Retail Food Group’s debt level comes into focus as shares fall further


Retail Food Group’s share price has continued to tank in the fallout of a profit downgrade and media reports that have raised serious questions about the company’s business model.

The stock fell 17.9 per cent on Wednesday to $1.62 – their lowest value in almost eight and a half years.

Shares had tumbled 25 per cent on Tuesday after the company behind brands including Gloria Jean’s, Donut King and Brumby’s said it expected its half-year profit to fall by $11.5 million to $22 million.

The stock has now shed 63 per cent of its value in less than a fortnight, after Fairfax Media published a series of articles revealing that RFG’s sharp business model was driving some franchisees to the wall.

The collapse is a victory for short sellers that have been betting that RFG shares would fall.

RFG is the sixth most shorted stock on the ASX, according to monitoring website Shortman, with 13.4 per cent of shares held in a short position.

Ben McGarry from Sydney-based fund manager Totus Capital, which has been shorting RFG, said the “elephant in the room” for the company was now its debt levels.

RFG had net debt of $240 million and total liabilities of $250 million at the end of the 2017 financial year, according to its annual report.

RFG’s market value is now $297 million, after falling more than $520 million in the past fortnight.

“With the share price collapse, it’s getting more expensive to raise money in the equity market, the franchisees are obviously unlikely to want to sign up and buy franchisees off them at the moment, and the bankers I suppose will be nervous given the deterioration in earnings and the share price,” Mr McGarry said.

RFG said on Tuesday it was negotiating with lenders to extend a three-year loan of $150 million that was set for repayment in December 2018.

Mr Garry would not disclose how much his fund had in a short position but said it had increased its holding last week.

“The share price could go anywhere in the short term, but until the debt or the business model problems are addressed I don’t think any bounces will be sustained,” he said.’Head office is not perfect’

Fairfax Media found that hundreds of stores across RFG’s brands – which also include Pizza Capers and Crust – have closed in the past year, and that at least 200 stores are up for sale.

The company has since moved to appease franchisees, with its director of bakery and cafe business, Geoff Cockerill, writing to Brumby’s franchisees last week pledging RFG would do more to support their businesses.

Mr Cockerill said this would start with a new advertising campaign and new uniform packs paid for by head office. But he conceded that would not be enough to alleviate the challenges some franchisees faced.

“Head office is not perfect,” he wrote in the the letter, obtained by Fairfax Media.

“There are key areas we must, and can, improve in terms of the support we provide to you all.”

RFG would release an “action plan” to store owners early in the new year, followed by support and cost-saving initiatives, he said.

In its trading update on Tuesday, RFG said three of its key brands – Michel’s Patisserie, Brumby’s and Gloria Jean’s – were trading worse than expected, which was consistent with other retailers’ performances.

Negative media coverage was leading to more franchisees leave the network and making it harder to find new store owners, RFG said, which would also hurt its earnings as signing new franchisees agreements is a major revenue steam.

The bigest losers from the share price collapse is Canadian investment firm Invesco, which is RFG’s largest investor with 6.2 per cent of shares. Invesco declined to comment overnight.