Taste Holdings (TAS) is an interesting combination of Jewellery and Watch retailer and fast food business. One third of sales are generated in the jewellery division, with the likes of NWJ, Arthur Kaplan and World’s Finest Watches, all stores that we come across in Gauteng’s shopping malls. Two thirds of Sales are from fast food franchises such as Maxi’s, Zebro’s Chicken and the Fish & Chip Company. Importantly, these also include Domino’s pizza in South Africa, which TAS are cleverly rolling out through the conversion of their Scooter’s and St Elmo’s stores and … of course … Starbucks.
Whilst the jewellery business delivers higher profit margins then food division, it is difficult to scale this business. The demographic that can purchase expensive jewellery will remain small in Southern Africa. The turnaround and medium term future of the business lies in the food segment. I am convinced that eating out is a growing trend globally and that Taste too, should benefit from it.
Management, who own a healthy 17% of the company, have a vision to grow both Domino’s and Starbucks into Southern Africa. Their challenge in the next two years will be to get both these strong international brands to scale, to ensure that the food business returns to profitability. It is with this overarching objective in mind that we should query their recent announcement:
TAS is buying 80% of 15 Domino’s stores for R6m from its CEO, at an effective price tag of R500,000/store. The reason given is that the deal is to remove a conflict of interest, whereby a director represents both the interests of a franchisee and the franchisor. At first glance this appears to be a logical explanation, particularly if the acquisition cost per stored is compared to the set-up cost of R2.3m/store posted in the Taste annual report.
However, with some closer inspection we discover that the NAV of the purchased stores is a negative R10m and that they produced an annual loss of R8m in the previous year. These stores must be extremely heavily geared and are clearly not running well. This acquisition should lead to a loss in the first year of R24m (R6m purchase price + R10m negative knock on the balance sheet + R8m loss), followed by subsequent losses of R8m per year. Or a loss of R0.08 per share or 4% of market cap. This is more than the 2015 profit made by the entire company.
It appears that we have a business buying worthless, loss making assets from its own CEO at a time when they should be knuckling down and delivering on their ambitious expansion programme. As a shareholder, I would certainly like an explanation.