Like for Like Sales Disappoint - Revolution Bars

Friday, Jan 20 2017 by
22

588257fca782dRevolution_logo.png

Revolution Bars (LON:RBG)


Share Price 204p                       Today -9.5p (-4.4%)

Market Cap €123.1 million         Bid/Offer 202p - 206p

Normal Market Size 2,000 shares


About the Company

Revolution bar operates 66 premium bars across the UK. The bars trade under the Revolution and Revolución de Cuba brand names. My back of the envelope calculations shows circa £1 million of turnover for each bar.  Pretty impressive turnover as business starts late morning for each bar and then trade continues until late at night as expected.

The company only rolled out four new Revolución de Cuba bars in H1 FY17 in Harrogate, Aberdeen, Reading and Glasgow.   Their fifth development this year in Southend on Sea is due to open in H2 which will bring the number of units to just 67.  

Challenges Ahead

(i) Results showed LFL sales only up 2% for H1 17.  Given the likely increases in running expenses including wages, drinks supply costs etc suggests that some margin pressure will occur in the 2nd half of the year.

(ii) The Revolution and Cuban bar concept may fade in fashion as the concept becomes tired and other theme bars move into that space. 

(ii) The group is only adding a half dozen extra bars a year so far. The actual percentage Increase in earnings will be getting smaller as part of a large number of existing bars.

(iv) A number of the best locations for the concept are already in place leaving more riskier and possibly less rewarding locations in the future to select. 

Concerns

The initial IPO price in March 2015 needed to be reduced substantially to get it away at a £100 million market cap. The company was promoted as a go-go growth stock in many respects. The single digit unit openings each year suggests only a pedestrian rate of growth.

All of the £86 million of money raised in the IPO was used to cash out existing investors who sold their 86% holding in the company. The fundraising was at 200p in March 2015.  The share has ebb back and forth and effectively gone nowhere.

The company is dependent on a limited number of suppliers and distributors and the price they charge. In particular, one key service provider, provides all of the Group’s logistics, warehousing and distribution services in respect of drinks products.

The new institutional investors who bought in at the IPO are reducing their stock exposure this stock, so they can invest their funds in alternative growth stocks.  Organic growth is too slow.  Only new investors are buying the old growth story.

The company's target of 100 Revolution Bars and 40 Cuban bars is just too far in the distance to imagine. The share price fall from IPO price and the recent share price faltering is suggesting that management may need to do a rethink on the self-funding roll out strategy.  A roll out of 20 units extra per year is required which either needs additional equity or a substantial lending facility on tap. 

Why The Two Brands?

"The Group’s management believed that the distinguishing features of the Revolucio´n de Cuba bars would allow them to be located near to existing Revolution bars whilst limiting cannibalisation. In addition to the distinct offering of the new Revolucio´n de Cuba bars compared to the existing Revolution sites, the new brand had (and has) a different target audience, with its customers being on average six years older than those of Revolution bars. The new brand was therefore intended to appeal to a segment of the UK’s working population which has a relatively high disposable income, is less price sensitive than other potential customers and which values quality and atmosphere over discounted prices."


Positives

(i) The bars are self-financing to date. No debt. The concepts are new and are working well.

(ii) The marketing of the bars through websites and social media looks to be top class. It looks the in-place to be for party nights and celebrations for free-spending customers which offer a good experience.

(ii) The bar design, table service, hand-made cocktails and freshly prepared food attracts the sort of customers willing to pay a premium.

(iv) The concept can be transferred to many more locations in Britain and Ireland and move later on to international locations.


Short Term Market Reaction to the Trading Statement

The share price sank at 8:00 a.m. after investors first take on the trading statement.  The price drop was mainly due to the disappointment in the 2% growth in LFL sales. I suspect the initial 4% or 5% share price drop knocked the share price through some investors stop loss positions.  This had the effect of further pushing the share price down another 5%. Later in the day, the share found support and the share rebounded back up to the 216p mark.

