Tasty: Radical Management Action Urgently Required As Estimated Pandemic Cash Burn Could Leave Company Broke By November

01 July 2020
By Maynard Paton

Results summary for Tasty (TAST):

  • Largely redundant annual figures that revealed revenue down 6% and another operating loss.
  • TAST’s 56 restaurants were shut in March and my estimates suggest the group could survive without sales until November.
  • The second half seemed encouraging after Christmas bookings were helped by a turkey-themed festive menu.
  • A £2m property disposal bolstered cash and cleared debt but significant liabilities remain.
  • The £2.8m market cap could be a bargain, but radical management action is now essential to keep the business afloat. I continue to hold.

Contents

Event: Preliminary results and annual report for the 52 weeks to 29 December 2019 published 17 March 2020

Price: 2p
Shares in issue: 141,089,758
Market capitalisation: £2.8m

Disclosure: Maynard owns shares in Tasty. This blog post contains SharePad affiliate links.

Why I own TAST

tast tasty fy 2019 results wildwood window
  • Experienced family management has already built and sold two quoted restaurant chains for £200m-plus (ASK Central and Prezzo).
  • Bombed-out share price may provide substantial upside… assuming the business does not run out of cash during (or after) the pandemic.
  • Just too late to sell. TAST now represents less than 1% of my portfolio, with the investment already losing more than 80% of its value.

Further reading: My TAST Buy report | All my TAST posts | TAST website

Results summary:

tast tasty fy 2019 results summary

Covid-19 and cash burn

  • TAST’s 2019 results are now largely redundant following the Covid-19 outbreak.
  • The first restaurant re-opened on 28 May for takeaways and deliveries, while seven further outlets have since followed suit. 
  • Three of the opened restaurants are dim-ts and five are Wildwoods:
tast tasty fy 2019 results re-opened dimt
  • TAST has therefore earned zero revenue for two months.
  • Restaurants are allowed to re-open for indoor/outdoor dining — albeit with restrictions — from 4 July.
  • At the time of the shutdown, TAST claimed it had “sufficient financial resources for the foreseeable future”.
  • The 2019 results revealed net cash of £2.9m as at 29 December 2019.
  • Heading into the pandemic, cash may well have been £4m or more while debt should have been zero.
  • TAST has not disclosed its financial position since the lockdown commenced.
  • Presumably employees have been furloughed and all other expenditure reduced significantly.
  • Four hospitality/leisure businesses have said their lockdown cash-burn rates were averaging 15.4% of revenue:
CompanyStated
cash burn (£k)
Annualised
cash burn (£k)
Revenue (£k)Cash burn/
Revenue (%)
Everyman Media900/month10,80064,95516.6
Hollywood Bowl1,600/month19,200129,89414.8
Loungers480/week24,960152,99916.3
Revolution Bars400/week20,800151,40413.7
Tasty132/week*6,849*44,57315.4*

(*estimated)

  • 15.4% of TAST’s 2019 revenue equates to £6.8m a year/£571k a month/£132k a week of lockdown cash burn.
  • TAST may have therefore burned through £1.8m since the restaurants were shut. 
  • At that rate TAST could survive without revenue until November before its cash runs out.
  • Those four hospitality/leisure businesses only disclosed their cash-burn rates because they were asking shareholders for extra money.
  • I guess everything depends on how TAST defines “the foreseeable future” when it says it had “sufficient financial resources for the foreseeable future”.
tast tasty fy 2019 results pizzas on table
  • The 2019 annual accounts were prepared on a ‘going concern’ basis. The report said:

“The Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for a period of at least twelve months since the Board approved these financial statements.”

  • Mind you, the results commentary did seem just as concerned about Brexit as Covid-19:

“Notwithstanding the Coronavirus (COVID-19) outbreak, the start of 2020 has continued to be encouraging. However, the full impact of Brexit remains unclear. The likely upward pressure on food cost and the reduction in the supply of labour and the availability of certain food items all remain a concern to the business. Whilst we have measures in place to reduce the anticipated impact of Brexit or COVID-19 issues, it is impossible to mitigate all potential risks but we are constantly monitoring the situation”

  • The commentary was published a week before the lockdown started, so perhaps management (alarmingly) had yet to grasp what was about to happen.
  • I get the impression the formal Covid-19 risk assessment was hastily produced:
tast tasty fy 2019 results covid-19 risk in annual report

