Langton Capital – 2015-09-11 – JD Wetherspoon FY numbers, pub trading & other:
A Day in the Life:
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I had a senior moment yesterday when I came to write down the word ‘frayed’ as in ‘frayed nerves’ or ‘the cloth was frayed’ etc.
A simple enough word you may suggest but I really couldn’t remember how it was spelled. Was it fraid or fraide or frade or freyed or frayed? Well of course it was the latter but it brought home to me the fact that 1) writing at stupid o’clock in the morning is a challenge in the best of circumstances and 2) English is a very weird language. On to the news:
JD Wetherspoon – FY numbers:
FY Results: 52w to 26 July 2015:
JD Wetherspoon has this morning reported full year numbers for the 52w to 26 July 2015 and our comments thereon are set out below:
LfL sales growth for the whole year has come in at 3.3% with total sales including new openings +7.4%
Profit before tax is £77.8m, down from £79.4m last year with EPS held at 47p (2014: 47p)
The full year dividend has also been held (at 12p).
Trading for the first 6wks of the current year are +1.4%
More on Trading:
Chairman Tim Martin reports ‘I am pleased to report a year of progress for the company, with record sales and free cash flow.’
Sales at the bar were +1.2% LfL in the year, food was +7.3% (impacted by breakfasts, further day-slots etc.) and machine income was down by 2.8%
Operating profit was down by 3.8% with operating margins down from 8.3% to 7.4%
Balance Sheet, Debt & Other:
Net interest was covered 3.3x by pre-exceptional operating profits
Some £106.3m was invested in new pubs and extensions to existing pubs during the year
The company opened 30 new pubs during the year and exited from 6
Free cash flow after maintenance capex was £44.8m
During the year the group bought back for cancellation 3.6m of its own shares at a total cost of £26.9m
Year end debt (including bank borrowings and finance leases, but excluding derivatives) was £601.1m versus £556.6m last year
As at the year end, the company had £240.9m of unutilised banking facilities and cash balances
JDW is ahead of the curve and, re the “living wage”, it says that it has increased the minimum hourly rate for staff by 5% in October 2014 and by a further 8% at the end of July 2015.
It says ‘both decisions were taken without the knowledge that the government was about to announce a new minimum wage, now called the “living wage”.’
Re current trading, JDW points once again to the VAT disparity on food between pubs and the off-trade but comments that ‘in the six weeks to 6 September 2015, like-for-like sales increased by 1.4%, with total sales increasing by 5.2%.’
Langton View: JD Wetherspoon had already commented upon a slowing performance throughout FY15. With that in mind, these numbers are in line with expectations but do suggest that the slowdown has continued into the first few weeks of FY16.
Chairman Tim Martin does acknowledge that the economy is slightly better and trading is currently ahead of last year. He says ‘a number of factors likely to influence our trading performance this financial year are difficult to quantify at this early stage. Positive aspects include an increase in pub numbers, a better economy and slightly lower interest rates; less favourable aspects include heightened competition from supermarkets and restaurant groups and increased staff, repairs, bar and food costs.’ Overall, Mr Martin concludes ‘we continue to anticipate a trading performance similar to, or slightly above, that achieved in the last financial year.’
There is no comment on suggested margins for FY16 but, as the previously-announced reduced prices for coffees, drinks and breakfasts feed through, these could remain under pressure.
The Living Wage will increase costs perhaps less for JDW than for some other operators and it will also put more money in the pockets of would-be JDW customers.
Overall, JDW should earn around 48p in the year to July 2016 and perhaps 51p in the following year. This implies that the group’s shares are trading on a current year multiple of around 15x with a 1.7% yield.
This is not cheap, per se, but bulls may focus on the fundamental strengths of the group and what looks should be higher margins next year whilst bears will suggest that the group may fail to deliver.
We would suggest that any material weakness should present a buying opportunity. Indeed the company itself could buy back more shares. The Living Wage should be a net positive and trading is set to improve a little in the coming year. The group is a superlative operator, it has focused on accommodation, drink, food, further day-parts, coffee and a host of other growth areas and we remain supportive of its shares.
Pub, Restaurant & Drinks Producer News:
• Real ale is now being served in 70% of pubs in the UK thanks to growing numbers of micropubs, according to Campaign for Real Ale. CAMRA research shows that British breweries have grown by more than 10% for the third year in a row.
• Pub and bar operator TCG is introducing a Sunday roast offer to six more sites following a 20% uplift in food sales across its five trial sites. TCG chief operating offer Nigel Wright said of the trial: ‘Key to the success has been our focus on quality, freshly-cooked food, backed with intensive training to ensure that we exceed customers’ expectations. The teams in all trial sites have quickly adapted to the new cooking and presentation styles required and are now serving Sunday roasts that look and taste great, while still delivering excellent value to our customers. ‘
• JW Lees’s The Parrswood in East Didsbury reopens today after a £900,000 refurbishment.
