RFG's bankers circle as group records massive loss

Sarah Danckert
31 August 2018
The Age
The troubled owner of the Gloria Jeans and Donut King chains has been given a little over a year to get its balance sheet in order by its bankers after further writedowns on the values of its brands led to a $306.7 million loss for 2018.
Retail Food Group revealed on Friday it had struck a new deal with its bankers with some tightened conditions after impairments for its struggling suite of brands blew out to $402.9 million, from $138 million six months earlier.
RFG’s bankers at Westpac and National Australia Bank have brought forward the date by which the company has to refinance its debts to October 2019 from 2020 previously.
All proceeds from any assets sales will now have to go to paying off its debts, which at the end of June were $258.9 million.
The company’s auditors and directors both warned investors of the “material uncertainty” RFG faced in continuing as a viable operation.
“Despite the program to restructure the franchise businesses and build confidence in the franchise brands by consumers and potential franchise investors, there remains significant risk that the group may breach financial covenant thresholds under its financing agreements within the next 12 months,” the company directors said in its full-year statutory report released on Friday.
“A breach of one or more of these financial covenants may result in all the syndicated debt becoming due and payable.”
RFG has been in strife with its lenders since December when a Fairfax Media investigation revealed the company’s business model had sent many of its franchisees to the wall financially and raised questions about the value of its brands and the quality of the company’s performance.
The group’s underlying performance also took a hit, falling 56 per cent to $33.3 million from $75.7 million year earlier, in what recently installed chief executive Richard Hinson described as a “disappointing” performance.
The poor performance led to RFG booking a $306 million writedown on the goodwill value of its brands for the year, with Gloria Jeans taking a $90 million hit to its value and Michel’s Patisserie being written down another $14.2 million.
As a result, the group has also upped the number of forecast store closures to 250 by June 2019.
Mr Hinson pointed to a series of changes made since he joined the company, including a reduction in the cost of goods and reduced fees for franchisees as a positive development in the group’s second half.
“Our focus in the current financial year is to stabilise the business and return it to a profitable platform, and optimise our core operations so that we enhance profitability and returns for both our franchisee customers and RFG,” he said.
RFG’s full-year loss compares to a statutory profit of $61.9 million in fiscal 2017.
For the year to June 30, Brumby’s earnings before interest, tax, depreciation and amortisation (EBITDA) fell 40.1 per cent to $6.3 million, while Donut King’s EBITDA slumped 33.8 per cent to $11.2 million.
Gloria Jeans’ EBITDA plunged 66.7 per cent to $6.6 million, while its Crust Gourmet Pizza and Pizza Capers brands reported a 17.2 per cent drop in EBITDA to $10.2 million for the year. RFG’s international division and its wholesale food division also recorded EBITDA declines of more than 40 per cent for the period.
RFG also warned that new accounting standards would force it to list debts associated with leases it holds for franchisees on its books. This would have a “material impact” on the group when the changes came in halfway through next year.
Shares in the group were down 6.4 per cent to 58.5¢ in afternoon trade.