Fast-expanding chains have a decent record of making investors money. Could Clapham House or Carluccio's fatten your portfolio?
No one eats pizza at the Gourmet Burger Kitchen, the jewel in Clapham House's (LSE: CPH) three-brand restaurant business. And while Carluccio's (LSE: CARL) does serve the cheese, tomato and dough combo, it isn't the main draw there, either. Yet memories of Pizza Express might prompt investors to tuck into both.
Pizza Express floated in 1993, with shares initially trading at 82p. They peaked at 977p in 1999 after an opening program that took Pizza Express to every semi-sophisticated corner of the UK -- and generated an elevenfold return for early holders who sold at the top.
The very best roll-outs do even better – think McDonalds or Starbucks. A modest initial investment in either chain could have made you very rich.
Share fight!
Both Clapham House and Carluccio's boast formats that have been successfully transplanted across the country, but aren't yet ubiquitous.
Clapham House was founded in 2003 to turn niche restaurants into bigger chains. It owns The Real Greek, Gourmet Burger Kitchen (GBK) and Tootsies, with a fourth brand, The Bombay Bicycle Club, sold on last year.
Much of the early buzz around Clapham House concerned co-founders Chairman David Page and CEO Paul Campbell, due to their previous form in expanding an established restaurant chain.
The restaurant? Yep – Pizza Express.
At Clapham House, it's GBK that excites them and me most. Familiar fare for Londoners, GBK regularly wins awards for its classy beef in a bun. Purchased as a six-site operation, Clapham House has expanded GBK to 49 locations, with a stated target of at least 150 restaurants nationwide. There are also ten GBKs overseas, run under franchise.
Clapham House also owns eight Real Greeks and 23 Tootsies restaurants. They are pleasant enough but aren't going anywhere fast. I'd prefer management sold them and concentrated on GBK.
Carluccio's is more focussed already. Founded in 1991 by chef Antonio Carluccio as an Italian grocer, it morphed into an innovative shop, café and restaurant hybrid that ticks over from breakfast until late at night. Antonio Carluccio is retained as a consultant. It won 'Best Chain Restaurant' in the latest London Restaurant Awards.
The Carluccio's format is very appealing to what might be characterised as the 'yummy mummy' demographic. It has been successfully replicated in 37 locations, with two more on the way, and again there are tentative steps overseas via franchises.
Clapham House and the downturn
In the past 18 months, restaurants faced a double-whammy of soaring costs and recession, but both Clapham House and Carluccio's are pushing through.
Clapham House reported trading in-line with expectations in March. GBK was singled out for particular praise, generating a strong return on capital at both new and existing locations.
At 79.5p per share, Clapham House is valued at £29.3 million. Earnings per share will decline due to the disposal of the Bombay Bicycle Club, but sales at the ongoing business were growing as of December's interims. The consensus expectation is for £3.1 million profits, or 5.7p per share, rising to 6.2p in 2010. There's no dividend.
Earnings per share of 5.7p puts Clapham House on a forward P/E of 14 -- cheap if it really can triple its GBK footprint.
The biggest downside is debt. Last year Clapham House extended its banking facilities until June 2012 -- a positive development given the credit crunch and Clapham's net debt of £12 million as of December. Rumours of a sale of Tootsies to pay down the debt have so far come to nothing.
What about Carluccio's?
Carluccio's is coping fairly well with the recession. Earlier this month it reported half-yearly results to March that showed turnover up over 10% to £34.5 million compared to last year, but profits down slightly from £2.8 million to £2.5 million.
As well as the slowdown, management blamed the weak pound, which increased the price of Italian imports by 20%. Carluccio's remains strongly cash generative though, and four of five new stores planned this year are already trading.
Best of all, Carluccio's has net cash of £2.75 million, although that's down from £3.6 million at the year end.
At a share price of 82.5p, Carluccio's is valued at £47.4 million. Forecast earnings per share of 5.25p are down from 6.2p, but analysts expect a slight revival in 2010 to 5.3p, for what it's worth. The forecast P/E is 15.7, with a yield of 2.8%.
Carluccio's looked tasty enough to attract a predator a few weeks ago, pushing the shares towards £1. But the talks were called off earlier this week, and they've since fallen sharply.
Food for thought
Carluccio's management describe conditions as "challenging", and Clapham House's bosses put the sector on notice 18 months ago. Since then the share prices – and P/E multiples – of both companies have plunged.
The de-rating looks fair enough in the short-term, with profit under pressure at Carluccio's and uncertainty and debt at Clapham House.
However both companies are opening more restaurants. Costs are easing, and Clapham House says landlords are getting more realistic, which should help it secure new sites. Both companies have discounted to support sales, but they're also benefiting from customers trading down from grander venues. With more of us holidaying at home and the weak pound attracting tourists, their strong London presence should help profits, too.
While Carluccio's bid interest evaporated, it suggests trade buyers see value at these levels. What's more, just under 25% of Clapham House is owned by Capricorn Ventures, which owns Nando's, and a bid has long been expected. Directors at both Carluccio's and Clapham House have significant shareholdings, which should ensure a good price from any sale.
Pizza Express grew through the downturn of the mid-1990s. I think with Carluccio's and GBK in the sweet spot between proven start-up and saturation, one or both could do something similar -- a potential that's not reflected in their current prices.
More from Owain Bennallack:
> Owain owns shares in Clapham House Group.