• The Deltic Group has acquired Play in Hereford and intends to continue operating the club in its current format. Commenting on the acquisition, Deltic Group’s chief financial officer Russell Margerrison said: ‘Tactical acquisitions have always been a key part of our strategy and Play fits well with our existing portfolio. Hereford is a thriving county town and we’re looking forward to working with the team to further develop the business.’
• Home Retail CEO John Walden is ‘optimistic’ this year’s Black Friday will be less disruptive than last year.
• ASK Italian, Carluccio’s and Zizzi are the latest restaurant chains to integrate mobile pay-at-table technology across restaurants. The brands will have signed up to Mastercard’s Qkr! With Masterpass app – which allows users to share and pay restaurant bills – by the end of 2015. GBK and Prezzo signed up to Paypal’s mobile app last year, while in June Bookatable.com became the first online booking service to introduce the pay-at-table function.
• Google has stepped into the competitive mobile payments space by making its Android Pay available at more than a million US locations. The tech giant will look to take on Apple Pay in the mobile payment arena, which continues grow rapidly as consumer cash use declines. The market is estimated to be worth $1tn, or £650bn, in 2017.
• Global food prices fell by 5.2% in August, the steepest drop in seven years, according to the UN’s Food and Agriculture Organization (FAO). All major commodities fell and the price of wholesale milk has now tumbled 20% in the past year. The European Commission is to provide €500m of funds to help the continent’s farmers.
• Casual Dining Group has announced it is to remove all administration fees for customer tips made by credit card or cash. The group, which recently acquired Las Iguanas and La Tasca for a c£105m, said the changes would come into force by the end of November
• Krispy Kreme shares fall on warning of slow sales of packaged-food products. Revenues $127m v estimates of $132m. EPS was 15c v 19c estimate. Co said it expected its packaged-goods business to remain “softer than planned” for the rest of the year. The shares fell 12% yesterday, the largest drop since June 2014.
• McDonald’s Japan sales rose on a LfL basis in Aug for the first time since early 2014. Sales +2.8% LfL.
Holidays & Leisure Travel:
• Travel spend grew 7% and transactions were up 28% in August as consumers booked more trips to escape the British washout. Travel spend grew 8.1% over the summer, compared to 3.2% for the same period last year, according to the latest data from Barclaycard. A host of UK domestic companies have noted a tough August.
• London Gatwick had the busiest month in its history in August, with more than 4.53 million passengers travelling through the airport. The 3.7% year on year increase means the airport has now had 30 months of consecutive growth. Travel to the North Atlantic was a key driver in this history-making month, seeing growth of 9.5 per cent on passengers flying to the US and Canada
• Average load factor at Stansted hit a record high of 93.5% in August as more than 2.2 million people used the airport. This represented a rise of 9.7% over the same month last year, making it the busiest August since 2008 and the fourth month in a row in which the airport has seen more the 2 million passengers.
• Heathrow’s CEO has warned the government that delaying its decision on airport expansion is costing the UK £1bn a month. Heathrow also recorded its busiest ever month in August, with passenger numbers up 4% to around 7.3 million people. A recent poll commissioned by Heathrow found that 50% of residents from 12 constituencies close to the airport are in support of expansion.
• Uber has suffered another setback after it emerged that a government body has already ruled its drivers are employees, not independent contractors. The distinction is important because employees are entitled to more benefits.
• International football tourists has netted £684m for the British tourism industry, growing 15% since 2010. A report by VisitBritain found that Old Trafford and The Emirates were the most visited stadia with 109k visits. Liverpool’s Anfield Stadium was in second place, while visits to London’s Wembley have almost doubled since 2010
Finance & Markets:
• Bank of England holds rates at 0.5%, QE at £375bn. Vote was 8-1 on rates, unanimous on QE. The Bank reiterated that it sets monetary policy in order to meet the 2% inflation target that it has been set ‘in a way that helps to sustain growth and employment.’
• Bank reports re holding rate that ‘12mth CPI inflation rose slightly to 0.1% in July but remains well below the 2% target rate.’ It says ‘around three quarters of the gap between inflation and the target reflects unusually low contributions from energy, food, and other imported goods prices. The remaining quarter reflects the past weakness of domestic cost growth, and unit labour costs in particular.’ Pay will be given a boost via the NLW but the Bank says ‘although pay growth has recovered somewhat since the turn of the year, the recent increase in productivity means that the annual rate of growth in unit wage costs is currently around 1% – lower than would be consistent with meeting the inflation target in the medium term, were it to persist.’
• Bank points to strong Sterling as a further reason for holding rates at 0.5%, says it is dampening inflation rate.
• Bank cautious on UK growth, says it ‘noted in the August Report that the risks to the growth outlook were skewed moderately to the downside’. It adds ‘in part [this reflects] risks to activity in the euro area and China.’ It says recent developments ‘have increased the risks to prospects in China, as well as to other emerging economies.’
• ECB will extend bond-buying programme beyond Sep 16 as it attempts to drive up inflation + rekindle growth suggests Reuters poll
• RICS has suggested UK house price inflation could hit 6% this year. At the start of the year, it expected a 3% rise.
