The £13bn UK restaurant meals market (excluding drinks) is growing by around 5% a year. According to the Office of National Statistics, we now spend more money on eating out than we do on our grocery shopping, with affluent yet time-poor diners choosing to avoid the hassles of shopping, cooking and washing-up. But if growth slows, disposable incomes shrink and families become more frugal, then I can see eating out becoming more of a treat than an everyday occurrence. If I’m right, then upmarket restaurant chains and delis, such as this stock, could suffer chronic indigestion in an already crowded market.
Turkey of the week: Carluccio’s (CARL), rated a BUY by Altium Securities
Carluccio’s was set up by celebrity chef Antonio Carluccio and his wife Priscilla in 1991. It now operates from 32 locations, selling fine Italian food and coffee. Last week the group reported that sales (split 78% restaurant and 22% deli) rose by an impressive 18% to £54m for the year to September, with profits set to beat City hopes. Its all-day operation from 8am until 11pm covers breakfast, lunch and dinner. On the one hand this means that assets are sweated, but on the other it also makes it very hard to improve like-for-like performance from already stretched levels. A typical store generates £1.9m per annum from 90 seats, turning-over five times a day, with customers paying an average £12 a head.
Impressive statistics. But as cash-strapped consumers start to cut back, where does this leave Carluccio’s? On the chopping board, that’s where, as consumers replace frothy cappuccinos and imported food with more affordable options. And due to its high operational gearing (where rents, utilities and salaries are largely fixed), if the top-line softens, then profits will quickly evaporate from these currently rich levels. To illustrate the point, if turnover slipped by, say, 5%, then I reckon earnings would fall by about 30%. Such leverage is great news in a buoyant market but a major headache if sentiment changes. Yes, the strength of the Carluccio’s brand should provide some defence in a slowdown; but if Antonio, now 70, were ever to leave the business, then it might lose some of its kudos.
Floated at 94.5p in December 2005, analysts predict the group will deliver underlying earnings per share of 6p and 7.4p for this year and next – putting the shares on racy p/e multiples of 31 and 25.7 respectively. To me, the stock looks far too over-cooked for my value-orientated palette, and hence vulnerable. Yes there is always a chance the chain could be taken over – with Richard Caring, owner of The Ivy and Annabel’s, holding a 9% stake – but at these stuffed levels, any buyer would need a bowl-full of synergies to get the numbers to work. Don’t get me wrong – I like Carluccio’s food, but as a price-conscious investor I’d prefer to tuck into the cuisine, rather than snap up the equity. And I’m not alone. Since January, a non-executive director has off-loaded 1.6 million shares at prices ranging from 180p to 230p.
Recommendation: SELL at 194p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments