A Day in the Life:

Follow us on Twitter at either @langtoncapital or @brumbymark.

Whilst admittedly I’ve never had to face up to a Jack Bauer type of challenge, I like to think that I’m good in a crisis.

And I’m talking here about essay-style crises, or the problem of how to cook three different meals for a choosy family of seven rather than being asked to defuse an atomic bomb but the skill still comes in handy from time to time.

In fact more frequently than that because I sometimes think I’m suffering from some sort of white-collar Munchausen’s syndrome in that I have a habit of creating the crises that I then have to solve, either by bad diary management or by biting off more than I can chew.

Hence I can only apologise – both in advance and in arrears – to those people who I have (or am about to let down) or who thought that they were meeting me at a certain time only to find that I’m in a different city, country or even continent and we then have to try to cobble together some sort of cockamamie conference on Skype at 3am. You know who you are. On to the news:

Whitbread – Q2 update:

Whitbread has this morning updated on Q2 trading for the 11wks to 13 August and our comments are set out below:

Current Trading:

The group reports Premier Inn total sales for the quarter +11.6% (LfL +4.3%), Restaurants +2.0% (LfL +0.6%) and Costa +16.2% (+4.0% LfL)

In Q1 LfL sales were +6.3% at Premier Inn, +0.1% at Restaurants and +5.0% at Costa showing that the pace of growth has slowed somewhat

Whitbread has been saying for some time that comps would get tougher in the current FY

Total sales across the group are up by 11.1% (+3.3% LfL) and for the first 24wks of the year are up by 11.8% and 3.9% respectively.

Premier Inn & Restaurants:

In hotels & restaurants, Whitbread reports ‘Premier Inn has continued to win UK market share’ and says total room nights sold rose by 8.0% to 8.3 million.

It says ‘total occupancy remained high at 83.5%, in line with last year, together with an 8.1% growth in the number of rooms available.’

It says that LfL sales growth of 4.3% ‘was ahead of the like for like revpar growth of 3.2%, benefitting from our accelerated hotel extension programme.’

Sales in London were +21.1% in the quarter ‘with a 20.3% increase in rooms available’

It says ‘in the regions we grew total sales by 9.2% in the quarter, with a 3.3% increase in total revpar, a 6.2% increase in rooms available with total occupancy similar to last year at 86.2%.’

In restaurants, the group delivered total sales growth of 1.7% and like for like sales growth of 0.3% for the 24 weeks. It says this was ‘ahead of a soft pub restaurant market outside the M25.’

Re growth, some 800 rooms have been added in H1 and the group says ‘for the full year, we plan to open around 5,500 UK rooms including c.1,300 extensions.’

Costa Coffee:

Whitbread reports ‘Costa grew its worldwide total sales by 16.7% and like for like UK sales by 4.6% for the 24 weeks’

It adds ‘UK Retail system sales, year to date, grew by 15.7% to £376.5 million with equity stores growing like for like sales by 4.6%. We opened 61 net new UK stores.’

International sales were up by 13.6% to £144.1 million (13.6% at constant currency).

For the full year ‘Costa plans to open around 220 net new stores.’ The group adds ‘this includes the closure of around 60 lower margin UK franchise stores in petrol stations following their disposal by Esso.’ Whitbread adds ‘we also plan to install around 700-800 net Costa Express machines in the year.’

Other:

Re finances, Whitbread says ‘the strong financial position of the Group remains unchanged.’

CEO Andy Harrison reports ‘we are developing plans to adopt the recently announced National Living Wage. We shall mitigate this substantial cost increase over time with a combination of productivity improvements, boosted by investment in systems and training, efficiency savings and some selective price increases.’

He concludes ‘our first half performance keeps us on track to deliver full year expectations, as well as our ambitious growth milestones.’

These encompass opening c5,500 UK rooms this year, adding around 220 net new Costa stores worldwide and installing 700-800 new Costa Express machines.’ Mr Harrison adds ‘our UK hotel pipeline has grown to 14,106 rooms.’

