Pizza Express is struggling; it’s in the process of hiring financial advisers to help negotiate a deal with creditors. Mark Halstead, partner at Red Flag Alert, considers the future for the iconic casual dining brand:
“With debts of £1.2bn and insufficient profits to cover interest charges on the debt at Pizza Express is unsustainable and will require a restructuring of the debt.
While the restaurant chain has seen significant sales growth in the past four years (from £371m in 2015 to £543m in 2018) the profits have dwindled from £59m in 2015 to £38m in 2018. With interest payments included these declining profits became heavy losses - the 2018 deficit was £52m.
With the business funded almost entirely by debt, the modest profits and high interest will eventually drain the company of cash and most likely lead to Pizza Express defaulting on loans, and then what happens is the business is in the hands of its creditors.
The only question remaining is what will those creditors do and what will happen to Pizza Express? It makes little sense for debt holders to push the business to failure, leaving several possible outcomes.
One option is a debt-for-equity swap; in this case, the debt holders will become shareholders, freeing the business from a portion of its interest repayments.
A second option is the debt holders push for a sale of the business to recover some of the investment.
Neither option is appealing to debt holders as they are likely to see a loss on the initial investment, and they’ll pursue a path to regaining as much capital as possible.
Pizza Express is unlikely to fail in the near future; the brand is strong, sales are growing and the business operation is profitable. However, restructuring to relieve the debt burden may well mean losses for landlords, suppliers, local councils and possible redundancy for staff.
At Red Flag Alert we rate Pizza Express as one red flag, meaning suppliers to Pizza Express should seek assurances or guarantees before extending credit.”
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