Back in April 2016, the share price was back down at the 150p level.  Since that low point, investors have become increasingly aware of the company’s obvious merits. Investors see the company as a reasonably valued growth stock and have bought in.  

The pessimists will point to the slight reduction in the profit forecasts for the end of this year and next year.  Any bad consumer spending news, inflation concerns, changes in consumer tastes are more likely to cause upset to the share price negatively. On the bright side, more tourists visiting the UK fashionable areas on weaker sterling may help somewhat.

Forecasts

Net Profit

EPS

DPS

Net Profit

EPS

DPS

(£)

(p)

(p)

(£)

(p)

(p)

Consensus Estimate

8.00m

16.3

5.37

9.20m

18.6

6.01

1m Change

-150k

-0.20

-

-100.0k

-0.050

-

3m Change

-150k

-0.20

-

-100.0k

-0.050

-


The company's price-earnings forecast is 12.63 for the 2017 results and after that, the company is on a  forecast price/earnings ratio of 11.07 for 2018.

Charts

The candle chart does look a bit worrying. Lots of red candles to be seen from late December 2016.

58827133e917fRevolution_bar_candle.png

Purchasing Decision

This share was on my watch list before the end of the year.  The company deserves a spot in my portfolio for diversification reasons only.  

Slowly, slowly I took an opening small position before the year end.  I took advantage of the Thursday drop below 200p.  I topped up once again late Friday afternoon on the negative tape.  Buying in separate lots on different days has now given me a more attractive average price entry point.

Around £800K worth of stock was traded today, so there are some determined sellers applying pressure to the share price.

My Future Expectations

I have only reasonable expectations for the share.  The company, if it grows its yearly earnings by 10% with a 10% increasing dividend would be nice. The business with a slow roll out of units as presently constructed, trades between a 10 and 12 times price earnings multiple. I think that is about right.

The current share price looks to want to trend down to the 180p-190p range where it may find support. The upside resistance level is at the 220p.  No need to rush to buy the share. 


Regards


Dearg Doom


PS (For entertainment purposes only.  No investment advice ever intended.)

Here is are individual links for all my comments to date.

May 22nd, 2017- After a Weekend of Reflection

My 2nd comment on Friday 19th May after the RNS profit warning.  

1st comment on May 19th, 2017 - My Profit Warning Initial View

My 2nd Comment on March 2nd, 2016 in reply to query RBG as a growth stock

My 1st comment to sell RBG March 2nd, 2017 






Filed Under: Stock Picks,

Disclaimer:  

All articles and comments are for general information only. No investment advice intended.

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Revolution Bars Group plc is a United Kingdom-based operator of bars. The Company has a trading portfolio of approximately 60 bars located predominantly in town or city high streets, which operate under the Revolution and Revolucion de Cuba brands. The Company's bars focus on a drinks and food-led offering, and typically trade from late morning, during the day and into late evening. Revolucion de Cuba bars are characterized by their 1940s Cuban-inspired style, with dark woods, traditional bar counters, antique tiles, vintage furniture, Havana-style ceiling fans, and original Cuban artwork and photographs. Its bars are located in various places, such as Cambridge, Ipswich and Norwich in South East; Bath, Plymouth and Southampton in South West; Birmingham, Derby, Leicester, Loughborough and Milton Keynes in Midlands; Cardiff and Swansea in Wales; Blackpool, Chester and Huddersfield in North West; Sheffield, Sunderland and York in North East, and Edinburgh and Glasgow in Scotland. more »

LSE Price
100.6p
Change
3.0%
Mkt Cap (£m)
50.3
P/E (fwd)
7.6
Yield (fwd)
5.4



  Is LON:RBG fundamentally strong or weak? Find out More »


61 Posts on this Thread show/hide all

simoan 19th May '17 42 of 61
2

In reply to post #186329

For the record, I was referring to the twitter comment, not what you wrote. I hold your thoughts in high regard so was a little surprised you would take a comment on twitter quite so seriously. I don't hold many RBG as it happens, certainly not enough to lose any sleep over, and will probably buy some more later today.

