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Pizza Express Q1’24 Credit Summary

A weak overall showing in Q1’24 for Pizza Express, revenues of £107m were down 2% LfL. Working capital outflows also hampered cashflow. Pizza Express burned though £25m in cash in Q1, though it is expected to turnaround c£10m of working capital in Q2. Weak consumer dining out market in Q1, with some data suggesting consumer burn out, and cost of living a stumbling block. Pizza Express has however, outperformed the “Italian food market” in the last 20 weeks. But it is telling that the Italian food sector has underperformed the wider casual dining market. Italian food is not the only choice out there.

• EBITDA was £9.4m similar to prior year with a marginal improvement in EBITDA margin at 8.9%.
• Net cash outflow was £25m in Q1’24. This was the result of change in normal working capital reversal and semi-annual interest payment.
• Liquidity remains sufficient with £52m in cash and RCF un-drawn £26m available.
• Net leverage (Pre-Ifrs 16) is 5.4x, which increased a bit compared to 5x at year-end with the cash reduction.
• Run rate leverage is more towards 5x for 2024.
• Regarding its UK main division, its market share had a slight decline of -0.2% to 7.4% in the quarter, while the casual dining market declined by 1%.
• Pizza Express completed 19 refurbishments in Q1’24, on the back of 70 completed in 2023, and on track for 70 more in 2024.
• The group reported its 2023 annual results with an EBITDA of £52m, affected by one-off strategic investments and problems with the Tesco Clubcard promotion. Despite significant investments in restaurant refurbishments (£12m), the group was slightly cashflow positive for the year. Operating cashflow was £32m after £24m in CAPEX, with additional costs of £8m in exceptional items and £21m in interest payments. There was no information provided on the outlook for the rest of the year or on the replacement of Jo Bennet, the Chief Business Officer, who left earlier this year.

• Pizza Express need c£100m in CFO to generate net positive cashflow in 2024.

Management in the investor call, stated that their costs are under control, energy is hedged and has significantly come down over the past year. Labor costs are driven by statutory regs, and food casts are relatively stable now, with some raw foods costing more than others, but they are seeing some deflation.

Operating Performance

UK Restaurant Segment

Q1 is generally the weakest trading month in the restaurant market in the UK. Q1’24 for Pizza Express was a mixed result. They outperformed the Italian restaurant segment, but underperformed the wider restaurant segment. Sales were down 3.5% YoY, and down 2% LfL YoY. EBITDA in Q1 was £9.4m pre-Ifrs (Q1’23: £9.6m), which is fairly weak, considering the cost savings planned in the past 12 months, due to weakening inflationary pressures across energy, labour and raw food costs. Dine in saw LFL sales decline 2.3%, whilst average spend was up 4.8%. Delivery was up 1.2% LfL. It is clearly a tight and saturated market. Market share was lost in the period, by 0.2%, but includes all dine-in markets.

Partnership Expectations & Progress

One of the stumbling blocks was Pizza Express’s partnership with Tesco and their loyalty card. Tesco streamlined their Pizza Express offering and induced clubcard holders to spend their money in Tesco, rather than in Pizza Express. Management did not disclose the cost of the program, neither the lost revenue or effect on EBITDA. Pizza Express have now however started a new partnership with Bluelight, the police force, ambulance service and armed forces. Revenue gains unlikely to kick in until Q3/Q4’24.

OPEX

A significant increase in opex of £16m over the past 2 years, on top of the compressed gross margin, led to a decline in EBIT to £28m. The demand for Pizza Express is not the issue they face, it is there strength of their supplier contracts that is the cause for concern. They will have to enhance their international offering to see positive EBITDA in 2024/5 but will have to spend heavily on CAPEX to achieve that goal. They have cash to achieve that, but there cashflow is not strong enough to satisfy investors that the return on investment is worth it, as the current EBITDA margin is low for the international business at c5%.

Q1’24 LTM adj EBITDA margins falling 120Bps YoY  to 17.2%. But increased OPEX costs of £16m reflecting inflation in their central costs, Advertising & Promotion costs and labour. All driving down EBITDA margin in 2023, should see some reversal in 2024. The EBITDA figures used are post IFRS.

Cashflow, liquidity and capex

Cashflow remains fairly subdued, including lease payments of £25m LTM, with a dilution in the cash position of £10.7m since FYE’23 to £50m. A key cause for concern for the company. However, expect a reversal of c£10m in Q2’24, due to the normalisation of their working capital.

With £76m in CFO for FY’23, this is a c£7m decline on FYE’23 and £9m lower than FY’22. As mentioned prior, the weaker margins contributing to the overall weaker CFO. Capex of £25m as people have returned to restaurants. This includes c70 refurbs in 2023, out of the 356 total restaurants. And another 70 planned refurbishments in 2024.

They have to see c£100 in CFO to have any positive cashflow, and delever the business in 2024.

Liquidity total of £76m includes £26m RCF and £50m in cash.

leverage, interest and asset coverage

As a result of the adjusted LTM EBITDA Q1’24 £77m, Leverage is now 5.79x (IFRS 16)…Held back by the weaker cashflow as mentioned above, with a relatively modest cash position of £50m. Leverage Pre IFRS is 5.38x, still an increase on FY’22 from 4.24x.

Adjusted EBITDA / Interest coverage  has declined to 2.10x, and 2.06x FFO.  Symptomatic of the cashflow issues mentioned.

Bond Yield

For other research please read Canary Wharf – https://www.europeanhighyield.online/canary-wharf-credit-review-fy-2023/