Here’s why the Restaurant Group share price is exploding today

The Restaurant Group share price exploded this morning after a trading update. Zaven Boyrazian explores what the business has been up to.

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The Restaurant Group (LSE:RTN) share price is on fire this morning after management released a short-but-sweet trading update. The stock is up 16%, at the time of writing, pushing its 12-month performance to a 31% return.

Given that restaurants and pubs were decimated in 2020 by the pandemic, seeing this degree of recovery is definitely an encouraging sight. So what has the business done that has gotten investors excited? And should I be considering this company for my portfolio?

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Restaurant Group’s share price is making a comeback

I’ve explored this business before. But as a quick reminder, Restaurant Group is the company behind several leading restaurant chains across the UK. The list includes brands such as Wagamama, Frankie & Benny’s, and Chiquito, to name just a few.

This morning, it provided a short update on how things are going. And given the upward direction of the Restaurant Group share price, I think it’s fair to say investors are pleased. With lockdown restrictions mostly gone and its locations now back open for business, it seems management has capitalised on the pent-up consumer demand.

That means like-for-like sales versus the general market are notably higher. And with UK airports seeing more passenger traffic, the group’s Concessions division is also starting to recover.

Consequently, full-year EBITDA guidance has been upgraded. The new outlook estimates underlying earnings will come in between £73m and £79m. If that target’s hit, it represents a minimum increase of 37% versus last year. Meanwhile, increased trading has bolstered the firm’s cash flow, resulting in net debt forecasts to be around £190m. That’s down from £308.3m in 2020.

Rising profits and falling debts is obviously fantastic news for the business and its investors. So seeing the Restaurant Group share price on the rise this morning is hardly surprising to me.

Taking a step back

As encouraging as this trading update is, the company still has a long road to recovery ahead. The EBITDA guidance is heading in the right direction. But even if it comes in at the higher end of the range, that’s still firmly below the £136.7m reported in 2019.

With like-for-like restaurant sales on the rise, this may soon no longer be an issue. However, as it stands, there remains relatively limited information regarding the exact performance of each brand. It could be a long time before revenues and, in turn, profits recover to pre-pandemic levels. In other words, today’s boost to the Restaurant Group share price could be short-lived.

The bottom line

Overall, my opinion of this business has improved since the last time I looked at it. However, the lack of detail makes me a bit cautious as it’s hard to judge just how well things are actually going. Preliminary full-year earnings are scheduled to be released in March next year.

These results will undoubtedly give a much clearer picture of Restaurant Group’s business and share price potential. Therefore, I’m keeping this stock on my watchlist for now.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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