The Restaurant Group’s (LSE: RTN) surged in value following the stock market crash. It’s up another 13% in Wednesday business (and trading around 60p per share). This means it’s almost trebled in value since late March’s record lows.
Investors have been boosted more recently by government plans to loosen quarantine restrictions, providing a much-needed chink of light for the UK’s battered hospitality sector. Bella Italia-owner The Casual Dining Group was plunged into administration last week in a sign how much the stress of the Covid-19 lockdown has induced.
Fresh bouts of balance sheet strengthening has also boosted The Restaurant Group’s stock price in recent weeks. Along with raising £57m in cash through a share placing, and increasing its credit facilities, the Frankie & Benny’s owner has also taken the hatchet to capex and other costs.
Big risk
Clearly, The Restaurant Group seems to be on a stronger footing than it was a few weeks ago. But does recent news flow justify its surging share price after the stock market crash? I’m not convinced.
Let’s not forget, Covid-19 aside, this is a small-cap that’s plagued with other troubles. Falling consumer confidence has had a severe indirect impact on footfall at its restaurants for a long time now. The lion’s share of its sites can be found in and around retail parks.
The Restaurant Group’s also been hit by intense competition in the casual dining space. Bella Italia isn’t the first casualty of Britain’s battered restaurant segment of course. Jamie’s Italian, Carluccio’s and Prezzo are just a few that have either gone to the wall, or been forced to enter company voluntary agreements (CVAs) in recent years. Plenty more operators have had to close sites in light of dwindling customer numbers too.
At the same time, these firms have been hit by a perfect storm of ballooning costs. Rents have risen, business rates have increased, while operating costs, like food and labour, have also gone through the roof. All this explains why The Restaurant Group’s profits slumped into losses in 2019.
Bouncing from the stock market crash
These problems will still be there when The Restaurant Group flings open its doors again en masse. Investors might be eyeing a quick resolution here too, but the business carries lots of risk in this regard. The government hasn’t signalled when the country’s hospitality sector can restart during this still-evolving pandemic.
And even when it’s permitted to fire up its kitchens again, social distancing requirements could still have a shocking impact on The Restaurant Group’s revenues. It also faces huge new costs in having to adapt to new norms and change the way it goes about its business.
I certainly won’t be buying The Restaurant Group’s shares today. Its profit outlook is packed with peril and it faces a severe deterioration in its balance sheet too (it expects net debt of £310m-£320m by December, up from below £290m a year earlier). I’d rather go dip-buying elsewhere following the stock market crash.