Langton Comment: Whitbread’s shares peaked ahead of FY numbers back at the end of April and they, along with the wider market (and despite good FY figures) have slipped since.

Today’s numbers, though good, do support the suggestion that LfL sales comparatives were becoming more challenging and that sales growth would slow.

This should not come as a surprise but, as mentioned in earlier emails, the group’s rating – at least until the recent sell-off – is perhaps somewhat stretched.

The company is pencilled to earn around 240p in the year to February 2016, putting the shares on some 19.7x current year earnings with a yield of some 2.0%. Whilst hardly cheap, this is not too high by Whitbread’s own standards.

The group’s targets should be achievable and Whitbread has scalable brands. Nonetheless, there is little room for error at these levels and the group has to manage its change of CEO before the end of the current financial year.

On balance, however, we continue to believe that, should the group’s shares weaken a little further, they may offer interesting value over the longer term.

Greene King – IMS – first 18wks of 2015/16:

Greene King has this morning updated on trading for the 18w to 6 Sept and our comments are set out below:

Current Trading:

Greene King reports that ‘in the first 18 weeks of the year, like-for-like (LFL) sales in Greene King Retail grew by 1.3% with growth of 1.9% in the last ten weeks.’

It says ‘all major sales categories are in LFL sales growth.’

Scotland is a bit of an issue but GNK reports ‘excluding the continued impact of drink-driving regulations in Scotland, LFL sales were up 1.8% in the first 18 weeks, and up 2.4% in the last ten weeks.’

Re Spirit, GNK reports ‘LFL sales in the Spirit managed estate grew by 0.8% over the last 18 weeks.’

Re leased & tenanted income, GNK reports ‘in our Pub Partners business, LFL net income was up by 2.0% after 16 weeks, while it was up 1.1% in the Spirit leased estate.’

Brewing & Brands own-brewed volume grew 1.7% in the first 18 weeks of the year ‘with good growth seen from Old Speckled Hen, Greene King IPA and Abbot Ale, despite strong Take Home comparatives due to the World Cup last year.’

Spirit Update:

Greene King reports ‘although it is still early in the process, the integration of Spirit is going well and we remain confident of generating at least £30m of cost synergies.’

It says ‘on 28 August 2015, we exchanged contracts on all 16 of the pubs that we were required to sell by the Competition and Markets Authority and we expect completion in early October 2015’ and adds ‘we will provide a further update on the integration at our interim results on 2 December 2015.’

Langton Comment: Greene King’s numbers are reassuring and its comment to the effect that trading has picked up in the last 10wks is helpful.

There is no comment on margins.

Numbers remain relatively fluid but GNK looks as though it should earn around 64.3p in the current financial year, suggesting that the group’s shares trade on around 12.6x earnings. The group’s shares yield around 3.9%.

Overall, GNK has sold many of its bottom end tenancies and has purchased Spirit. The average quality of the estate is improved. There will still be some low-hanging fruit re capex post-merger and the integration benefits, though one-off, should be achievable.

Greene King’s shares are not expensive but, in an industry with a number of operators in which one can invest one’s money, we are not short of choice.

The News:

Pub, Restaurant & Drinks Producer News:

• Punch sells 50% interest in Matthew Clark for £100.7m in cash. Says ‘total consideration includes a dividend of £1.5m’

• Punch disposal. The Matthew Clark business is a 50/50 joint venture between the Group and Hertford Cellars Limited, a subsidiary of Accolade Wines Limited. Punch comments ‘as part of the same transaction, Hertford Cellars Limited will sell its 50% shareholding in Matthew Clark to Conviviality Brands.’

• Punch + Matt. Clark. Says ‘the unaudited value of the investment on the Group’s balance sheet as at 22 August 2015 was £52.3 million. Share of profit attributable to the Group’s 50% shareholding in Matthew Clark for the financial year ended 22 August 2015 was £7.8 million.  (FY14 audited: £6.2 million).

