Winter, Comfort Food, The Munchies and Restaurant Stocks

I love restaurant shares and there are many compelling reasons for investing in restaurant stocks. Let me remind readers of some of them:

Restaurants can offer very good value for money – remember restaurants don’t pay what we pay for groceries and it is so convenient.
Throughout the world more and more meals are consumed out of the home and every year this trend continues.
Restaurant stocks have tremendous brand loyalty.
A massive increase in the standard of living of the middle class guarantees a steadily increasing customer base.

Another fascinating demographic is that the emerging middle class do not have a high propensity to save, so not only do they enjoy a larger slice of the Gross Domestic Product of a country but they also blow a higher proportion of it on discretionary expenditures like fast food. The modern society workforce is much more mobile, and urbanisation has radically increased the number of breakfasts, lunches and dinners that are eaten on the road.

In South Africa we have Famous Brands Limited. Famous Brands is Africa’s leading Quick Service and Casual Dining Restaurant Franchisor. It has over 2 000 franchise restaurants spread across South Africa, 17 African countries and the United Kingdom. It’s most well known brands are Steers, Wimpy, Debonaires Pizza, Mugg & Bean, FishAways, House of Coffees, Brazilian Café, tashas and Black Steer. The major turning point for this company came when it acquired Wimpy. Before this no one was paying attention. The Wimpy deal took Famous Brands from 500 to 1000 outlets. Now, of course, it is so much bigger.

Famous Brands remains a misunderstood stock. It is not merely a coupon clipper of franchise fees. There has been major backward integration in that it makes a huge chunk of its profits from distribution and production services for its franchised outlets. It also has blue sky potential as it expands its brands into Africa and other countries. It has iconic brands. Wimpy coffee isn’t half bad and more and more people are eating Debonaires pizza. If investors had kept their eyes open they would have invested steadily in Famous Brands shares over the years. Famous Brands announced in June that for the first quarter of the year sales at franchises increased 16.8%. Like-on-Like sales grew by 9.6%.

Chief Executive Kevin Hedderwick said: “These results derive from our extensive portfolio of brands turning in a strong performance, underpinned by growing logistics and manufacturing capability. Our “Gorilla brands” all performed exceptionally well, with most of them recording comparable year-on-year double digit growth, notwithstanding the sheer size of these individual businesses and the fact that their growth comes off a huge base. It is not just our brands that talk to mainstream South Africa that delivered stellar results, but also the likes of tashas at the premium niche end of the spectrum, which produced astonishing growth, turning in a 22% rise in sales versus the previous year. During the quarter, 34 new restaurants were opened. New restaurant openings across the brand portfolio will increase in the second quarter of 2013, with 46 restaurants planned. The first Steers restaurant has opened in London, and Debonairs pizza in Mumbai, India.
Particularly strong drivers of growth in the industry are breakfast and coffee – with “all day breakfasts” identified as a key future trend; while coffee is no longer seen as a meal accompaniment, but increasingly being purchased as a snack meal. There are a range of opportunities we plan to capitalise on. Among those is to unlock the potential of our new acquisitions, including Turn ‘n Tender, the Famous Brands Great Bakery company, Famous Brands Choice Meats company and, of course, growing the volumes and range out of our Coega Cheese company. Additionally, we are enthusiastic about the potential to grow our presence on the African continent. The rest of Africa is fast becoming the playground for opportunistic investors.”

Famous Brands is now officially a “40 bagger” which means had you invested a million rand at R2.50 per share, admittedly some time back, and with the shares now approaching R100 per share, you would be sitting on R40 million rand!