The UK franchise owner of American casual dining brand TGI Fridays, Hostmore (HOST), was spun out from private equity trust Electra (ELTA) on 2 November but its shares have been a flop so far. They’ve fallen by 27% to 108p, possibly caused by Electra shareholders dumping the shares they received as part of the demerger.

There is a lot to like about the company’s growth plans, but equally there are some key risks to consider which means there is no rush to buy. We want to see evidence that the new management team can successfully execute on their plans before seriously considering Hostmore as an investment.

NEW-LOOK BUSINESS

TGI Fridays has been operating in the UK since 1986 when Whitbread (WTB) acted as the master franchisee and rolled out 45 restaurants over two decades before selling the business in 2007.

Electra purchased the company in 2014 and increased its footprint from 66 to 87 sites. Earlier this year the UK restaurant chain rebranded as Fridays, in keeping with franchisees in other geographies.

Hostmore has a franchise agreement with US brand owner TGI Fridays which is owned by TriArtisan partners. It pays a fixed royalty payment of 4% on all revenues.

All the Fridays-branded sites are managed by Hostmore, so this isn’t like Domino’s Pizza (DOM) which manages a portfolio of franchisees who run individual stores.

In May this year Hostmore launched its second brand, 63rd & 1st, a city based cocktail bar and restaurant. It offers a customer experience reminiscent of the original TGI Fridays restaurant which was opened in 1965 on the corner of 63rd Street and 1st Avenue in New York.

The brand has been tested in Cobham, Surrey and a site has just opened in Glasgow. The company will target university towns and affluent locations. ‘This brand has been developed in response to growing consumer demand for all-day venues and members clubs and boutique hotel style environments where customers can work, rest and socialise,’ says Hostmore.

EXPERIENCED TEAM

A new management team headed by Robert Cook was brought in to revitalise the Fridays brand just before the pandemic. The business has been shaken-up and re-energised from top to bottom. The quality of the food and drinks been upgraded while a new joined-up digital strategy has been implemented.

Cook used to be the CEO of hotel chains Malmaison and Hotel Du Vin and was managing director of Virgin Active. He told told Shares the average spend per head for Fridays since reopening has increased by around 15% to £20, demonstrating that customers are happy to pay more for a higher quality product and service.

The intention is to grow Fridays to a net 100 stores in the next three to five years and have at least 10 63rd & 1st bars signed up by the end of 2023. Hostmore sees scope for more than 20 sites for 63rd & 1st by 2024. In addition, management will look to incubate ‘fledgling brands’ and help them grow.

According to Globaldata the UK market is forecast to grow at a compound annual growth rate of 7.7% a year over the next three years.

WEEKLY REVENUE

The average size of a Fridays restaurant is around 6,800 square feet, operated by 37 staff. The estate has capacity of 12.4 million covers a year (a term used in the restaurant industry to describe a customer eating a meal).

Average weekly turnover per site in 2019 was £47,500 which is almost double the industry average of £25,000 and comparable to leading firms such as Wagamama (£51,800), which is part of the Restaurant Group (RTN).

Higher than average weekly revenues reflect the size of the sites and a higher than average spend per head which supports the ethos of the brand with customers visiting primarily for celebrations and special events rather than everyday dining.

The restaurants are predominately located in high footfall locations such as retail parks and shopping centres. Only 15% of sites are in city centres.

The Fridays brand has a net promotor score of 25% which is comparable to Nandos and above Pizza Express (11%) and Frankie & Benny’s (10%), albeit still room for a lot more improvement. A score between 0 and 30 is considered ‘good’, 30 to 70 is ‘great’ and 70 to 100 ‘excellent’.

INVESTMENT OVERVIEW

Based on Numis’ 2022 earnings estimates and Shares’ analysis of the marketplace, Hostmore trades at an approximate 40% discount to its peers.

The strategy to revitalise Fridays looks interesting, but a lot of work will have to go into changing public perception of the brand. Ask the average person and they’ll probably say (TGI) Fridays is a name of the past, not somewhere you’d aspire to visit today. In general, reviews of its restaurants on Trustpilot are not complimentary.

The hospitality sector received a big boost this summer as people were eager to get out of the house again, so positive recent trading for Hostmore isn’t a surprise. However, we would rather see how trading has been over Christmas and next Easter to get a sense of more normalised trading conditions. It’s a wait and see situation from an investment perspective.

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