• Punch says ‘net cash proceeds of the Disposal, after transaction costs and expenses, amount to approximately £98.7 million.’ It adds ‘the sale will enhance the Group’s financial flexibility to pursue its strategic objectives.’ Punch will ‘enter into a 10 year non-exclusive drinks supply contract with Matthew Clark Wholesale Limited. Under this supply agreement, Matthew Clark Wholesale Limited will supply selected wines and spirits drinks products for sale to members of the Group at agreed pricing levels.’

• Punch disposal, CEO Duncan Garood reports ‘we are pleased to have agreed the disposal of our investment in Matthew Clark and at a significant premium to our current book value. The sale of a non-core business will enhance our financial flexibility to pursue our strategic objectives for our core activities.’

• Tasty has this morning produced half year results for the 26 weeks to 28 June.   Revenue was up 24% to £17m while pre-tax profit was up 36% to £1.3m, with six new sites being opened in the period, and a further site having been opened since the end of the period.   The group now operates 46 restaurants, 6 Dim t and 40 Wildwood and Wildwood kitchens, and plans to open another 4 sites by the end of the year.   Chairman, Keith Lassman, said ‘The Group continues to expand its operations through new openings.  Actions are regularly taken to improve profitability at all sites, increasing sales through updated menus and improving food and labour margins.’

• A record 360 pubs have closed in the last year in Scotland due to the government’s new drink-drive limit in December. Waterson, chief executive of the Scottish Licensed Trade Association (SLTA), says the rate of pub closures has gone from three a week to seven, and that Scotland now has the toughest drink-drive regulation in Europe. He commented: ‘A large percentage of the pub trade was workers having a drink before they drive home. That has almost evaporated, with most people having that drink when they get home. Takings at places like golf and rugby clubs are down by up to 70 per cent.’

• A new report by KPMG and the REC has highlighted the hospitality industry’s need for more staff, ranking it second in a list for August. Recruitment and Employment CEO, Kevin Green, said: ‘In response to worsening skills shortages, employers are focussing on retaining the staff they have and this will promote wage growth. Better investment in training and motivating the current workforce should also help to improve productivity.’

• Beer now selling 3 cases for £24 in Sainsbury in new lurch down for prices. Equates to c69p per pint of Foster’s

• iNTERTAIN is investing £700,000 into introducing bookable booths, ‘VIP’ areas, a new menu and new bars to its Swansea Walkabout. CEO John Leslie said of the news, which follows a major refurbishment of the Walkabout in Sheffield: ‘We are very pleased with the results of our investment programme thus far, particularly in daytime trading and food sales and it is great to be able to add another venue to the list of new style Walkabouts.’

• All-day café bar chain Loungers has appointed La Tasca’s Antony Bennett as Head of Food. Loungers MD Nick Collins commented: ‘We are delighted to welcome Antony to Loungers having seen him do such a great job at La Tasca.  The evolution of our food menu and the consistency of its delivery will be critical to the continued success of Lounge and Cosy Club in the coming years, which is why we decided to create a new Head of Food role.’

• BrewDog has promised to build a bar in any town or city with 200 or more ‘Equity for Punks’ investors, according to the PMA.

• Finsbury Food Group is launching a range of Thorntons-branded cake bites called Little Temptations. Brand manager Natalie Nairn said of the move: ‘We are excited to be launching the first cake bite into the market that is packaged in a fantastic re-sealable bag. Increasing numbers of consumers want treats that can be shared in and out of home and we believe the format of Little Temptations fits this perfectly. Thorntons has a 40% share of the £35m cake bites market and has seen its sales grow 25%.’

Holidays & Leisure Travel:

• Center Parcs is planning to build its first holiday village in Ireland and sixth in total, which will include 500 lodges. The village, of 500 lodges at Newcastle Wood, near Ballymahon, will feature a ‘subtropical summing paradise, spa, shops, restaurants, a lake, outdoor sports and leisure facilities and a nature centre’, can create around 1,000 permanent jobs once operational.

