South Africa | Famous Brands fully impairs UK business, expects 10-fold fall in earnings

The owner of Steers and Wimpy has warned that its earnings could tank more than ten-fold, plunging the restaurant group into one of the biggest loss-making positions it has ever recorded.

Famous Brands, which also owns Mythos and House of Coffees, said on a trading update on Friday that it is expecting a basic loss per share of between R13.82 and R16.89, compared to basic earnings of 159 cents per share in the first half of 2019.

The group's share price price slid by over 5% when the announcement was made, but regained some lost ground to trade down 3% by midday. 

Famous Brands is due to present its financial results for the six months ended 31 August on 26 October.

While the company suffered operational losses due to lengthy lockdowns in both SA and the UK, it expects the biggest hit to come from the R1.3 billion impairment related to its UK-based Gourmet Burger Kitchen (GBK) business. GBK restaurants recorded a 66% decline in system-wide UK sales.

Famous Brands has struggled with GBK since it bought the restaurant chain in 2016. The initial acquisition coincided with the beginning of Brexit, which has sent many retail and restaurant chains into a tailspin as consumer confidence fell. 

In the 2019 financial year, Famous Brands impaired GBK by R874 million after recognising a R373 million impairment a year earlier. When the Covid-19 pandemic struck, the group announced that it will stop funding the business and anticipated more impairments would be raised.

On Friday, Famous Brands said the R1.3 billion impairment means that GBK UK has now been impaired in full at Famous Brands Group level. This means that Famous Brands will not need to recognise any impairments related to GBK in future and will therefore no longer incur losses because of it.

Operationally, Famous Brand faced tough trading conditions because of Covid-19 restrictions, which caused the company to move to a loss-making position even on a basic headline basis - a measure of profit that focuses only on day-to-day operations and ignores once-off transactions like the GBK impairment.

The group expects a basic headline loss per share of between 216 and 264 cents, compared to earnings of 159 cents per share recoded at the end of August 2019.

"During the lockdowns, in line with regulations, our SA and UK operations were entirely shut with the exception of the SA retail division," explained the company in the trading update.

It said while restrictions were less onerous in the Africa and Middle East regions (excluding SA) where it also has operations, it still recorded a 48% decline in sales from its leading brands. Its signature brands saw sales tank by 70% across all restaurants in the network. 

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