Fierce competition, rising inflation and the potential erosion of consumer confidence will make it tougher for rated European high-yield casual dining restaurants to defend margins while maintaining or growing sales in the next 12-18 months, says Moody’s Investors Service in a report.
PizzaExpress, Wagamama and Stonegate Pub Company were among the businesses listed by Moody’s to be in for a difficult 2018.
“While more people are eating out and casual dining chains are winning market share from independent restaurants, operating conditions will be tough into 2018 as intense competition, rising inflation and the potential for Brexit to knock consumer confidence in the UK will make it tricky for the sector to both maintain margins and grow sales,” says Emmanuel Savoye, Assistant Vice President — Analyst at Moody’s.
Moody’s expects continued pressure on margins for all companies due to competition and, for UK companies, the annual increase in the minimum living wage that started in April 2016. Pizza Express’ margins remain the highest although they have narrowed in the past 12 months because of cost inflation. BK France’s margin has improved thanks to a good performance by the newly opened and rebranded BK restaurants.
Stonegate and BK France have the highest leverage. Stonegate’s leverage increased because of a dividend recapitalisation at the beginning of the year. Moody’s expects that BK France’s leverage will improve as it completes its conversion plan and opens new restaurants.
Retained cash flow generation is adequate across the sector. However, Moody’s expects limited free cash flow (FCF) generation because companies continue to invest in new restaurant openings.
Because spending to expand is discretionary, it could be scaled back to improve liquidity if needed. However, overall liquidity is sufficient for most issuers, with no maturities due in the next 18 months. Cash balances are generally good, companies have access to revolving credit facilities, and benefit from positive retained cash flow generation.