Finance & Markets:

• China’s imports declined by 14.3% in yuan-denominated terms year-on-year this August, while exports also fell by 6.1%. The tumble reflects recent slides in global commodity prices and the country has reduced its 2014 growth forecast from 7.4% to 7.3% — its lowest for almost 25 years.

• New Japan figures show the country contracted by less than originally estimated in the three months to June. Japan’s economy contracted by 0.3% instead of 0.4%.

• World markets: UK and Europe higher yesterday. US closed for Labour Day holiday, Far East mostly down in Tues trade

• Oil price down over last 24hrs to around $48 per barrel

• Eurozone investor confidence fell in September to a measure of 13.6 from 18.40 in August

Retail Roundup from Nick Bubb:

BRC Retail Sales figures for August (the 4 weeks to Aug 29th):
We flagged yesterday that  the City economists who had foolishly pencilled in a 0.5% LFL sales rise in August (versus +1.2% in July) would be a bit shocked, because the figures were bound to be depressed by the later Bank Holiday this year…And so it came to pass, with overall LFL sales actually falling by 1.0%, although the BRC played it down, by emphasising that the Bank Holiday on August 31st falls into September for reporting purposes and that “Food sales saw a clear improvement compared with July” (the overall survey was headlined “August Food sales: Light at the end of the Tunnel?”). Needless to say, Food sales still look to have been down LFL in August, by about 1% (having been down c2% LFL in July), but that means that Non-Food sales must also have been down about 1% LFL in August, which is a sharp reversal from the recent +4% LFL uptrend.
Furniture was the worst performing sub-category in August, but the BRC said that “the impact of the Bank Holiday shift needs to be assessed fully before concluding that the nice run enjoyed by big ticket items since the start of 2014 has started to slow” (although Electricals were also weak). Dull Clothing and Footwear sales in August were blamed on “the weather”. August also saw much slower Online Non-Food sales growth than usual, up only 6.5%, although even that still increased the overall Non-Food Online sales penetration rate to 17.2%, from 16.3% in August 2014.

John Lewis Sales Watch: So, after a poor August, how has September started for that great High Street bellwether, John Lewis? Well, we flagged last Friday that recent trade at John Lewis hasn’t been truly “LFL”, given that the Bank Holiday was a week later than last year, so this Friday’s figures for w/e Sept 5th should see a lot of lost ground regained, with the key “back to skool” trade kicking in at last on the back of a wet Bank Holiday. We would expect LFL sales to be up by c9%-10% last week, which will pull the 5 week cumulative outcome up to about -1% LFL from the disappointing -4% LFL outcome for the first 4 weeks of August/H2.

Conviviality Watch:
We noted yesterday that on Friday afternoon Conviviality Retail said of its reverse takeover bid for the drinks wholesaler Matthew Clark that “…discussions are progressing well and Conviviality will provide a further update to shareholders shortly” and the full announcement has been duly made today, with the price confirmed at £200m. This should be a transformational deal for Conviviality, but even so it is impressive that the hard-working bankers have been able to place all the new equity involved (£130m gross) at 150p, ie at such a small 3% discount to the 155p price before the shares were suspended back on July 8th. In the year to 28 February 2015, Matthew Clark generated revenue of £811.2m and adjusted EBITDA of £25.3m and the acquisition is expected to be earnings enhancing from the first full year of ownership (ie to April 2017). Conviviality believes that
there are potential significant synergies to be realised from the combination of the two businesses, in buying, distribution, organisational efficiencies and additional revenue generation, so it will be interesting to see how the shares trade in due course.

Nick Bubb – nicholas_bubb@hotmail.com

Monday Wrap:

This was produced for distribution yesterday afternoon: So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following:

Campaign for VAT reduction across leisure services:

• Interesting to note that M Borel has now suggested that expecting an immediate cut in VAT for leisure services to 5% was unrealistic.

