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Is Tasty plc a falling knife to catch after dropping 30% today?

Shares in casual-dining company Tasty (LSE: TAST) have plunged, after the company issued a relatively downbeat set of results for the 53 week period ended 1 January 2017.

During  the period, the group continued to expand, increasing revenue by 28% year-on-year to just under £46m. This growth came off the back of the opening of 13 Wildwood restaurants during the year. Headline operating profit increased to £4.8m. However, the group reported a pre-tax loss for the period of £88,000 after taking exceptional costs of £3.6m. For the last comparable period, the company reported a pre-tax profit of £3.1m.

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The £3.6m impairment charge is a result of management’s decision to reconfigure some of its restaurants in order to bring performance in line with the rest of the estate. Management is also trying to improve staff productivity and reduce staff turnover by conducting training programs, as well as rebranding in certain areas. All of these changes, which should have a positive long term impact on group performance, are holding back short term trading.

Unexpected costs 

As Tasty continues its expansion plan, it goes without saying that the company is going to have to book some exceptional growth charges. However, City analysts hadn’t expected these charges to be so significant and were instead expecting charges to be more spread out.

Indeed, analysts had pencilled in earnings per share growth of 34% for the year ending 31 December 2016, on a pre-tax profit of £4.7m. Further growth was expected for 2017 and 2018, with pre-tax profit estimates of £6m and £7.6m pencilled in. From 4.6p for 2015, earnings per share had been expected to hit 10.1p by 2018. Now that Tasty has stumbled, it looks as if these profit forecasts may be revised significantly lower. 

Unfortunately, the market had awarded Tasty a high growth multiple of 18.5 times forward earnings based on lofty city estimates for growth. Now that it appears that the company will struggle to meet these targets, investors have reacted by dumping shares in Tasty.

Multiple headwinds 

Tasty’s outlook may not improve any time soon. Headwinds for UK retail companies are building, with higher minimum wages, inflation and other rising employment costs all increasing the burden on employers. Meanwhile, higher prices from inflation and a more price conscious consumer are two factors hitting the supply-side. Put simply, doesn’t look as if Tasty’s outlook is going to improve significantly any time soon and this is bad news for the share price.

With headwinds against the business building and Tasty struggling to hit City forecasts for growth, it looks as if this is one falling knife investors should avoid. The shares may have further to fall before they fully reflect the company’s new depressed outlook and it will take some time for the company to prove to the rest of the market that can return to its previous growth trajectory.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Tasty. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.