Retail Food Group stocks hit 10-year low on $88m loss and 200 stores to be closed

Retail Food Group's (RFG) shares sunk to a 10-year low on Monday, as investors reacted negatively to a series of pessimistic announcements.

Key points:

Retail Food Group shares sunk by more than 40pc in early trade, Monday
RFG posted a first-half loss of $87.8 million, after writing down $138 million in assets
The company will close down up to 200 Gloria Jean's, Michel's Patisserie, Donut King, Brumby's and Crust stores.
It is facing a potential class action from disgruntled franchisees

The troubled company — which owns the Gloria Jean's, Michel's Patisserie, Donut King, Brumby's Bakery and Crust Pizza Bar franchises — plans to shut down up to 200 of its stores by mid-2019.

RFG did not specify how many stores from each of its franchises would be closed down.

The company blamed "unsustainable rent", "declining shopping centre performance" and a "sharp decline amongst domestic franchise sales and renewals" as the main reasons for its "disappointing performance".

Its shares fell by 36.3 per cent to $1.30 (at 2:15pm AEDT on Monday), after it emerged from a two-day trading suspension — after it failed to lodge its first half results in time.

It plunged by as much as 43 per cent in early trade, and is today's worst-performing stock by a long shot.

Positive spin on its legal woes

Furthermore, negative media coverage of RFG has led to its share price dropping sharply since early December, when its shares were worth $4.40.

In its latest ASX announcement, the company did not address allegations of systemic wage fraud, exploitation and underpayment of workers which have plagued it for over the last few months.

It also did not mention the potential class action from Bannister Law, which represents hundreds of disgruntled franchisees who allege they were forced into severe financial hardship due to RFG's brutal business model which demands exorbitant fees.

The closest RFG got to mentioning those issues was a vague comment from its managing director Andre Nell.

"RFG's future profitability and growth is directly linked to the health and sustainability of its franchise network," Mr Nell said.

He said it was "clear from the review process that RFG needs to reset its business model and enhance its support to franchisees, including accelerating the delivery of initiatives that increase their revenues, reduce operating costs, and provides them with a more 'hands-on' assistance in the field".

'Disappointing' financial performance

Another trigger for investors pressing the "sell" button was the lacklustre financial results which RFG released last week.

The company reported a bottom-line net loss of $87.8 million for the first half of the current financial year — a steep drop from the $32.7 million profit it posted in the six months ended December 2016.

Its pre-tax earnings also fell by a hefty 282 per cent to $100.8 million. This was mainly due to significant write-downs totalling $138 million.

A detailed breakdown of these write-downs include $84 million worth of "brand system impairment", $35.7 million from its "closure program" and $18.3 million for the diminished value of its inventory, plant and equipment.

Adding to shareholders' disappointment was the company's decision to suspend its dividend indefinitely.

A murky future ahead

"Given RFG's ongoing business-wide review and the decisive action being taken by the Group, it is difficult to predict full year outcomes at this juncture," the company said in a statement.

Not only that, the company's net has ballooned to $259.7 million.

However, it did manage to enter a new loan agreement with its lenders Westpac and NAB.

Under the new terms, RFG's debt to earnings ratio has been lifted to 3 times (up from 2.5 times) for the next 12 months.

It also needs to achieve minimum underlying pre-tax earnings of $90 million in the 2019 financial year. It is currently at $45.7 million, according to its current first-half results.

Furthermore, 60 per cent of proceeds from its asset sales will need to go towards its debt repayment.

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