the window to buy the company on the cheap following earlier profit warnings has closed, in our opinion.
There had been much speculation that private equity companies had shown interest in the company earlier this year.
On a conference call this morning, chairman Debbie Hewitt says the company would have had to disclose any approaches if they had been made.
Restaurant Group says increased competition is not the only reason why sales growth has come under pressure. It admits taking some popular choices off menus, adding new products without sufficient testing of concepts, removing value offers and raising prices has backfired.
'Our issues are the result of internal decision making,' says Hewitt. 'They are all fixable.'
New chief executive Andy McCue will join in mid-September, having previously been boss of gambling group Paddy Power. A new managing director for Frankie & Benny's joined in June.
'The message is simple, its recent reversal of fortunes is of its own making rather than heightened competition,' says N+1 Singer analyst Sahill Shan. 'To this end, pricing, menu and lack of leadership have been spotlighted in the review and will be addressed under the new team.
'Net, there are no major surprises this morning other than the strategic review being part completed.
'On balance what has been articulated re: Frankie's and the dividend signal is encouraging and should be taken well by the market.'
