Retail Food Group cleanses bitter taste from investors' mouths with humble pie

Retail Food Group’s share price has languished since accusations of franchisee mistreatment emerged in 2017, but Collins St Asset Management believes subsequent changes may breathe new life into the business.

Shares in the company – which operates well-known franchise brands Donut King, Crust Pizza, Gloria Jeans and more – had previously traded above $7 each before stories emerged of franchisees allegedly being taken for a ride by a “brutal” business model.

As the number of stories grew, the share price shrank – and news of an investigation by competition regulator ACCC added further selling pressure to the beleaguered business’ stocks

By 2020, that investigation had given way to legal action from both the regulator and franchisees, many of whom had chosen to join class actions against the business.

The company’s share price fell below $1; a barrier it has yet to break back over.

Michael Goldberg, managing director of Collins St Asset Management, however, likes the business’ chances looking forward.

“We thought the business was worth over 12 cents, probably closer to 15 cents,” he told Reach Markets’ subscribers in January.

“I think we continue to believe that.”

Although the company still faces challenges (such as restructuring its business model and culture and contending with ongoing ACCC actions), Mr Goldberg said the business has undergone a great deal of change to shed those legacy problems.

But these activities have not been properly reflected in the company’s price – leaving an opportunity for investors.

“What we have here is what is now a fundamentally sound business – they’ve already taken the pain of the restructure to their culture and to their stores successfully,” he said.

“Even though we’re dealing with COVID, they’ve managed to maintain profitability even through this period, and I think it’s worth noting that Retail Food Group is trading at a fraction of the multiple of some of its peers.”

Instead, the current price is driven by investors who don’t like or don’t trust Retail Food Group because of their past controversies.

These concerns still appear to be fresh in the minds of investors. In March, Retail Food Group executive chair Peter George was grilled by guests of Reach Markets’ fortnightly Meet the CEO session on what the company has done to earn back the trust of the market.

“It’s a very good question,” he said.

“I won’t say ‘trust me’, I would say talk to a franchisee and get them to tell you what life is like now compared with how it used to be. At the end of the day, the success of this company rises and falls with the success of the franchisee.”

Mr George said the company has taken numerous steps to better support franchisees, including offering direct financial support, improving services, and providing better products to help sales.

“I think the proof in the pudding will be in the hands of the franchisee,” he said.

Click here to view more videos from Michael Goldberg’s  Meet the Fund Manager’ session, or click here to view the full ‘The Insider: Meet the CEOs’ session.

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