Retail Food Group faces class action over share price wipe-out

FRANCHISE BRW 100212 MELB PIC BY JESSICA SHAPIRO… GENERIC Donut King owned by the Retail Food Group. Story for Fast Franchising issue. BRW FIRST USE ONLY PLEASE!!! SPECIAL 122228The besieged franchising giant behind the Gloria Jean’s, Donut King and Brumby’s chains is under attack on a new front, with a possible class action in the works on behalf of investors who lost money in the company’s share price wipe-out.

Retail Food Group has also received a “please explain” from the ASX about a profit downgrade it issued on Tuesday, which accelerated a share price freefall that obliterated $512 million, or 63 per cent, of the company’s market value in just eight days trading.

RFG’s shares had been tumbling since last Monday, after Fairfax Media revealed that many of its franchisees were struggling to survive under a model that demands they pay hefty fees, royalties and food bills to head office.

The company, which also owns the Crust and Pizza Capers brands, claims to have more than 2500 stores, but Fairfax has revealed that at least 200 have closed in the past 12 months and that more than 200 stores are up for sale.

Former store owners have spoken of their lives being “destroyed” and their personal finances devastated after they become franchisees.

The expos?? included allegations of widespread wage fraud within its network, as struggling franchisees cannot afford to pay correct wages.

One franchisee, Julia Banks, told Fairfax Media she still finds herself waking up in the middle of the night, heart pounding and mind racing, from the stress of running a Donut King franchise in Marsden, Queensland. As debts and losses mounted, Banks and her husband John lost their savings and family home.

“It’s pretty well destroyed our lives,” she says.

Shareholders could now inflict further damage on the company, after Bannister Law on Thursday said it was investigating whether RFG breached the Corporations Act with earnings guidance it released to the market.

RFG said on August 29, November 30 and December 7 that it expected to grow its underlying net profit by 6 per cent in the 2018 financial year.

But on Tuesday it shocked investors by forecast its “statutory” profit in the first-half to fall 34 per cent compared to the same period last year, to $22 million. Shares fell 25 per cent that day.

Bannister Law said it was investigating whether RFG had reasonable grounds for making its earlier earnings guidance, given the allegedly flawed nature of its business model, complaints by franchisees about high fees and the large number of RPG stores that are up for sale.

The firm is also looking at whether RFG should have issued the profit downgrade earlier.

Bannister said it will consider launching a class action on behalf of shareholders who invested between August 29 and December 19 and have lost money in the ensuing share price collapse.

An RFG spokeswoman said the company took its continuous disclosure obligations “very seriously”.

“All prior statements regarding earnings guidance have been made in compliance with these obligations,” she said.

After falling 63 per cent in eight days trading, from $4.40 to $1.62, RFG shares regained 54?? on Thursday to close at $2.17.

Fairfax Media understands that several fund managers, including one American firm, are considering buying a strategic stake in RFG in the belief they can help address some of its fundamental issues in the business.

Stockbroking firm Morgans told clients it thought RFG shares had been “oversold”, meaning the price had fallen to below its true value.

The stock is one of the most shorted on the ASX, according to monitoring website Shortman, with 13 per cent of shares held by investors betting that the share price would fall.

Meanwhile the ASX has asked RFG if it informed the market soon enough about its revised half year guidance.

RFG responded on Thursday, telling the exchange operator that its forecast of a 34 per cent fall in expected half-year profit was not a “revised” guidance, because it had previously only given an outlook for its full-year underlying profit.

Thus, the ASX describing the downgrade as revised guidance was “not true and this misdescription is unhelpful”, RFG said.

The company said it released its profit guidance to the market on Tuesday morning shortly after the board met to discuss November’s performance numbers and the impact of “recent media activity” on the business.