QUALIPORT
Checking Out The Restaurant Rivals

By Maynard Paton (TMFMayn)
March 22, 2001

Carburton Street, London -- For long-term investors, it's always worthwhile to monitor the competitors of your chosen companies. By looking at rival businesses, it gives you a better understanding of the relevant industry and can widen your circle of competence. Reviewing similar companies can also highlight investment opportunities and, perhaps, investment weaknesses within your portfolio too.

Restaurant company PizzaExpress (LSE: PIZ) is a major holding within the Qualiport. To build on my own personal understanding of the restaurant sector, I've previously reviewed two smaller sector operators: ASK Central (LSE: AKC) and Fish (LSE: FIH). Both companies possess the key feature for any expanding restaurant chain: a menu that is simple, focused and relatively cheap.

ASK reported its annual results today, while Fish gave its twelve month story yesterday. Time again to review how the fellow restaurateurs are doing.

ASK Central

AIM-listed ASK operates 107 pizza restaurants throughout the UK, and today's results reported an impressive performance. Sales surged 49% to £61.1m and pre-tax profits soared 51% to £10.4m. But a closer inspection of the numbers reveals a slowdown in growth.

(to 31st December)      1996    1997    1998    1999    2000
 

Turnover (£k)          6,373  12,832  23,707  41,161  61,138
Operating Profit (£k)    684   1,849   3,852   7,052  10,559

Operating Margin (%)    10.7    14.4    16.2    17.1    17.3

Average number of       13.5    23.3    37.5    60.8    92.3
   restaurants 

Sales per average
 restaurant (£k)         472     552     632     678     663 

ASK has the irritating habit of refusing to publish like-for-like sales growth figures. However, through the sales per restaurant calculation, a crude estimate can be made. Even with the caveat of new "immature" restaurants affecting the calculations, the levelling of this performance is concerning. A minor improvement in operating margins doesn't provide much encouragement either, given the economy of scale improvements from previous years.

What's more, the reputation and the recent actions of the ASK directors also gives the impression that all may may not be well.  In this post, TheLazyFool highlights the operational strategy of ASK director Philip Kaye. In short, he has a history of floating different restaurant chains only to then sell out when the going gets good. At ASK, he has run the company alongside his sons, Adam and Simon.

All three Kaye directors have been conspicuous sellers of their company's stock. During 1999, the Kaye trio raised nearly £13m through various share disposals, while last September, they raised another £6m. Intriguingly, Philip Kaye retired from the ASK Central boardroom at the end of 2000.

The combination of the results and the director activity gives me a distinct feeling of PizzaExpress in 1997. The directors of the Qualiport firm were big sellers when they too passed the 100th restaurant mark, disposals which now look quite canny four years on. Does going beyond the 100th outlet disproportionately increase the risk of operational problems and general growing pains? Overall, I don't visualise ASK replicating PizzaExpress' record from here on in. In fact, I sense some sort of hiccup in the future.

Fish

Yesterday's results from AIM-listed Fish (nee BGR) were distorted by the disposal of a software operation and a handful of peripheral restaurants. Stripping out the outgoing businesses, the core Fish restaurant operation saw sales increase by 140% to £4m and profits rise 120% to £1.1m. The substantial improvements were due to an extra four Fish outlets, bringing the company's total up to six. Similarly to ASK, a like-for-like sales growth figure was not reported.

There were three positives from results:

* The corporate disposals have left the management focused on the core dining chain;
* Another 22 restaurants are expected to be opened by October 2002, and; 
* The former property director of PizzaExpress is now working for Fish and securing the suitable sites.

However, quite incredibly, Fish's results stated: "Two out-of-London sites [are now] operating, proving the concept for national roll out".

Well, far be it from me to say, but just having two provincial restaurants up and running just doesn't prove anything! Although the dining concept looks sound, there's a long way to go before investors should take the plunge. There's plenty of operational and management hurdles to jump before Fish get anywhere near the proven roll out stage.

While the early signs look promising, Fish is presently one to watch from the sidelines. PizzaExpress currently have around 260 restaurants in the UK. Fish would still have significant long-term potential even after 20 or 30 outlets had been opened.

Summary

While both ASK and Fish have the potential to be "the next PizzaExpress", it's unlikely either will make it into the Qualiport. Although ASK's financial record is good, I smell investment danger lurking. I'm not entirely convinced by the latest figures and of the management's long-term motivation. With Fish, it's far too early to make any judgement. Nevertheless, it's still worth monitoring this dining upstart. Needless to say, I'm very happy to remain with PizzaExpress.

More on Drawing your circle of competence, ASK Central and Fish