From Tasting to smelling the coffee
Taste Holdings, facing an uphill battle to raise cash to fund further expansion, suffered a fresh setback this week when it released interim results showing its losses had widened further.
The small-cap fast-food and luxurygoods company is seeking ways to raise much-needed capital to fund further rollouts of outlets for global brands Starbucks and Domino’s locally.
Reduced profits in the luxury-goods division contributed to the operating loss of R73.3-million for the interim period ending August, against R41.1-million in the previous comparable period. Finance costs rose to R23.3-million from R16.1-million as both the cost and quantum of borrowings increased.
The group’s fast-food outlets reported sales growth of 6% to R282-million, but jewellery sales dropped 15% to R253-milion, resulting in a 9% dive in revenue to R483million.
CEO Carlo Gonzaga said the company had expected luxury goods to decline but not to the extent that they had in the first quarter. “Apart from the lower-end consumer being under pressure [which impacts brands such as Fish & Chips Co, Zebro’s and Maxi’s], we are reasonably comfortable with Starbucks and Domino’s.”
Taste has the master licence for the two US brands in South Africa.
Perfect storm
“Our long-term view hasn’t changed but we have the perfect storm of a downturn in the middle of a start-up phase of a business with a balance sheet that has not matched the start-up business.”
Gonzaga said there was no reason to slow down the rollout, as the performance of the stores was good. “In fact I’d rather speed them up. But if we are not successful at restructuring the balance sheet we will have to slow down.”
The market has been pessimistic about the possibility of raising further money through a rights issue.
“We should be done with that in about four weeks,” said Gonzaga, referring to assessments of fund-raising options. He declined to discuss what these might be.
“If we were in a buoyant economy we may have adopted a less conservative approach,” he said.
If the group could solve the funding problem and the consumer situation did not deteriorate further, Gonzaga said, it could get to a cash breakeven point in the second half of next year.
Quick-service restaurants had also become cyclical, he said. This was particularly evident among lower-income groups and was reflected in the 8.6% decline in samestore sales across the brands.
Gonzaga said the strategy of rolling out big global brands was the correct one for the company. “We don’t pay royalties in dollars, they’re calculated in rand.”
By year end Taste will have 10 Starbucks outlets with a pipeline for another 12 next year. However, new store openings will drop if management adopts a conservative approach in the current environment.
Holding on to the crown jewels
The company recently halted the sale of the luxury division, which includes jewellery retailers, before any binding offers were received.
“We got interest but most people that are genuinely interested are concerned about the macro-economic environment, and it wasn’t helped by the performance of the luxury division in the first half of the year.”
NWJ is the third-largest national jewellery chain in terms of store numbers, and the division includes Arthur Kaplan and World’s Finest Watches.
“We were trying to sell at the bottom of the cycle. We also believe times like these require exceptional focus.” The luxury division had its toughest six months since 2008, according to Gonzaga.
Anthony Clark, a small-cap analyst at Vunani Securities, said Taste’s results were worse than expected.
“The issue with Taste is the balance sheet and cash position. The key issue is that total debt is just over R323-million as at the end of August and total cash at the end of August is R86-million. If you extrapolate out of this, the company will run out of money in the first quarter of next year.”
Clark said the options were to renegotiate the bond debt or have a large emergency rights issue, but this would lead to earnings dilution and the market has been tepid about this prospect.
Bringing in a white knight shareholder would also lead to significant dilution. “When a company’s in distress you try and get the best possible deal. They would negotiate a very, very tough deal.
“I think the next three months for Taste will be quite difficult and constrained,” said Clark.