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Tasty – Interims leave a sour undertone

By Nigel Somerville | Tuesday 12 September 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

AIM-listed restaurant group Tasty plc (TAST) served up its interims to 2 July this morning. Starters included good news that revenue was up 12% and that four new sites were opened. But the main course left a bad flavour in the mouth, reflected in the (last seen) drop of 12% in the share price.

Tom Winnifrith was only discussing customer-facing businesses (and why they should be avoided) in his weekend Bearcast and the commentary from Tasty simply underlines that:

The Board believes that the sector as a whole has been suffering due to a slowdown in consumer spending since the beginning of 2017 and this is set to continue into 2018. This is not unique to the Group or any particular area but appears to be a nationwide problem particularly evident in London and has impacted turnover and profit.

So the entire industry is I trouble

As a result of the weak trading environment the Group is facing pressure on sales and margins. The Group is taking decisive action to improve its position;

So falling prices and rising costs?

The Board has noted that the level of promotional activity in the sector has increased significantly in 2017. The Group continues to match the activity of the competition with regard to promotions and is reviewing alternative strategies.

In other words everyone else is piling on the promotions so we’ve had to as well. More squeeze on margins, then.

The Group has undertaken a comprehensive review of its estate during the period and has recognised an impairment charge of GBP9,492,000 in light of current trading conditions

With the result that…

A number of sites have been identified as underperforming and turnaround measures have been implemented which are producing encouraging results. We are currently in the process of disposing of some sites and are marketing others which have not shown significant signs of improvement.

If you were under the impression that sales have fallen off a cliff, the numbers don’t quite bear that out even if like-for-like sales numbers were down. No, the problem is the price of maintaining sales. As the old saying goes, revenue is vanity…

So while revenue of £24.4 million was up for £21.8 million a year ago and £45.8 million at the full year, the cost of sales went up to £23.5 million from £19.5 million for H1 last year and £40.6 for the full year. Clearly the pressure on sales and margins and the cost of matching other players in the promotions to drag in sales is having an impact. That in turn suggests that H2 last year clocked costs of sales of £21.1 million, a figure which has increased by 11.4%.

We might note the statement at the start of the RNS which tells us of revenues up by 11.8% on the comparative period. But the full year numbers suggest that sales are actually pretty flat on the second half of the year (£24.4 million this time, versus £24.1 million – an increase of just 1.2%. Having opened 4 new sites during the period, to take the estate to 65 eateries (an increase of 6.6%) the marginal revenue growth is quite a disappointment.

The group has recognised an impairment charge of £9.5 million against its estate. That may be a non-cash item, but frankly it isn’t as non-cash as the company wants you to think because it represents cash ponied up in previous periods and capitalised. It might distort the loss for the period: without it the company would have posted a profit of just £18,000. But then there are capitalised costs of property plant and equipment of £4.4 million. One may wonder whether more write-downs will follow in future.

On the balance sheet we see net current assets sit at MINUS £268,000. It plans to open two further sites imminently and has no plans for further acquisitions this year or next. Let’s hope the costs of those have already been recognised, but one has to be concerned at the possibility of the need for a placing to shore things up.

Net debt level sat at £5.4 million as against available banking facilities of £12 million. The intention is to reduce net debt by the year-end. In the face of the challenging conditions currently faced, good luck with that, and in the mean-time let us hope that the banks don’t have any irritating covenants to waive at them.

The shares have had a torrid time, falling from around the placing price last December of £1.45 to the current 37p. That still represents a market capitalisation of £22.1 million. For a company losing money in its last three reports, negative net current assets, falling like-for-like sales and an increasingly uncertain environment that looks pretty steep against the total net assets of £20.9 million.

In other words, I avoid.

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