All the best, Si

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Dearg Doom 19th May '17 43 of 61
4

In reply to post #186301

Hi Ramridge, Jane,

For the time being "the loo" in the Revolution Bar Group is "out of order". Their business model is stuck for space to grow. Likewise, their future overall sales growth in one set of bars will be met by falling sales in another set as the novelty wears off to a certain extent.

For the share price to rise, investors need to be sold a story, like the new investors were at the IPO Whether the story rolls out as planned in full or not, investors need to buy into that hope. Opening a bar in New York, Shanghai may yet again wet the appetite of some investors.

For the time being it is a trading stock for investors who crave excitement in the dull world of stock investing. Having sold prudently the stock near its highs, I find buying a small holding now much more palatable. Averaging down from lower points than today's share price would be a mistake.

Regards

Dearg Doom

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AlanJenkins2 19th May '17 44 of 61

I own some,and agree that the market has treated them harshly..I do wish,however,that they would wait for the new bars to become fully profitable,and put their expansion plans on hold in the mean time.

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simoan 19th May '17 45 of 61

In reply to post #186364

Dearg,

I am not sure you read the same RNS as I did? the share price fall is a big overreaction IMHO. If the business model is busted why are they still going to open six new bars? Not all profit warnings are created equal, and this is disappointing but doesn't look too bad to me. I am just reversing the truck out of the drive...

All the best, Si

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Ramridge 19th May '17 46 of 61
4

In reply to post #186343

Si - No offence taken. But I am very serious about the question raised. Let me explain.

The basic model of any roll-out is,
- increase in revenues which give rise
- fat margins which give rise to
- sufficient free cash flow to fund further new openings
All the while ROCE should stay reasonably high.

As long as this is true the company needs no debt and net profits will eventually turn positive and rise substantially. The virtuous circle will take care of that.

This basic structure of a roll-out applies whether you are a butcher, baker or candlestick maker.

Hence a genuine question. in RBG's case, Is this model somehow broken?

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gus 1065 19th May '17 47 of 61
11

In reply to post #186294

Hi Ram.

I hold both Revolution Bars (LON:RBG) and Crawshaw (LON:CRAW) (which I bought in the high teens after the sell off a few months back). While I think a direct comparison is not especially helpful (very different markets, business plans etc.) I do think there is a lesson to be had in investor psychology (possibly being fanned by some Market Maker games) with a growth stock that goes (or appears to go) off the boil.

In both cases, the shares had developed an almost evangelical following and associated premium share rating on the back of faith in management and an evolving stellar growth story (although to be fair Crawshaw (LON:CRAW) had a much higher p/e than Revolution Bars (LON:RBG) at the peak). In both cases, loss of momentum in the growth story seems to have pricked the balloon and the half full glass has gone from being "nearly full" to "nearly empty" in the twinkle of an eye.

In the case of Crawshaw (LON:CRAW) , the profit warning came with a commentary to the effect that their high street roll out had stalled due to trying to ramp up margins requiring a redirection into out of town large scale outlets. Sentiment changed sharply and the view became that the management really doesn't have a clue what their USP should be. Never black or white, I think this was over done and following a recent tie in with a strategic investor/supplier the share price at least seems to have stabilised. Could go either way from here IMO but I've had a nibble.