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Revenue, another loss and sales per site

  • TAST’s financials pre-Covid-19 were already in a perilous state.
  • In the event TAST said “trading over the Christmas period was positive” and the second-half figures showed some encouraging signs.
  •  For the full year, revenue fell 6% and another operating loss was reported:
Year to c31 December20152016201720182019
Revenue (£k)35,79445,84750,30947,27844,573
Operating profit before pre-opening costs (£k)3,8184,6921,101(478)(542)
Pre-opening costs (£k)(644)(642)(413)--
Operating profit (£k)3,1744,050688(478)(542)
Net finance cost (£k)(107)(213)(202)(252)(214)
Other items (£k)-(3,925)(9,956)(11,087)490
Pre-tax profit (£k)3,067(88)(9,470)(11,817)(266)
Earnings per share (p)4.64(1.56)(13.84)(19.42)(0.23)
Dividend per share (p)-----
  • TAST explained the sales shortfall was “mainly due to the closure of sites and partly due to like-for-like decline”.
  • Three restaurants were shut during the year to reduce the estate to 57 outlets.
  • I estimate average revenue per restaurant dropped a fraction to £762k a year:
Year to c31 December20152016201720182019
Revenue (£k)35,79445,84750,30947,27844,573
Year-end restaurants4861646057
Average restaurants4254.562.56258.5
Revenue per restaurant (£k)852841805763762
  • Between 2011 and 2014, sales per site topped £900k.
  • TAST collected sub-let site rents of £245k during 2019:
tast tasty fy 2019 results sub-let income annual report
  • Adjust for the sub-lets, and the trading profitability of the restaurants was therefore worse than the headline numbers suggested.  

Second half and Christmas dinners

  • The second half showed a promising sales-per-site improvement on the comparable period of 2018:
H1 2018H2 2018FY 2018H1 2019H2 2019FY 2019
Revenue (£k)22,99724,28147,27821,12623,44744,573
Average number of units62606258.55758.5
Average revenue per unit (£k)742809763722823762
  • H2 sales per site of £823k was the best six-month performance since £851k was registered during H2 2016.  
  • The simple idea of serving turkey at Christmas worked well:

“In Wildwood we offered four turkey-based dishes including a roast dinner which proved to be popular and we believe a better choice and more competitively priced Christmas menu than our competitors was one of the key reasons we performed well over the period.”

  • The turkey-based dishes were turkey burgers, roast turkey, a Christmas pizza (which included turkey) and roasted turkey penne:
tast tasty fy 2019 results christmas menu 2019
  • TAST’s festive menu was priced at £17.95 per person for three courses for bookings on or before 28 November 2019. The charge thereafter was £19.95 per person.
  • The half-year splits show TAST reporting an operating profit during the second half:
H1 2018H2 2018FY 2018H1 2019H2 2019FY 2019
Revenue (£k)22,99724,28147,27821,12623,44744,573
Gross profit* (£k)31359590829868897
Operating profit*(£k)(184)(294)(478)(658)116(542)

(*includes sub-let income)

  • Bear in mind that H2 profit was supported by those sub-let rents, without which TAST would have reported a small H2 operating loss.

Estate optimisation

  • This 2019 statement hinted that an earlier plan to “optimise the estate” may now be completed. 
  • The preceding half-year results said:
    • Our focus is on optimising the current estate and turning around underperforming sites.
    • The Group continues to review the estate and further disposals will be made if appropriate.
  • Whereas this full-year statement said:
    • We have addressed optimising the estate in two key ways.
    • The Group continues to review the estate and will consider any appropriate offers but no further disposals in 2020 are currently planned.”
  • TAST reported tangible-asset impairments during 2016, 2017 and 2018, but nothing was reported for 2019: 
Highlighted itemsFY 2016FY 2017FY 2018FY 2019
Profit on disposal (£k)-1,2372,132(43)
Rebranding (£k)(55)---
Onerous leases (£k)(1,635)(1,635)(1,687)564
Lease impairment (£k)(294)(96)(897)-
Asset impairment (£k)(3,576)(9,462)(10,063)-
Goodwill impairment (£k)--(115)-
Restructure & consultancy (£k)--(457)-
Total(3,925)(9,956)(11,087)490
  • Wishful thinking perhaps, but perhaps the lack of 2019 write-offs indicates restaurant trading is no longer deteriorating (at least up until Covid-19).
  • TAST added:

“In addition to site disposals we engaged with our landlord’s for assistance. Our collaborative approach has been well received and generally we have found landlords to be supportive and cooperative. We have been successful in achieving rent reductions and lease concessions on a number of sites.”