• The M+C reports ‘Borel’s new offer to Government is a cut to 10% VAT on food and alcohol under 15% ABV for three years before a further cut to 5%.’

• That too may prove to be over-optimistic as 1) it’s hard to see the government sacking nurses to give alcohol a break and 2) it’s always an attractive option for politicians to maintain the status quo and do nothing.

• M Borel says that he is talking to potential new members but accepts there will be no Tax Equality Day in 2016, implying that two was enough. M Borel conceded that the Tax Equality Day was ‘a very expensive operation.’

• On the basis that campaigns have to move forward if they are to avoid moving backwards, the campaign for a VAT reduction does run the risk of losing some of its momentum

Technological changes, evolution etc.

• The contactless limit rose to £30 from £20 on 1 Sept.

• Why is it then, that whilst, the Co-op, Waitrose, Boots, Costa, Tesco & Drake & Morgan accept contactless, the two Sainsbury’s closest to Langton Capital don’t?

• We posit that this is not something that can be ignored & will keep an eye on the situation going forward.

Sterling, interest rates etc.

• As betting has shifted back to a September rate rise Stateside, Sterling has weakened against the US$.

• As Europe has alluded to growth, it’s weakened against the Euro.

• This is hardly likely to suck in inflation in the very short term but it could raise some prices, particularly for dollar-denominated commodities that haven’t seen their prices fall – and admittedly there aren’t that many of them.

World markets:

• So we missed a tumultuous week last week.

• And, when you look back on it with the benefit of hindsight, the movements and the micro-movements can be conveniently ascribed to China fears, US rate rise fears, commodity glut fears, etc. etc.

• But it just feels as though the market is having a wobble. That’s not a very scientific term but, with interest rates set to rise in the West for the first time since 2007 and China trying to manage down its growth rate from 10% to 7% to probably 4% without experiencing negative numbers, that’s hardly surprising.

• Hence, if Mr Market offers you a stock ‘too cheap’, you can buy it and if he bids you more than ‘fair value’, then you can sell it. Sounds easy, doesn’t it but, as always, the devil is in the detail.

The next Big Thing:

• Explaining the past is easier than explaining (forecasting) the future.

• It’s clear that new financial instruments incentivised property brokers to puff up the property market in the US and it’s equally clear that, when that bubble popped, there were going to be tears.

• But looking forward, what should we be preparing for?

• Well we’ve alluded to two issues above namely 1) getting our heads around the fact that interest rates can go up as well as down and 2) the fact that the Chinese authorities need to slow a half-million ton super-tanker whilst minimising collateral damage.

• But three, we would suggest, and we know the UK economy is relatively peripheral in world terms, the Citizens’ Advice Bureau may be on to something when it says that c1m interest-only mortgage holders may struggle to pay back the capital sums owed

• That may be like saying ‘some cows are brown,’ but it’s nonetheless true for that.

• Add to capital repayment woes the fact that there are concerns that Chinese buyers could pull out of the London property market (especially if Sterling weakens further) and that the CML economist Bob Pannell has said that the UK housing market is “dysfunctional” + we have the makings of a problem.

• It’s perfectly possible to spot 12 of the next two recessions but, hey, you have to start somewhere.

Random information, hopefully not all of it useless (re most leisure operators etc.):

• Commodity prices are still extremely low. We know oil’s cheap but so are metals, coffee, grains, cattle and lumber. Inflation, where art thou?

• Punch & Matthew Clark. Still waiting for news.

• Interesting to see Tesco imply that it may buy in some of its freeholds. Morrison’s is already effectively there.

• Ipsos has suggested that retail footfall in London fell by 9.5% on Tube strike days.

• Noteworthy that some retailers are blaming sluggish shop spend on an upturn in leisure spending

• John Lewis has now reported 4 consecutive weeks of lower sales. Perhaps a little early to say that the crown is slipping but it does highlight the fact that growth cannot be taken for granted.

• High car sales tend to confirm that big-ticket spending remains robust.