It is best known for its sprawling collection of fast food joints, which span donuts to cakes and bakeries, with pizza and coffee shops in between, but investors in Retail Food Group (RFG) headed for the exits on Monday due to concerns about upcoming accounting changes.
![Retail Food Group recently forked out $164 million to buy up Gloria Jean's coffee.](http://web.archive.org./web/20170611081417im_/https://www.fairfaxstatic.com.au/content/dam/images/1/m/9/q/s/y/image.related.articleLeadwide.620x349.gwkjot.png/1496644159578.jpg)
RFG's shares were dumped, closing down a heavy 11 per cent at $4.63, ending near the day's low of $4.59, with sellers on edge thanks to an analyst note that warned of a balance sheet hit due to planned changes to accounting standards.
It operates a string of well-known food outlets, such as Michel's Patisserie, Brumby's Bakery, Donut King and Crust Pizza.
Under revised accounting standards, operating leases will be consolidated onto balance sheets and it is likely that RFG will have to update the market on the prospective impact when it releases its next set of results later in the year.
The selling pressure spilled over to a host of other retailers, with shares in companies such as Metcash, Sigma Healthcare and Australian Pharmaceutical all lower on the day. Sigma operates outlets such as Amcal and Australian Pharmaceutical, the Priceline chain. Metcash shed 6 per cent to close at $2.03 with Sigma falling 4 per cent to 85.5c as API slipped 2 per cent to $1.81.
Under new accounting standards, from the beginning of 2019 all companies must clarify their financial exposure to operating leases, with accounting groups warning retailers and software companies in particular could be most exposed to the changes.
UBS analysts told clients that Retail Food Group has only a modest $15 million or so of operating leases on its balance sheet at present, which it believed to be "net of sub-leases to franchisees".
"When reviewing against the accounting standards, we believe that it is likely that the full lease obligation – including where [RFG] has the head lease agreement for an outlet with a shopping centre and has sub-let to a franchisee – will be consolidated onto the balance sheet," UBS told clients.
As a result, UBS has maintained its "sell" call on the company's shares and applied a $105 million discount when setting the share price target, which it now puts at $4.70 "to better reflect the risk of upcoming accounting standard changes".
"[RFG] does not disclose the number of outlets that are under a sub-let arrangement. If we assume a range of 250-750 outlets paying circa $48k in rent p.a. (out of total domestic outlets of circa 1800) are consolidated on-balance sheet in addition to other operating leases, we estimate that around $105 million in lease debt would be added to net debt," the analysts wrote in the note.
Despite the caution, the UBS analysts cautioned their analysis was only an estimate, since they were uncertain whether all head lease agreements would be consolidated, and about the final number of outlets and size of the lease commitments.
"We would therefore apply some caution to our estimate of $60-151 million present value (average: $105 million) in additional lease debt for fiscal year 19 estimate."
The company has been contacted for comment.
According to data from the corporate watchdog, the Australian Securities and Investments Commission, at the end of May, the outstanding short position in Retail Food Group totalled 10 per cent of the shares on issue.