BreadTalk Group Limited’s Latest Earnings: What’s Next After A Painful 60% Drop In Earnings?

BreadTalk Group Limited (SGX: 5DA) reported its fiscal third-quarter earnings yesterday evening. The reporting period was for 1 July 2015 to 30 September 2015.

The food purveyor may best known for its signature pork floss buns that it sells in its namesake BreadTalk bakeries all around Singapore and other parts of Asia. Beyond bakeries, BreadTalk also organises its revenue into the Restaurant segment and the Food Atrium segment.

To learn more about the company, go here. If you’d like to catch up with its previous earnings report, hit the link here.

Financial highlights

The following’s a quick take on BreadTalk’s latest financials:

  1. For the third-quarter of 2015, revenue rose by 4.7% year-on-year to $161.7 million. The majority of sales growth came from the Food Atrium and Restaurant segments.
  2. But, net profit fell by a hefty 60% year-on-year to just $1.6 million as a result of higher distribution and selling expenses as well as higher administrative expenses.
  3. Consequently, BreadTalk’s earnings per share (EPS) suffered a 59.7% year-on-year decrease from 1.39 cents in the third-quarter of 2014 to 0.56 cents.
  4. For the third-quarter of 2015, cash flow from operations was $22.5 million while capital expenditures clocked in at $7.9 million. This gave BreadTalk positive free cash flow of $14.6 million, a slight increase from the $14.0 million seen in the same period a year ago ($24.2 million in cash flow from operations and $10.1 million in capex).
  5. As of 30 September 2015, BreadTalk had $92.9 million in cash and equivalents and $210.6 million in debt, giving rise to a net debt position of $117.7 million. This is a slight improvement compared to end-September 2014 when BreadTalk had $121.2 million in net debt.

Overall, BreadTalk’s profit had lagged its top-line growth for the reporting quarter. The food and beverage firm also remained in a net debt position; this is something investors may want to continue to keep an eye on.

On the other hand, BreadTalk’s cash flow from operations had stayed robust in the reporting quarter and the firm managed to generate positive free cash flow. Notably, this is the second consecutive quarter in which the company had generated positive free cash flow.

Operational highlights

For the reporting quarter, the Bakery, Food Atrium, and Restaurant segments saw revenue growth of 0.9%, 6.1%, and 11.8% year-on-year, respectively.

It was a different story for the segments’ profits. In terms of EBITDA (earnings before interest, taxes, depreciation and amortization), the Restaurant segment recorded a steep 44.3% increase. The Bakery and Food Atrium segments however, both fell (by 36.4% and 6.8% respectively).

When it comes to food & beverage retail outfits, the total outlet count is an important number as changes in the figure can give investors important context to assess the firm’s growth opportunities. For BreadTalk, the total number of outlets was 932 at the end of September 2015, unchanged from the previous quarter.

BreadTalk’s management team had given the following insightful comments in the earnings release regarding the firm’s outlook for the near-term future and what it’d do to address the challenges it’s facing:

“Bakery Division is in the process of implementing new strategies to improve its profitability, including better manpower cost control, raw materials cost management, tightening of operating procedures as well as closing the underperformance gaps in certain area such as Hong Kong, Malaysia and Toast Box in Mainland China. A new BreadTalk concept store is expected to be launched in the fourth quarter.

Food Atrium Division continues to see operating challenges from the slowdown in Mainland China, translating to weaker footfalls in the shopping malls where our outlets operate. The opening of the four new outlets during the year is expected to exert pressure on profitability of the Division during this initial gestation period.

Restaurant Division remains focused on executing on its core strategies for Din Tai Fung to continue to drive revenue growth and margin expansion in both Singapore and Thailand. We expect the streamlining of underperforming Ramen Play outlets in Singapore and China to be completed by the end of the year, as well as the addition of one more Din Tai Fung outlet in Thailand.

Overall, the Group expects the operating environment in China to remain challenging in the near term on the back of the economic slowdown and the shift in consumption pattern from offline to online.

Against this backdrop, the Group will review its expansion strategy including refocus our business model with focus on instilling greater cost discipline on our operations as well as turning around underperforming areas amidst a more cautious outlook for the next 12 months. Barring any unforeseen circumstances, the Group expects to remain profitable for the rest of FY2015.”

Foolish summary

At its closing price yesterday of $1.20, BreadTalk traded at around 32.9 times its trailing earnings and had a dividend yield of around 1.3%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.