BRISBANE - [AAP] Shares in Gloria Jean's owner The Retail Food Group (ASX: RFG) have continued their slide after the company warned that half-year profits would likely be down by more than a third on last year's.

RFG says recent negative media reports about its treatment of franchisees are partly to blame for the fall in sales, along with a tough retail environment.

It says its major brands Crust Pizza and Donut King have continued to perform to forecasts but Michel's Patisserie, Brumby's and Gloria Jean's are trading below expectations, and domestic franchise revenue continues to track lower than anticipated.

One-off costs of $7 million, including expenses linked to a business-wide review, will add to the pain, the group says.

As a result, RFG expects net profit to be around $22 million for the first half, down 34 per cent on the $33.5 million profit made over the same period a year ago.

RFG shares on Tuesday morning were their lowest since September 2011 having fallen 40 cents, or 15.1 per cent, to $2.25 by 1139 AEDT.

Fairfax Media over the past 10 days has run a series of reports with former and current RFG franchisees claiming RFG had charged store owners exorbitant fees and food costs in order to grow its own profits.

Its business model allegedly had forced some franchisees to underpay staff to make ends meet, while others had been driven to breaking point, according to reports.

RFG has denied all allegations.

On Tuesday, the company said the retail environment had been tough, particularly for retailers in shopping centres, with fewer shoppers passing through.

"Recent negative media coverage about franchising, retail and RFG, in particular, has also contributed to a noticeable decline in momentum in new and renewing franchise sales," the group's statement to the ASX said.

"Associated revenues are now forecast to be below prior expectations and future franchise trading revenues are also likely to be impacted."

The company said it was difficult to predict full-year outcomes given the heightened risk to franchise earnings.

The group's commercial division, including food processing and distribution operations, was performing in line with expectation and had secured new customer contracts.

Managing director Andre Nell said the group would look to accelerate any cost-saving initiatives arising from its business-wide review that began in June.

"The retail market is expected to remain challenging for the near future and we remain focused on responding to this challenge through delivering franchisee support initiatives and reducing corporate costs," he said.

RFG also is continuing negotiations with its lenders to roll over its three-year loan facilities of $150 million, which mature in December 2018, into longer dated maturities.

 

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