x Abu Dhabi, UAETuesday 23 January 2018

Rising costs take a bite from Herfy margins

What's Down: Herfy, Saudi Arabia's local restaurant chain, is expanding at a rapid rate but contracting margins are a concern, according to Al Rajhi Bank.

Herfy Food Services, Saudi Arabia's answer to McDonald's, may be growing fat on the kingdom's increasing appetite for burgers, but its shrinking margins are a worry for some analysts.

The company reported a third-quarter net profit of 34.5 million Saudi riyals, compared with 30.9m riyals in the same period last year.

Gross margin, however, declined to 30.2 per cent in the quarter, compared with 32.8 per cent last year.

"This can be attributed to increasing foodstuff prices, packaging costs and direct labour costs," said Khaled Al Ruwaigh, an analyst at Al Rajhi Capital in Riyadh. Herfy falls within the green category of the kingdom's Saudization programme that requires Saudi nationals to account for 23 to 30 per cent of its total workforce.

Mr Al Ruwaigh maintained a "neutral" rating on the stock but revised the target price from 91.70 riyals to 84.90 riyals adjusting for the company's 10 per cent capital increase in August.

Herfy's shares declined 0.3 per cent to 77.5 riyals on the Tadawul stock exchange yesterday.

According to Al Rajhi, Herfy's market share in the kingdom is second only to that of McDonald's.

The food franchise opened 11 additional restaurants this year, including six in the third quarter, reaching a total of 183.

Herfy's strategy is not just about the number of restaurants it is opening, but their location. In addition to growth in large cities such as Riyadh and Dammam, it also plans to extend its reach in rural areas, suburbs and smaller cities where no other restaurant chains are represented.

Herfy menus offer choices including chicken, beef and fish dishes. Chicken dominates the menu, as is typical within the Saudi fast-food market. The company introduced new meals this year, such as jumbo hotdogs and jalapeno chicken, which should support sales growth, Mr Al Ruwaigh said.

The launch of the Herfy's Cafe segment has been delayed. The first store to be opened in Riyadh, initially planned for September, has been postponed to this month. The second store will be opened this year in Qassim.