  • TAST directors Adam and Sam Kaye — and their wider family — do own a number of sites occupied by TAST, and appear to have co-operated as landlords.
  • Related-party transactions were reduced by 13% to £573k last year:
tast tasty fy 2019 results related party transactions annual report

Financials

  • However, a liability that has yet to be cleared is the provision relating to loss-making restaurants.
  • During 2017 and 2018, TAST charged a total of £3.3m against earnings as an “onerous lease” provision.
  • This £3.3m represented the estimated cash outflows from underperforming restaurants and/or the associated costs of exiting the leases.
  • During the second half of 2019, cash of £564k was absorbed by the underperforming restaurants and/or the associated costs of exiting the leases:  
tast tasty fy 2019 results provision movement annual report
  • TAST’s “onerous lease” provision now stands at £2.8m, which suggests a further £2.8m must be spent to handle the troubled outlets:
tast tasty fy 2019 results provisions annual report
  • This £2.8m will be reflected within future cash flow statements but not within TAST’s future income statements (because the sum was expensed during 2017 and 2018).
  • Remember also that TAST carries long-term lease obligations that at the last count totalled £84m before sub-let income:
tast tasty fy 2019 results lease commitments annual report
  • Lease obligations for 2020 of £5.5m suggest TAST’s average lease length is 15 years.

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Valuation

  • The recent 2p share price supports a £2.8m market cap.
  • A £2.8m market cap compares to trailing revenue of £44m and a net book value of £13m.
  • The estate currently comprises 51 Wildwood restaurants and 5 dim-t restaurants. Each site is therefore valued at £2.8m / 56 = £50k.
  • For comparison, three outlets were disposed of during 2019 for cash proceeds of £0.5m.
  • TAST could of course have sold its best sites and those that remain may not be worth as much — assuming they are worth anything at all.
  • Bear in mind the aforementioned £2.8m provision indicates some restaurants had a negative value at the 2019 balance-sheet date.
  • The pandemic will undoubtedly prompt management and/or the auditors to review the carrying value of TAST’s estate and possibly declare additional provisions/write-offs.
  • The £2.8m market cap also compares to 2019 free cash flow of £1.8m before interest costs:
H1 2018H2 2018FY 2018H1 2019H2 2019FY 2019
Cash generated from operations (£k)(2,259)2,648389(460)2,6862,226
Tax received (£k)-2626---
Capital expenditure (£k)(670)(591)(1,261)(227)(226)(453)
Free cash flow before interest (£k)(2,929)2,083(846)(687)2,4601,773
Net interest paid (£k)(125)(127)(252)(176)(38)(214)
Free cash flow (£k)(3,054)1,956(1,098)(863)2,4221,559
  • Interest costs with debt being cleared should now be zero.
  • The shares appear to be a bargain — assuming the cash does not run out during the pandemic and the business can become profitable once social-distancing measures are scrapped entirely.
tast tasty fy 2019 results nhs collage pizzas

What now?

  • Returning TAST to profit post-Covid-19 requires some radical management thinking.
  • The business lost money during the two years before the pandemic, so going back to the same menu with the same discounts with the same way of working at the same locations does not seem viable.
  • The pandemic has instead brought an opportunity to reshape the group entirely.
  • Possible ways to lower costs and/or increase staff productivity include:
    • Go takeaway/delivery only;
    • Adopt a very simple menu and self-service dining (see Toby Carvery);
    • Implement a CVA to jettison all the problem sites, or;
    • Become a franchisor and let others run the restaurants.
  • TAST did conduct an email survey on 19 May asking customers for their post-lockdown intentions:
  • Questions included:
    • When government restrictions are reduced/lifted, how soon are you likely to dine out again?
    • What would be most important to you in choosing to dine out with Wildwood in future?
    • What type of food would you most want to be available?
tast tasty fy 2019 results customer email survey
  • I would not like to be served a meal by an employee wearing a mask and gloves.
  • At least the 2019 results commendably included this new goal:

Our aspiration is to be the high street brand with [the] highest standard of customer service in the casual dining sector.

