COFFEE REPUBLIC - about to boil in 2006?

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Long Term Chart

Fundamental Data

Sector   FOOD & DRUG RETAILERS   Mkt.Sector   AIM   Mkt.Segment   AIM   Turnover   5.85   Profit   -2.50   Norm EPS   -0.40   PE Ratio   -   Market cap   4.34   NMS   -

News

09/10/08 09:08 TFNF 08/10/08 09:03 UKREG 30/09/08 11:18 TFNF 24/09/08 17:12 UKREG 23/09/08 10:45 TFNF 22/09/08 09:23 TFNF

Okay, this is the story.
Remember, your mind is like a parachute, not much use unless it is open.

So have a read, think about it openly and then make your decision.

Coffee Republic (CFE) is a chain of grim, unpleasant coffee shops that lose money - who would invest in that? Not me. The thing is winning investments don’t look at the past, they look at the future.

CFE know that they can’t make money selling coffee. How can you? £2.50 a cup and someone sits in your store for an hour taking up space for that. CFE realised this and have decided to change tack, creating Coffee Republic Deli - a bright new store design that sells not just Coffee but hot snacks, freshly made. You can see the new look here:



The exciting bit is that these new deli’s are going to be franchised.

After opening half a dozen 'company owned' Deli’s the company has seen sales rise by around 30% on the new format. They get people in and out faster and spending more but the important thing will be the franchising. The Coffee Shops don’t work because they are company owned. Staff working long hours and paid low wages are hardly conducive to growth and profitability in a ‘peoples’ business. Once franchised out, CFE have someone in place that is running their own business and motivated. This means less work for CFE and the stores run themselves.

The money from the franchising is the exciting bit tho. Look at Dominos Pizza, one of the most successful food franchises ever, or Mac Donalds. There is a ton of very successful food franchises, it’s a very successful, proven, highly profitable model.

For every existing store CFE sell off to a franchisee (they have 46 of them and are selling off half) CFE pick up around £200K in a one off fee. On top of this they get royalties of around 10% on all sales from that store. Sales are estimated on average to be around £500K per store pa. CFE should pick up £50K on average per store. They are also letting franchisees open new stores at their own premises. This will cost the franchisee £17K rather than the £200K. You can apply for the franchise details here:



You fill in your details and they send you the franchise details.

They state:

Typical Deli Turnover = £500K

£17K to buy the franchise and 10% of the turnover including your promo fees:

CFE have 47 stores and are going to franchise off half of them. Think about it.

23 stores bringing in one off sales for the stores of £200K. This would be £4.6m, that’s the current market cap of the company! They would then be getting 23 x £50K royalties per annum per store that are nearly pure profit, no real costs, just a royalty. That’s £1.1m coming in from half the existing stores franchised out. They then retain the other half and convert to delis that they run for themselves, included in these will be the highly profitable ones like Heathrow and Bluewater.

They then grow the business by opening new site franchises that gain bring in £50K pa and a one off £17K. In two to three years they could have very high revenues and profits on this basis.

‘Oh yeah, well they have to franchise these out first’ I here you say. Well at the final results in September they hadn’t franchised any but said they aspired to open 6 this year. Today the company published the interims and said they had already opened 4 franchises in less than 3 months - a blistering pace and they are going to open their first new store in four years.

Read the results, the numbers were rubbish, just as expected, but they are all pre-franchise. H2 may see a huge improvement imo. The company sounds more upbeat than I can remember too. Cash flow and profits could soar if they keep pumping out franchises at this rate imo.

Take a look at Caffe Nero (CNE) both they and Costa Coffee (owned by Whitbread) are looking to franchising for future expansion.

Check out all the other food franchises too.

If CFE maintain the franchising pace there could be serious upside from here imo. Many a slip from cup to lip on a Risk v Reward ratio it looks very interesting to me and a multi bagger if it comes good imo.

See the CFE franchise offer here and compare with other franchises:









T-SHIRT DESIGNS:














I have the artwork for these in a format useable by a T-Shirt printer ig anyone want's it for the AGM.

I'm ot keen on spending my time emailing it to loads of CFE holders with it so perhaps if there are any that want it I can get it attached to the group email.


CR