Rivals and weak market force Spur to cut dividend
The move suggests a serious waning in discretionary spending and increased competitive pressure
Restaurant franchiser Spur Corporation, which has thrived through SA’s many economic challenges over the past 50 years, surprised the market by cutting its dividend for the first time since listing on the JSE.
The dividend cut for the year to end-June suggested a serious waning in discretionary spending and increased competitive pressure in the second half, especially since the cash-generative and cash-flush Spur had raised its interim payout 6% to 71c a share for the period ending December 2016.
The company, which owns the Spur steak ranch franchise as well as smaller eatery brands such as Rocomamas, Panarotti’s, the Hussar Grill and John Dory’s, on Thursday reported a 8.3% fall in comparable headline earnings from continuing operations with the all-important operating margin gnawed down to 27% from 35% previously. At the interim stage, comparable headline earnings from continuing operations were up 4.5%.
Spur, which had about R250m cash on hand, limited the reduction in the dividend to 5.7% for a payout of 132c a share. But the market still had trouble digesting the news and Spur’s share price had fallen 1.37% to R28.80 at the close.
Lentus Asset Management chief investment office Nic Norman-Smith said Spur was a well managed enterprise, but the results confirmed an underlying weakness in the consumer market.
"In addition, competition drives down prices and margins, and we’ve seen a proliferation of new fast-food brands in the local market."
Spur CEO Pierre van Tonder said the reduced dividend offered a reasonable balance between meeting shareholder expectations and providing support for the company’s franchisees during a particularly tough trading period.
The company needed to help a number of Spur steak ranch franchise holders through a perfect storm that involved poor economic conditions, competitive pricing by rivals and the discontinuation of promotional activities, such as the Monday Burger and Thursday night rib specials, he said.
Norman-Smith said Spur’s proposal to trim the dividend was prudent. "It caters for tough times ahead."
Trading at Spur outlets were also hit in the past quarter by calls for a boycott after footage emerged on social media in March showing a heated argument between a white man and a black woman in the Texamo Spur in Johannesburg.
Van Tonder said it was difficult to quantify the individual effect of these events on Spur’s results. A breakdown of revenues did show, however, that the Spur Steak ranch division saw turnover rise 1.9% between July and the end of March to R3.5bn, but then fall off markedly almost 15% between April and the end of June to R934m.
Franchise revenue followed a similar pattern, with the first nine months of the financial year 1% higher to R176m, though the past three months were down 25% to R41m.
Van Tonder said Spur, which spent R78.6m on store revamps and relocations, would look at downsizing its traditional outlet.
"We will be reducing the size of the ‘box’. The bigger Spur model is not sustainable and you won’t always find us going into expensive shopping malls.
"We are focusing on operational intelligence to make sure our franchisees get up to double-digit growth again."
While the curtailment of specials on Mondays and Thursdays was unpopular with some customers, this kind of promotional activity was not sustainable, he said. "Franchisees are again profitable and margins are better … the improvements are already coming through in the stores.
"We saw a 2% swing in margins after discontinuing the Monday night two-for-one burger special."
One bright spot in the company’s results was the strong performance from recently acquired specialist burger brand Rocomamas and newly launched upmarket Italian eatery Casa Bella.
The Rocomamas franchise had increased revenue 37% to R24m and operating profit 34% to R16.5m, Van Tonder said. Casa Bella managed revenue of R44.5m, which was 9.6% ahead of budget.
Van Tonder said that while Spur would still assess acquisition opportunities, there would also be an emphasis on developing new internally generated brands.
Spur had just launched an upmarket seafood outlet under the Monterey brand, he said.