‘Material uncertainty’ over the future of Pizza Hut Restaurants as it looks to refinance debt - updated

Heart with Smart, the operator of Pizza Hut Restaurants in the UK, has confirmed it is currently negotiating with its lenders to refinance £30.9m of loan notes and its lending covenants.

In its latest accounts filed to Companies House, the group, which is also a franchisee for east Asian chain Itsu, revealed that due to ‘unprecedented inflationary pressures’ attributed to the outbreak of the war in Ukraine, the directors of the company anticipated a potential breach of its covenants and have agreed a temporary revised covenant structure for 2023.

Company directors also considered a ‘severe but plausible’ downside scenario whereby guest demand declines sharply during the summer of 2023, reaching a low point in October, before recovering in summer 2024.

This scenario would require significant tightening of discretionary spending with liquidity reducing significantly, according to the group, and mean that a least two development projects would need to be deferred.

The company said it does not anticipate any breach, other than in this scenario. However, in its own report, PwC, the company’s auditor, warned there is ‘material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern’.

Heart with Smart added that it has an ‘excellent’ relationship with lenders, some of whom have equity in the group, and the directors anticipate any potential breach is likely to be waived in advance of occurring.

The directors also expect the refinancing of the loan notes will be agreed, but acknowledge that before that happens, there remains a risk that the group would not have the funds to repay its loans.

Pizza Hut Restaurants is the dine in arm of Pizza Hut in the UK and was acquired by Heart with Smart from London-based turnaround investor Rutland Partners in 2018​​ as part of a management buy-back deal.

At the time the group operated an estate of around 260 restaurants. However, in 2020, amid the Covid-19 pandemic, the group underwent a Company Voluntary Arrangement (CVA)​​ that led to the closure of many of its sites. 

According to its latest accounts, it now operates 152 Pizza Hut Restaurants, alongside four Itsu outlets.

In the year ended 4 December 2022, Heart with Smart reported a pre-tax loss of £3.6m, although revenue rose from £130m to £161m.

Update: ​Following the publishing of the accounts, Jens Hofma, chief executive of Heart with Smart, said: “Our turnover rose 25% in 2022 and we remain optimistic given the demand for restaurant experience remains strong, energy prices are easing and productivity initiatives and investments are gaining momentum.

“As of today, we are currently trading well ahead of 2022, with a 16.8% like-for-like growth in restaurant sales in the financial year to date and 12% across the whole business.

“Our operating result of minus £3m for 2022 is marginal when you consider the impact of Omicron in the early part of the year, followed by utility bill rises and other cost pressures – many operators are facing similar or worse issues with profitability during this period. 

“Our current trading results demonstrate we are in strong recovery with fantastic momentum this summer, achieving double-digit sales growth.”

Pizza Hut Restaurants is an entirely separate entity to Pizza Hut Delivery, which has more than 350 locations across the UK including some with dine-in facilities and is owned by Yum! Brands.