Shares in Gloria Jean’s owner Retail Food Group have plunged to an eight year low after the company warned its half year profit is set to fall by more than a third.
A 25 per cent fall in the company’s share price on Tuesday to $1.98, its lowest level since August 2009, caps a 55 per cent fall since December 9, when Fairfax Media first published reports accusing the company of mistreating franchisees.
More than $440 million has been wiped from Retail Food Group’s market value in under a fortnight.
The company said on Tuesday that its Crust Pizza and Donut King brands have continued to perform in line with forecasts, but Michel’s Patisserie, Brumby’s and Gloria Jean’s are trading below expectations.
Domestic franchise revenue is now expected to be lower than what the group previously anticipated, and it will book one-off costs of $7 million, including expenses linked to a business-wide review, in its accounts for the six months to December.
As a result, Retail Food Group expects a net profit of around $22 million for the half year, down 34 per cent on $33.5 million in the same period a year ago.
Charles Schwab market analyst Ben Le Brun said this was a significant earnings downgrade.
“It’s a deep cut that will fester for some time and their shares were already coming off a low base,” he said.
Retail Food Group said recent negative reports about its treatment of franchisees, along with a tough retail environment, are partly to blame for the fall in sales.
Fairfax Media has run a series of reports containing claims from former and current franchisees claiming the group had charged store owners exorbitant fees and food costs in order to grow its own profit.
Its business model allegedly forced some franchisees to underpay staff to make ends meet, while others had been driven to breaking point, according to the reports.
Retail Food Group has denied all allegations.
On Tuesday, the company said the retail environment had been tough, particularly for retailers in shopping centres.
“Recent negative media coverage about franchising, retail and RFG, in particular, has also contributed to a noticeable decline in momentum in new and renewing franchise sales,” the group said in a statement.
“Associated revenues are now forecast to be below prior expectations and future franchise trading revenues are also likely to be impacted.”
The company said it was difficult to predict full-year outcomes given the heightened risk to franchise earnings.
Managing director Andre Nell said the group would look to accelerate any cost-saving initiatives arising from its business-wide review that began in June.
“The retail market is expected to remain challenging for the near future and we remain focused on responding to this challenge through delivering franchisee support initiatives and reducing corporate costs,” he said.
Retail Food Group also is continuing negotiations with its lenders to roll over its three-year loan facilities of $150 million, which mature in December 2018.