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It’s difficult to escape the depressing news emitted by Britain’s high street retailers. Consumers, faced with a neurotic housing market and the slowing British economy – and no doubt perturbed about the amount of debt they are servicing – have reined in their spending. These facts are writ large all over the results of the likes of Bhs, John Lewis and Boots, colossal players that have reported falling sales, profits and confidence.

Considering that the weeks and months ahead are likely to remain ‘demanding’, ‘tough’ and ‘competitive’, it’s none too surprising that many investors are giving the sector a wide berth.

We’re still eating out
However, despite all this, there is one retailing niche that seems to be defying depressing trends – high street restaurants. As Altium Capital’s leisure analyst Greg Feehely points out, ‘eating out continues to grow despite the challenging outlook. People are eating out more and more, for a whole host of reasons. Food sales (but not alcohol) are growing ahead of inflation and increasing numbers of women are eating out, and thereby growing the market.’ Feehely argues those that are really thriving – and are likely to continue to do so in the short- and medium-term – are restaurant groups that boast ‘a strong concept’, offer a ‘contemporary and fresh’ experience and can deliver value for money to hard-pressed UK consumers. Interestingly, AIM boasts a whole clutch of companies that could possibly fit this bill.

Clapham House and Prezzo bent on success
At first glance, Clapham House does not look particularly appetizing. It made a loss of over £600,000 on sales of £7.46 million in the year to March, and, at £30 million, is valued far above its net assets. Then there is the rating – on current forecasts, it trades on a forward p/e of around 64.

But what it does boast is a great management team. Heading this are David Page and Paul Campbell, the retailing gurus behind the success of Pizza Express. In a very short space of time this dynamic duo has acquired a complement of brands – The Real Greek, Bombay Bicycle Club and Gourmet Burger Kitchen – boasting 25 outlets between them. Further growth is likely to be delivered very fast, (rendering the price-earnings ratio useless) funded initially from the £11.7 million that sits on Clapham’s balance sheet. A profit of £675,000 is expected this year, rising to £2 million the following year.

A second AIM-listed restaurateur with proven managerial pedigree – and a justified healthy rating – is Italian chain Prezzo. Ensconced in the boardroom here is The Kaye Dynasty, the family behind the phenomenon that was (and still is) ASK Central. Jonathan Kaye is the chief executive here with his father Philip listed as the major shareholder with a 49 per cent stake.

Italian eateries are the core offering but a departure was made with the recent launch of the Mexican-style Chimichanga chain. In all, there are 65 restaurants operating and more in the offing. Pre-tax profits perked up 74 per cent at the recent interim period to July and house broker Evolution estimates full year figures will more than double to £5.5 million on sales of £30.8 million. Prezzo has all the trappings of a future sector star.

Tapping the tapas market
A business with a good value look about it is La Tasca, which is hoping to exploit the growing demand for Spanish food. It has a 53-strong string of profitable tapas restaurants in the UK and the US, and generated a 51 per cent improvement in pre-tax profits to £3.9 million in the year to April. Chief executive James Horler, who previously ran the Frankie & Benny’s chain for the Restaurant Group, has installed highly-incentivised managing partners at each restaurant in the bid to make each a profit centre in its own right.

Eight new outlets were opened in Britain, all are trading well and a new La Viña brand was added very recently.

House broker Altium, which pulled in £19 million of new money at February’s float, forecasts profits will climb to £6.1 million in 2006 and believes the recent weakening in the price to 117.5p is unwarranted, setting a bullish target of 175p. £2.4 million of the original cash pile remains.

A smaller fish to try
FishWorks, which started ten years ago as a fishmonger and now has seven outlets, only arrived on AIM this year. Fronted by celebrity chef Mitchell Tonks, the unique selling point of the brand is that a fishmonger’s shop sits in front, with a restaurant behind. Both sides of the business are profitable and the ever-confident chief executive Roy Morris says the short-term ‘event horizon’ for expansion plans amounts to four new openings each year for the next three years, all in ‘city village’ locations.

Of the £3.8 million raised at 33p on flotation in June, £1.6 million is left and the current 44p price values the business at £14.2 million. The award-winning new restaurants are already trading well and the company turned a £670,000 loss into a £158,000 net profit in the year to last February, on turnover up 52 per cent to £4.1 million. House broker Arden forecasts progress to profits before tax of £1 million in 2006 and £2.4 million the year after, putting the group on a forward rating of 16.3 for this year and a mere 8.5 the year after.

Out of town trips
Lastly, one interesting sub-niche of the restaurant game is the out-of-town sector. KBC analyst Paul Hickman recently flagged up two worthy of attention – fully listed Restaurant Group, which Hickman points out has outlets at airports that are ‘doing very well’, and tiddler Gourmet Holdings, with its small collection of attractive Home Counties ‘restauropubs’.