• Halifax reports UK house prices up 2.7% in Aug alone. Prices had fallen by a revised 0.4% in July, however
• World markets: UK lower yesterday, Europe also down. US up in later trading but Far East mostly lower in Fri trade
• Oil price up a bit at $48.75. Still firmly below $50 – at least for the moment.
Retail Roundup from Nick Bubb:
BDO High Street Sales Tracker: the weekly High Street sales index organised by BDO remains a good guide to Fashion trading momentum and sales have been poor in recent weeks (which BDO blame on consumers spending on holidays abroad), but last week burst back into life, on the back of the autumnal weather, Bank Holiday and “back to skool” trade. Overall Fashion store LFL sales in w/e Sept 6th were up by 9.3% (the best performance since early January) and total BDO LFL Store sales (including Homewares and “Lifestyle” retailers) were up by 9.1% last week, with total Non-Store sales (including some Online-only retailers) picking up strongly, with LFL sales up by 32.6%.
News Flow Next Week: After the news overflow that was “Super Thursday” yesterday, next week is, mercifully, much quieter, but there is still quite a lot going on. Tuesday brings the Kingfisher interims, the Ocado Q3 and a Pets At Home Investor and Analyst Day. Wednesday brings the JD Sports interims and the BRC Annual Dinner and then on Thursday we get the French Connection interims and the ONS Retail Sales figures for August.
Director Buying Watch: It was good to see that Trevor Strain, the FD of the embattled Morrisons, took advantage of the weakness in the share price yesterday after the interim results to buy 58,453 ordinary shares at 169.8p. His total shareholding following this purchase is 97,794 shares.
World Retail Congress Watch: We flagged yesterday that the prestigious World Retail Awards were held last night in Rome and, inter alia, “Store Design of the Year” went to Fitch Design for Hamley’s Moscow store. Marks & Spencer won “Retail Advertising Campaign of the Year” for its “For Every Milestone” campaign. The “Young Retail Entrepreneur of the Year” award went to Nitin Passi, the founder and CEO of the Online fashion retailer Missguided and mighty Primark was the winner of the “World Retail Award for Retail Transformation and Reinvention”, whilst Primark CEO Paul Marchant picked up the “Outstanding Leadership” award.
Nick Bubb – email@example.com
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:
Current pub & restaurant trading, August etc.
• The CGA Peach Tracker doesn’t encompass the whole industry but, as it covers perhaps a third of operators & it would be impossible to encompass all of the independents in any case, it’s a very useful steer. We would suggest that the take-away points are:
o Overall Growth: Growth slowed in August (to LfL 0.6%). This is, as mentioned, down on July but it is still ahead of the CPI which last seen was only 0.1%.
o New Build: Total sales were up by 4.3% (against 0.6% LfL) suggesting that around 4% of new capacity has been put on. This is impacting rental values (esp. in London), plot values and the like. Capacity cannot go on rising (in excess of population growth) indefinitely.
o More on New Build: The Tracker quotes Paul Newman, head of leisure and hospitality at Baker Tilly, as saying ‘we are seeing a number of well-funded, emerging young brands posting market-beating sales and we expect the larger operators to find it increasingly hard to maintain historic rates of LFL growth in the face of such stiff competition.’ This theme was explored by Langton in recent presentations, available on request.
o London v Provinces: London LfLs were +1.0%, somewhat better than the regions at 0.5% (and the whole country at +0.6%). London pubs performed more strongly (at the LfL level) than did London restaurants.
o Pubs v Restaurants: Pubs performed more strongly than restaurants. Drink led pubs were up 2.8% in LfL terms. This is partly because beer gardens got more use in what was an average August (2015) v a poor August 2014.
o Holidays overseas: The Tracker echoes comments from WTB and GOAL this week to the effect that many would-be customers appeared to have taken their holidays overseas. Interestingly Homebase this morning refers to ‘weaker overall market conditions in August’.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Commodity prices: Terry’s Chocolate Orange-lovers beware, orange juice & cocoa the only soft commodities showing any signs of life. Grains dirt cheap, meat prices down, coffee for free.
• Sterling up a little yesterday. Various bets still being placed on who amongst the developed nations will be the first to put rates up. Betting is still on the US, perhaps by only one eighth of a percentage point but maybe as early as later this month.
• Morrison’s recovery ‘will take time’. Should be no surprises there though the group’s shares are currently down a short 4% presumably on investor disappointment.
• Morrison’s C-Stores: Exiting at half entry cost isn’t something to be proud of but a mistake is a mistake and, if you get married in Vegas, it might be better to get divorced quickly rather than limp along for a couple of decades. It’s probably better not to take that analogy an awful lot further.
• Overseas holiday companies. Surely TCG and TUI shares should be rising a little. Both companies will update on Q4 trading later this month and, if GOAL, WTB, the Peach Tracker, Homebase, the BRC and others are to be believed, late demand out of the UK for overseas holidays has been very strong.
• Restaurant Group: Great stock, etc., but it’s not cheap & the companies above have suggested that August was not good & that shopping centres performed poorly.