  • That target seems more achievable than possessing the most attractive and/or profitable menu in the casual dining sector.
  • Whether the “highest standard of customer service in the casual dining sector” revives TAST’s fortunes post-pandemic remains to be seen.
  • For now, the over-riding issue is whether TAST will survive the pandemic.
  • A lack of funding could leave the door open for TAST to de-list. 

“The Directors have concluded that the Cancellation will enable the Company to reduce significantly administrative costs, enabling Richoux to continue trading as a private company, possibly without the requirement for external funding whilst the Company focusses on improving its estate.”

  • TAST represents less than 1% of my portfolio, with the investment having lost more than 80% of its value. I am resigned to holding on with the vague hope of a recovery.
tast tasty fy 2019 results sharepad share price

Maynard Paton

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3 thoughts on “Tasty: Radical Management Action Urgently Required As Estimated Pandemic Cash Burn Could Leave Company Broke By November”

  1. Tasty (TAST)

    Publication of 2019 annual report

    Various interesting snippets, most of which were not mentioned in the blog post above;

    1) Going concern

    Confirmation of the ‘going concern’ narrative. The board has a “reasonable expectation” — the same term used for the previous two years:

    2) Audit

    Haysmacintyre replaced BDO as auditor for 2019:

    The new auditor appears to have evaluated certain management assumptions in greater depth.

    In particular, impairments and lease provisions are now double-checked with 10-year projections:


    The ‘going concern’ basis was also checked for 2019:

    A good sign — audit materiality was reduced significantly. Scope remains 100% as well:


    3) Corporate governance

    New for 2019 — a full corporate governance statement:

    Lots of corporate-governance commentary on employees, which noted the benefits of staff training have yet to be realised in full:

    The Kayes like to skip the occasional board meeting:

    Would be useful to know more about the “effective procedures” to monitor the conflicts of interest.

    A useful line on the group’s culture:

    ‘Tri for life’ is an organisation associated with director Sam Kaye.

    4) Debt

    Confirmation that the debt has all been paid off:

    5) Director pay

    Probably the most encouraging note in the accounts this year. The Kayes have waived their fees and the two other long-time directors have reduced their fees by 75%:

    6) Employees

    TAST’s employee stats showed good productivity improvements during 2018, but the ratios declined a fraction for 2019:

    Revenue per employee was £43k versus £45k for 2018, while employees per outlet were 17.6 versus 16.9 for 2018.

    I had hoped those 2018 stats would be maintained for 2019, although perhaps 2018 was a freak result and/or the figures are skewed by part-time workers. The average cost per employee was £17.7k, versus £18.3k for 2018.

    Total staff costs remain at 41% of revenue. Was 36% in 2014.

    7) Fixed assets

    This accounting looks somewhat suspect:

    A 10% straight-line reduction could be equivalent to a useful life of 10 years, which feels optimistic for restaurant fittings. Restaurant Group applies an equivalent useful life of 3-10 years.

    A 5% straight-line reduction for computer equipment — indicating perhaps a useful life of 20 years — seems ridiculous.

    Too late to bother with this bookkeeping policy now. But had I noticed the policy a few years ago, I may have questioned the accounting optimism — and perhaps considered other aspects of TAST where management were (in hindsight) too ambitious.

    8) Goodwill

    If you believe the accounting, two restaurants enjoy a total carrying value of £326k:

    My blog post above calculates the market cap per restaurant to be £50k.

    9) Inventories

    The £11.4m of stock expensed through the P&L represented 26% of revenue — matching the proportion for the previous two years.

    The level was 23% for 2016 — Brexit year — which indicates TAST has indeed lost some margin due to Brexit if (as I suspect) most stock is bought in from overseas.

    The £871k of raw materials and consumables suggests TAST carries c28 days of stock.

    10) Options

    Oh dear — various subsidiary options were repurchased by the company for just £28:


    I can’t be sure, but I believe those options explain why the holding company owns 53% of the main operating subsidiary:

    The percentage was always 100% in previous reports. Not sure if the new auditor has applied a different calculation, or perhaps the rights issue last year has affected the percentage. Similar to the useful-life policy, not something to worry about unduly given the current questions over the group’s survival.

    Option dilution is not a problem with the shares at 2p:

    Options that can be exercised need the shares to rally to 31p.

