Revolution Bars Profit Warning: Lower for FY19 Amidst Turbulence

Revolutions Bars Group (LON:RBG), the operator of bars such as Revolution and Revolution Cuba bars today guided profits lower for FY19. It has reported increased costs and lower like-for-like sales in the first half of the year. To be quite truthful this is a rather mild event for the company as in recent years it has seen CEO departures and takeover bids. This has resulted in an extremely choppy share price. All of this has not been good news for investors. With the momentum been largely downward before the latest Revolution Bars profit warning:

Many will be familiar with this group, it being a long-standing operator in the market under the main ‘Revolution‘ brand. Initially centred around vodka, the group now is a more generalist high-end cocktail bar with an increased focus on food. The group is still expanding and aims to trade from 150 sites around the country. The bulk of the most recent expansion has come from their newest brand ‘Revolucion de Cuba’, allowing a greater focus on rum.

Revolution has not been immune from the general headwinds in this area. A decrease in disposable incomes and general lifestyle changes against alcohol has seen many pubs close. An increase in wage costs (which go up every year) has put more pressure on margins. Arguably Revolution are one of the better placed companies to weather this storm. They operate at the upper end of the market: a cocktail is an extremely expensive drink.

Many investors hold because of the prospect of a buy-out. Shareholders rejected a 203p offer from Stonegate in October 2017 despite a board recommendation to accept. Given the share price today this seems a bit of a rash decision. Clearly many believe in the longer-term prospects of the company despite the current share price.

The Warning

The warning comes in a trading update RNS covering the first half of the financial year. First of all the good news:

Total revenue for the 26 weeks ended 29 December 2018 was £78.5m (H1 FY18: £73.8m), an increase of 6.4%. Five new venues opened during this period: Revolution Mitchell Street in Glasgow and Revolucion de Cuba Southampton in August, Revolucion de Cuba Bristol in October, and Revolucion de Cuba Huddersfield and Revolution Durham in November. Overall, these venues have traded ahead of expectations.
Like-for-like* sales in the important four week trading period leading up to and including New Year’s Eve were 2.6% higher than last year and 8.7% higher over two years. This is the sixth consecutive year of growth over the festive period. During this four week period, pre-booked party revenue was up 11.7% on a like-for-like* basis and average weekly sales per venue were above £60,000 with 22 venues setting new total sales records. As expected, and as reported by many high street retailers, Christmas trading came late with like-for-like* sales in the last two weeks of the financial period up 8.1%.

Then some bad news:

Like-for-like* sales performance for the 26 weeks ended 29 December 2018 was -4.0% below last year with the first quarter at -5.0% (as advised at the time of the Group’s announcement of its annual results on 2 October 2018) and an improved second quarter at -3.1%. Sales trends in October and November broadly followed those experienced in the first quarter but, as anticipated, stepped up significantly in December. The 26 week reporting period does not include New Year’s Eve, consistent with the comparative period.

This translates into real figures:

The Board expects adjusted EBITDA** for H1 FY19 to be approximately £2.0m lower than last year due to the like-for-like sales decline and increased operating costs. Whilst the business has seen a much improved trend over the Christmas period, there is still further work to be done on the Revolution brand and therefore the Board is taking a cautious approach to trading in the second half given the economic and political uncertainties at this time. Accordingly, it expects adjusted EBITDA** for the full year to be approximately £12.0m (FY18: £15.0m).

A decrease in like-for-like sales is painful. All sites have high costs as slack cannot be shared, so the lost sales have a big impact on profitability. Conversely, an increase in sales is good, as the additional sales only incur marginal costs.

The Business

The business performance can really depend on what perspective and time-frame you would like to use. The group is still growing, although at a modest pace. The numbers are not like-for-like:

Given that we have seen averages of £60k per week per bar over the Christmas period (over £3m per year), we can imply that this period is much, much busier than other periods. And as like-for-like sales have declined a little, we can expect to see that overall revenue will still increase as these figures will show all revenue.

The group uses adjusted EBITDA as its profit measure. This measure strips out exceptional costs and bar openings and last year looked like this according to the results:

The exceptional items look high, and are incurred through the aborted takeover bid as well as restructuring costs and onerous lease provisions. It does seem that much of this £11m incurred with be an anomaly and as such the reported reduction of reduced EBITDA will reflect largely the cost of new sites.

These adjusted figures are saying that the business is generating real cash. But taken together with the cash-flow statement, this shows that all of it is being re-sunk into the business and then some. An excerpt from the accounts reads that £7.5m was borrowed in 2017 and £8m in 2018:

Prior to this the group was debt-free. Curiously for this situation, the share pays dividends. This has cost the company £2.475m in 2018 and the same in 2017. At least in part, the borrowings have gone to paying this. With the 2018 results out of the way, it does seem that even on a reduced profit expectation there should be ample headroom on this facility. There would be several measures that could be taken before it became distressed.

Is the Revolution Bars profit warning a buying opportunity?

Today’s news has lopped off another 20% of the share price. Shares are now under a pound. It can be seen that there are both good sides and downsides to this.

On the plus side, I do believe that there is nothing wrong with the Revolution brand. A slight premium offering has been very durable over the years. The Cuban variant offers the chance to refresh the brand. Going forward there should be ample opportunities for expansion. Pubs are closing at record rates, and there may be some in good locations for Revolution. Their product offering is good. Despite a decrease in disposable income and poor trends for drinking among younger people, I do suspect that younger people will always be enjoying nights out. These nights invariably involve spending large amounts of cash, given the average price of a cocktail. Many of the city centre locations face little competition in the same bracket.

On the negative side, a lot of money is required to keep up the pace of expansion. Over £14m was spent on capex across new sites and refreshing older sites. Spending money on the latter is likely to be always required. Venues becoming tired is likely to see customers drift away to new openings. Given how money has been borrowed over the last two years to finance new sites, this pace cannot be sustained. Hitting the £25m facility is imminent if nothing else changes.

I do think the dividend will end up being cut sooner rather than later to help finance new locations. In this case the share price might take a further fall. There is quite a nice upside if the company does well and under ideal conditions I can see it being worth in excess of the 203p rejected. That said, I do believe the company are walking a bit of a tightrope at the moment. It is imperative for them to control costs and protect revenues. Some evidence of that is already in place although it is too early to tell the effects for sure. The like-for-like figures show them down, but the rate of decline is slowly and may turn positive if momentum is good.

With the appearance of debt in the past couple of years I would not say the business is safe from a prolonged downturn. However equally some of the elements of the downturn such as better sites and reduced rents might actually favour it. No real opinion so I will be a 3/5 here.

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