With Revolution Bars (LON:RBG) , I think we're at a much earlier stage of the possible disillusionment process. All the recent statements up until this morning have been bullish, and even today's has the feel of "well it's tough for us, but we're doing a damn sight better than the competition in a difficult market". Not sure if this is justifiable management sel-confidence or misplaced denial. The nagging doubt for me is that there are headwinds (for everyone) but being a premium price operator, Revolution Bars (LON:RBG) might be at the sharp end of consumers minding the pennies and trading down to cheaper alternatives. Also, losing a respected FD doesn't help with the perception they try to give that everything is ticking along just fine especially when in March they seemed to think the issues on cost (minimum wage, business rates etc.) were manageable but now seem to think they are a problem.

I suspect plenty are willing to give Revolution Bars (LON:RBG) management the benefit of the doubt for now and use today's fall as a buying opportunity. I'm thinking the same thing, but conscious of the fact that Crawshaw (LON:CRAW) fell from the 80p's to low 40's but eventually dribbled down to about 15p at the nadir. I think I will hold fire for now .....

Gus.

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hayashi22 19th May '17 48 of 61
3

There can't be many folk able to spend £9 on a drink. The pricing model seems to rule out students who are heavy drinkers. Only in London and south east will you find people who are prepared to pay these fancy prices.

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herbie47 19th May '17 49 of 61
1

In reply to post #176112

Double Income No Kids Yet, I think.

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Ramridge 19th May '17 50 of 61
1

In reply to post #186413

Hi Gus -
Great post. Much to digest, but I like the general drift of your argument and conclusions.

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herbie47 19th May '17 51 of 61
3

In reply to post #186455

Yet some reports say they are popular with students, if they can afford drinks at £9 I don't see any reason for free tuition fees.

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Flackwell 19th May '17 52 of 61
1

They are extremely popular with students - believe me - I'm the father of two

However, they're popular because the prices are lowered for student nights which results in the double whammy of 'normal' customers avoiding the place like the plague whilst the leaders of the future have their (cheap) fun

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gus 1065 19th May '17 53 of 61
2

In reply to post #186301

Hi Jane.

You've clearly never been skiing in Verbier or Courcheval!!!! £9 wouldn't cover the complimentary nibbles let alone a cocktail.

Gus.

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Dearg Doom 22nd May '17 54 of 61
9

Hi,

It has been a particularly bad time for many private investors in Revolution Bar Group. Investors' loss of capital, the frustration at management's failure to anticipate increased costs as well as revenue shortfalls has put the management in the sin bin.

Two trading days later, post the profits warning, the company's share price has not found a floor. It is prudent even if we are bullish to re-read the results to at least see what bearish investors might be reading into the latest RNS release.

The mood is generally that sales will not likely increase on LFL basis but rather remain static at best. Operating costs will continue to be higher due to wage and commercial rates increases. The company had been over enthusiastic about its new concept bar taking off and has had to roll back those figures as regards time to reach maturity. These maturity figures may have been too high in reality.

There are some accounting issues real or otherwise on investors' minds. How best to determine profits from a business that rents out properties but at the same time spends millions on refurbishing bars to a high spec. This is particularly the case when it does not own the properties. This is further confused with maintenance capital expenditure per annum for properties already done up. How to work out the actual earnings in the price-earnings ratio is causing the problem. The fact those earnings may not increase at all from now on is keeping investors on the sidelines.

What is the mindset of institutional investors who have had a growth thesis on the stock? Do they sell? Well yes, it seems if they can do so at any reasonable price. No amount of private investors averaging down or buying into the stock pushed the share price back up higher than a few pennies over last few days.

Certainly, those institutions expecting at best static sales, coupled with increased costs over time realise there is only a dull share price performance going forward. Also, some investors may be concerned about is whether this if the first of three profit warnings or is there already further bad news already known by insiders. Was there anything unusual in the last month's LFL sales.

So why buy the stock? The company can cut costs in all areas to get better value from capital expenditure and drive productivity from better use of its own workforce. Also, better food offerings, a simpler menu of cocktails will assist profitability.

If the company was to halt expansion after the next six bars are completed, what sort of profits would shareholders enjoy? A model of share buybacks, the closing of unprofitable units quickly, change of some top management, together with increasing dividends could work.