    11) Receivables

    No problems here:


    12) Payables

    No problems here:

    13) Related party transactions

    Benja Properties was omitted from last year’s transactions but included this year:

    14) IFRS 16

    The adoption of IFRS 16 for 2020 will reduce profit by £1.3m:

    IFRS 16 does not affect cash flow, and I will worry about the finer details should TAST ever get to publish its 2020 annual report.

    Maynard

    Reply
  2. Tasty (TAST)

    Statement re: Redundancies published 03 July 2020

    Radical action — 32% of the workforce has been let go. The company also needs more cash. Here is the full text:

    ——————————————————————————————————————————-
    “Further to the Company’s announcement on 26 June 2020 regarding the phased opening of a limited number of sites over the next few weeks, given the anticipated drop in footfall due to the continuing restrictions imposed as a result of COVID-19, the Board has come to the difficult decision that staff numbers need to be reduced accordingly. Consequently, some 284 staff members (representing approximately 32 per cent. of the total workforce) have been made redundant across our restaurants and Head Office. Clearly, this decision has been very difficult for everyone involved and throughout this process our priority has been to support those that have been affected.

    The board of directors is exploring ways to minimise costs and to strengthen the balance sheet including investigating the possibility of new debt and / or equity capital and also discussing terms with landlords and trade creditors. Further announcements will be made as and when appropriate.”
    ——————————————————————————————————————————-

    Would be interesting to see if “new debt” could indeed be taken on and on what terms. Not sure there will be great appetite for another equity raise. Oh dear.

    Maynard

    Reply
  3. Tasty (TAST)

    Paul Scott scuttlebutt published 07 August 2020

    Investment blogger Paul Scott has visited Wildwood Bournemouth. “Very busy“:

    ———————————————————————————————————————————-
    Pubs and restaurants seem to be seeing a surge in demand, thanks to the Eat Out to Help Out Govt discount scheme. Industry data suggests that sales were up 70.9% in the first 3 days of the scheme (food up 114.3%). I decided to mystery shop Wildwood, in Bournemouth, a pre-covid favourite of mine, on Weds earlier this week. I couldn’t believe how busy it was – packed downstairs, and a good smattering of groups upstairs too (which is usually empty).

    I asked the waitress how business has been, she replied, “very busy, every day, since we re-opened on 18 July“. Isn’t that surprising. She said the Govt scheme has helped, but it was busy already. Bournemouth generally was busy with people at about 6pm, although being a seaside town, and the weather being pleasant, and people not going abroad, then perhaps those factors help. It looks very mixed anyway – central London is still almost deserted, but by the looks of it seaside/holiday towns are doing alright. I’m going to mystery shop Franco Manca for lunch today!
    ———————————————————————————————————————————-

    Talking of Franco Manca, owner Fulham Shore issued this statement on 06 August 2020:

    Trading at the Group’s re-opened restaurants has started gradually, and the early signs in both businesses are promising. In the four weeks since 6 July 2020, like-for-like restaurant sales at reopened sites were approximately 72 per cent. of the equivalent weeks in the previous year.

    The Group has shared approximately half the benefit of the new six month reduction in VAT on food with its customers. In addition, both Franco Manca and The Real Greek will be participating in the Government’s Eat Out to Help Out initiative, where customers will enjoy a 50 per cent. discount (up to £10 per person) when dining from Monday to Wednesday in August. Both these measures are expected to have a positive impact on the Group’s trading as sales rebuild to pre-COVID-19 levels.

    Like-for-likes (LFLs) down 28% does not seem catastrophic all things considered. Something to bear in mind is the adjustment to VAT and the government Eat Out to Help Out scheme. I am not sure how the LFL numbers will be affected by these initiatives. For example, FUL has shared half the VAT benefit with customers, implying the other half has benefited the company. So LFLs may be flattered a little by the subsidies.

    Loungers, which operates a hybrid cafe/bar/restaurant chain, issued this statement on 05 August 2020:

    The Board is pleased to update on current trading having now re-opened all 165 sites in the estate, with the exception of Cosy Club in Leicester which opens this Friday. Like for like sales have been -1.7% over the period from 4 July, when our phased re-opening commenced, through to 2 August. Whilst these are still early days, we are encouraged by the initial strength of our trading performance to date and remain confident the Company will emerge strongly from this period.

    LFLs down just 1.7% is incredibly impressive.

    All told, perhaps the dining-out sector has not died just yet. TAST’s next update should be interim results during September.

    Maynard

    Reply

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