We believe there are elevated risks to the Revolution Bars (RBG) investment case following a profit warning. Do not buy the shares at 122.01p as a recovery trade until there is evidence problems facing the cocktails-to-food specialist can be fixed.

We fear that the company could have another profit warning in the near term given difficult market conditions.

Shares in Revolution Bars fell by 40% on 19 May when it said costs were higher than expected, two sites had to be closed for refurbishment and new sites (mostly the Revolución de Cuba brand) were taking longer than anticipated to hit full profitability.

The severe share price decline suggests the market has lost confidence in the business, and for good reason.

Higher wage costs shouldn’t have been a surprise to management. They will have known about these extra costs when reporting full year results on 28 February, so that is a feeble excuse.

The decision to temporarily close a site in Blackpool in March should also have been known at the time of the full year results.

Canaccord Genuity analyst Nigel Parson attributes 70% of the profit warning to poor budgeting rather than operational issues. ‘If this proves to be right, then we view the profit warning as an irritating blip that can be sorted quickly.’

While we think the analyst makes a valid point, the slow take-up of the new Revolución de Cuba sites is a major concern.

Five of this year’s six new site openings are the Revolución de Cuba format, plus half of next year’s planned openings.

‘Under our new forecasts, Revolution would need to fund capital expenditure ahead of organic cash flow instead of generating a surplus,’ says Parson, who has slashed his earnings per share forecast by 28% this year to 10.2p and by 34% to 11.4p for 2018.

‘In the short term, it can cope as the balance sheet is in good shape with £5m cash on the balance sheet and net debt of c£0.1m and a £10m facility to draw upon. But, if there is a deeper issue we believe it will need to slow the opening programme, or cut the dividend or both. Not so good.’

The casual dining market is in oversupply and rising inflation is putting pressure on consumer spending. Several restaurant businesses have issued profit warnings this year, saying trading conditions are tough.

In contrast, pubs operator Marston’s (MARS) on 18 May reported decent trading. Its chief executive Ralph Findlay told Shares that pubs tend to outperform restaurants and casual dining sites when customers are feeling under pressure.

He said Marston’s had recently seen strong demand for cocktails, so perhaps Revolution Bars is losing custom to pubs? (DC)

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