My gut instinct says the share should have climbed back above the 140p mark easily. Failure to do so over next five days is a negative which I will not ignore.

Regards

Dearg Doom







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summit1971 22nd May '17 55 of 61
3

In reply to post #187759

Hi Dearg
RBG - a pretty similar situation to NCC after its trading update on the 21st Feb - as the RNS left more questions than answers and unquantified (as with NCC) - the shares will not easily bounce and hold.
Imv, the shares are oversold, but those attempting to short term trade for a bounce with ultimately leave for easier pickings in this illiquid share at the best of times.
With 3/4 or the shares held by institutions, I would suggest that it is pretty clear that one or more of them have chosen to throw in the towel at whatever cost (at a huge loss) , and if one feels there is value at this price is simply to wait for the RNS to show who the fund seller/s is.

Off topic, concur with your TBCG conclusions on today's update - a seller/s has definitely been keeping the price flat footed at the 16 handle.

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gus 1065 23rd May '17 56 of 61
1

In reply to post #187759

Hi Dearg.

Good overview of the various thought processes running through investors' minds. Highlights the distinction between "traders" and "investors" IMO. I think the former maybe see it as an opportunity to job in and out in the hope that the sell off is overdone and there'll be a short term chance to make a profitable quick exit. Longer term holders maybe feel the roll out growth story is a little less rosy but at a 40% discount for a stock with a reasonably strong financial position and previously very well thought of business model and management it's cheap and a good opportunity to top up positions.

I think the hot money will look to move on quickly one way or another so expect more volatility in the next few days. I could also see some of the Insti investors moving on putting further downward pressure - always hard for a fund manager to justify holding on to a falling star to a sceptical investment committee so selling becomes the path of least resistance. The company needs some positive news e.g. the appointment of a quality FD to steady the ship or a significant buy from management and/or a keystone investor otherwise further drift down is possible, especially if the usual bear commentators decide to take of the cudgels and bad mouth the stock and open up short positions.

Gus.

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paraic84 23rd May '17 57 of 61
4

Did everyone see The Times article? https://www.thetimes.co.uk/article/workers-hamper-the-advance-of-revolution-kh5dmgd7f

The Times is speculating it could be bought out by private equity or "a rival such as Stonegate Pub Company" which seems strangely specific! The CEO also says the share price drop has been an "overreaction".

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maffs0 23rd May '17 58 of 61
5

Have you guys read the profit warning research done here by Ed and co? It is always possible that Revolution Bars bounces and the bounce is missed, but it is far more likely that it has further to fall and will take ages to recover.

Unless RBG is different of course...



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Bonitabeach 23rd May '17 59 of 61
10

I have read all of this thread and a lot of "research" has been put in by interested parties. Opinion is divided. If I may summarize; the business model appears to be - "pull in the totty and sell expensive drink to the resulting punters" This is being touted as a growth story but I struggle to see the growth. 2% like-for-like isn't even inflation - ignoring the budget duty hikes.

I was tempted that this was now cheap enough at 120p to offer some value, or at least a dead cat bounce.

Mr Doom brought me back to reality with this part of his original epistle:

"All of the £86 million of money raised in the IPO was used to cash out existing investors who sold their 86% holding in the company. The fund raising was at 200p in March 2015."

I think the existing investors knew more about the prospects for this business than any of us.

I pass.

Bonitabeach

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iwright7 24th May '17 60 of 61
4

In reply to post #188034

Boni,

The Revolution Bars (LON:RBG) IPO and growth story reminds me of, The Emperor's New Clothes. All was fine until a child in the crowd pointed out, "He isn't wearing anything at all".

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Flackwell 24th May '17 61 of 61
1

And maybe, just maybe, there's more bad news to come - if the cost increases took them by surprise - what else will?

If new branches are taking longer to reach profitability, then why open more?

Too risky for me

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