Taste Holdings

Now that Taste Holdings has delivered on its promise for aggressive expansion plans, there’s no doubt that the market will focus on the returns from its large-scale investments.

taA different Taste with added scale has emerged over the past two years; becoming the licensee of restaurant chain Domino’s Pizza, and coffee conglomerate Starbucks, has propelled it into the bigger franchise leagues.

These two global brands have bolstered its food division which also includes quick service restaurants like Maxi’s, Scooters Pizza, The Fish & Chip Co, Zebro’s Chicken and St Elmo’s.

The five-year plan to build scale involves the licensing of global brands, growing its low-cost food brands and increasing ownership of corporate owned stores.

But implementing its expansion plans with gusto has seen Taste incur sizable costs along the way. Core headline earnings per share fell to 1.5 cents for the year to February 29 2016, compared with the previous year’s 16.1 cents.

“These last two years have seen us focus our energy outward as we aggressively pursued opportunities. The next step is maximising the opportunities secured from those multiple long-term earnings drivers via a period of inward focus,” says Taste CEO Carlo Gonzaga.

Taste’s core revenue grew by 41% surpassing the R1 billion mark for the first time for the period under review.  Its earnings include its 2014 acquisition of Arthur Kaplan Jewellers and private company World’s Finest Watches outlet in Nelson Mandela Square in Sandton, which sells upmarket brands such as Rolex, Breitling, and Hublot.

Arthur Kaplan added scale to Taste’s luxury goods division, which includes jewellery company NWJ. Taste’s group system-wide sales rose 9% to R1.72 billion, which combined with the Arthur Kaplan acquisition, additional corporate stores and increases in the food services business, saw another R293.6 million of core revenue added.

Its core gross profit increased by 44% and core gross profit margin improved to 40.6% from 39.6% due to owning and operating more corporate stores.

There is a concern in the market that Taste is spending too much on its brands – this argument was heightened by the establishment of two Starbucks stores this year. The small-cap company has forecast opening up to 15 Starbucks stores in the next two years. This is arguably an expensive exercise, as marketing research, IT systems, employment costs of a dedicated Starbucks team and store infrastructure will be incurred. Starbucks costs will continue to be incurred in the next financial year, the company says. Already Taste’s finance costs during the period rose to R27 million from R13.1 million.

A more immediate cost is the company’s conversion of its St Elmo’s and Scooters chains into Domino’s and the establishment of dough production and distribution facilities. In more than a year, Taste established 74 Domino’s Pizza stores.

“We are clearly in a phase of building on these opportunities and, while the positive effects on earnings will not be immediately realised, our globally-leading brand portfolio represents long-term earnings drivers,” says Gonzaga.

Its global brands focus comes while a swathe of international food and beverage chains are setting up shop in SA. Brands like Burger King, Pizza Hut and recently Krispy Kreme entered the local market. Grand Parade Investments, which launched Burger King in SA, is looking to bring Nasdaq-listed Dunkin’ Brands into the country to open Dunkin’ Donuts and Baskin-Robbins stores.

Momentum Wealth portfolio manager Wayne McCurrie says he is not sure if Starbucks and Domino’s will be successful in the long run. “The question is whether Taste can get the right volume growth in both brands. Only time can tell but SA consumers love global brands. The company is also trying to build something big and they seem to be upbeat about building scale,” McCurrie tells Moneyweb.

AlphaWealth portfolio manager Keith McLachlan supports McCurrie’s views saying Taste is in a growth phase. “The Taste that existed five years ago no longer exists. We are now seeing a high quality and fast growing company focusing on jewellery and food with two global brands and lower-end brands,” says McLachlan.

Reference: Moneyweb Today

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