Rights issue for Starbucks rollout

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Taste confirmed yesterday plans for a rights issue to raise R226m to mainly fund the expansion of the recently acquired Starbucks coffee chain licence for SA as well as underpin growth initiatives at its jewellery franchising hub.

In April this year it raised R95m in a shares-for-cash issue, roughly six months after raising R180m in a rights issue to underpin the rollout of the Dominos pizza brand and fund new acquisitions.

That means that since August last year Taste will have raised more than R500m in new capital - which is significant for a company with a market capitalisation of only R1.1bn.

Vunani Securities small- to mid-cap analyst Anthony Clark was surprised at the latest capital raising proposals, arguing that it was critical for the company to start showing meaningful returns from its new investments. "I like the brands the company owns, but without meaningful returns Taste is trading on promise ... it's nothing more than foam in a coffee cup." Taste CEO Carlos Gonzaga said about 70% of the company's shareholders had already indicated support for the rights issue.

New shares will be issued at 300c per share - an attractive discount to Taste's shares, which closed at 368c on the JSE yesterday.

The Starbucks rollout looks set to unfold at a markedly slower pace than Taste's rapid rollout of the Dominos pizza chain. Gonzaga said 12 to 15 Starbucks outlets were planned within the first 24 months of the first store opening (scheduled for the first half of next year).

He said that this financial year Taste would incur once-off start-up costs of about R29m ahead of the opening of the first outlet.

The capital expenditure and pre-opening expenses for the first 12 to 15 stores was estimated at R108m.

Taste has estimated a market for between 150 to 200 Starbucks outlets - which would entail an estimated capital expenditure per store of R3m to R10m.

Gonzaga said the initial measured rollout should see the Starbucks business unit achieving break-even on earnings before interest, tax, depreciation and amortisation during the second year after the first store opening.

He saw future growth of 20 stores a year funded through internally generated funds and debt.

Taste has set a ten-year target of 30% for internal rate of return at store level.

Gonzaga said the initial rollout of Dominos - which includes the conversion of existing Scooters and St Elmos outlets - had provided valuable lessons for the Starbucks rollout.

"With Dominos we did underestimate how long it would take to get efficiencies flowing through. There was always going to be execution risk in the rapid rollout of Dominos ... but we would have backed ourselves to do a better job."

Taste's half-year results showed a R30m loss as the costs of rolling out Dominos stores - now at more than 50 - eroded profits.

Gonzaga said the Dominos and Starbucks growth opportunities were significant.

"It is not often in a company's journey such long-run chances occur simultaneously - or even at all - and they will require capital in the next two years even if the short term effect is negative."

He said that Domino store conversions had, in some instances, seen sales growth of up to 60%.