Langton Capital – 2015-09-14 – More on JDW, Kuoni, China, MOD pizza & other:
A Day in the Life:
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Haven’t you ever plugged your charger in only to find, two hours later, that it wasn’t turned on at the wall, that your phone’s flat and that there’s no way that you’re going to be able to read your emails on the way to that next crucial meeting?
Because I have. Certainly if you substitute ‘crucial meeting’ with ‘pub’ and, what I find even more annoying, is when it’s plugged in at the wall and switched on OK but someone has pulled the charger out of your phone and plugged it into theirs.
Or worse still, you have a flat phone because it was crucial that someone charge up their Nintendo mini or iPod or some-such device that, whilst it may help them keep awake during the daytime, doesn’t do much for the bottom line at Langton. On to the news:
JD Wetherspoon – FY Numbers – Analysts Meeting:
JD Wetherspoon has hosted a presentation on its full year numbers for the 52w to 26 July 2015 and our additional comments thereon are set out below (see earlier email for more detail):
CEO John Hutson said that trade for the wider pub industry, including JDW, has slowed gradually since October 2014.
Its activity in the breakfast trade is seen as an investment for the future, rather than a present driver of profitability.
Its four pubs in the Republic of Ireland have been performing well, although it is still too early to value them on a cash basis (instead, management are looking at operational KPIs and sales growth). JDW is investing in infrastructure in order to continue expansion here.
Trading for the first 6wks of the current year are +1.4%
More on Trading:
Hutson believes the firm is ahead of the curve with regards to the National Living Wage increase in April 2016. Wetherspoon could pay for a substantial chunk of wage rises to 2020 out of their bonus pot for employees – though it has not confirmed that this is what it intends to do.
However, as the pub group believes these bonuses are partly responsible for record high levels of staff retention and superior customer service, the group would rather retain its bonus structure as a point of differentiation.
JD Wetherspoon expects 2016 LfL sales to be somewhere between 0-2%, coming from a mix of volume and price.
Balance Sheet, Debt & Other:
The company opened 30 new pubs during the year and exited from 6, adding that returns on new pubs are the same or better than average. Some 80% of its new sites were freehold.
Year-end debt (including bank borrowings and finance leases, but excluding derivatives) was £601.1m versus £556.6m last year, while the group’s proportion of freeholds in its estate has risen to 49.1% of its 951 pubs (2014: 47% of 927).
JDW is unflustered by trickier trading conditions since October of last year and continues to invest significantly in its proposition.
Evidence of the success of this investment can be seen by the operator’s best-in-class levels of brand recognition in the UK, even if returns on capital may take a number of years to filter through – and we would expect to see this in a more heavily-freehold model.
The group was keen to add that its 0-2% LfL sales forecast was just that – a forecast, at the mercy of the wider trading environment.
The market has so far reacted benignly to JDW’s prelims following its share price correction earlier in the week. Many will be relieved that today’s numbers contained no negative surprises and, indeed, alluded to a better FY16.
Langton View: JD Wetherspoon has flagged that, while trading has become more competitive over the past year, the group has the brand presence and financial firepower to continue profitably growing its footprint and improving its existing estate.
Staff rooms have been improved, beer gardens redone and more accommodation has been added, indicative of the fact that the group intends to continue investing for the longer term.
The group has manageable debt levels and a solid expansion plan, backed by a strong focus on cash generation. It is this dependable level of free cash flow (2015: £109.7m) which allows it to invest in its brand and properties and ensure its long-term trading prospects.
Customers (CGA brand tracker) would like a JDW to open near to them and its competitors would not – that speaks volumes.
Margins may stay under pressure as the group’s investment in grabbing market share of the breakfast trade continues. The introduction of the New Living Wage may also hurt margins. However JDW is better placed for this than many of its competitors. Furthermore those consumers benefitting from a higher hourly wage might even find themselves spending a little of their additional spare cash in a Wetherspoon pub.
For those with a long-term investment horizon, we continue to be of the view that JD Wetherspoon is a good investment. It is structured to survive and prosper with little help from the economy and in five years’ time it will in all likelihood be a materially larger company. Share price weakness should be viewed as a buying opportunity.
Jack Brumby – email@example.com
Pub, Restaurant & Drinks Producer News:
• Sir Charles Dunstone is to bring Seattle-based MOD pizza to the UK via joint venture. Two years ago he brought Five Guys. MOD, which stands for ‘made-on-demand’ was founded in Seattle in 2008 and now has around 70 outlets. Founders Scott and Ally Svenson lived in the U.K. for 11 years and created the Seattle Coffee Company, which they later sold to Starbucks. The Seattle Times reports MOD as similar in concept to Chipotle and the company suggests that it practices “enlightened capitalism,” which involved competing aggressively but also treating employees well, paying a starting wage of around $11 an hour in the US with more in some places. Co-founder Ally Svenson said that London could be a platform for further expansion suggesting ‘it’s a door to the rest of Europe, and also to the Middle East.’
• Yo! Sushi is reported by Sky News likely to be bought by Mayfair Equity Partners in a deal to value the chain at less than £100m. Inflexion is said to have been the initial front runner but it is thought to have tried to chip the price. That will only be one side of the argument, however.
• The Craft Beer Co. has reported a 22% jump in turnover across its six units ahead of the opening of its next site by the Gherkin on Mitre Street. Founder Martin Hayes commented: ‘We’re really pleased with the latest numbers, not least because whilst craft beer sales are high, so are the number of people trying to retail craft beer… What sets us aside is our unwavering dedication to stocking the world’s finest craft beer, which includes many breweries from the UK. We’re not just ticking the boxes, craft beer is who we are, not what we want to be.’
• Bill’s is to slow down the rate of its openings after expanding to over 60 sites in the past three years, according to the M&C. the 68-strong company was now looking at opening c15 sites a year going forward with a lean toward unlocking further sites in small market towns where the brand’s all-day dining offer is proving very popular.
• Consumer spending rose 3% in August thanks in part to strong growth in restaurants (+11.4%) and pubs (+12.4%). However, average transaction value in restaurants fell 6.1% during the month, against a 4.3% decline overall.
• iNTERTAIN has invested £1m in rebranding Bar Risa on Broad Street in Birmingham as ‘6 on Broad Street’. CEO John Leslie, said: ‘Our research has shown us that consumers – who are more sophisticated than ever before – are looking for increasingly exciting entertainment solutions. This new venue will provide something for everyone, from a sit down meal to comedy to a club night.’
• The M&C reports that Be At One has secured new sites in Camden and Sheffield. The business posted a 30% rise in sales during the first half of its financial year.
• Lidl is planning to open stores in central London and aims to have around 300 new sites within the M25.
• Majestic Wine has unveiled its new Definition range comprised of 12 wines priced between £7.49 and £13.49. ‘The Definition range showcases what we consider to be the most important wine styles in the world,’ Justin Apthorp, Majestic’s buying director, commented.
Holidays & Leisure Travel:
• Kuoni has announced this morning that the sale of its European tour operating activities to REWE completed on Friday
• Hotel prices in England and Wales have jumped up in the Rugby World Cup’s host cities. Prices in Cardiff have reached an average of £1018 per night, while London’s highest average price coincides with the final of the competition at £334 per night and Brighton’s highest price is £376 for the clash between Russia and Japan at the Amex Stadium.
• Cheshire-based Luxury tour operator Journeys of Distinction is to close and be integrated into the main Kuoni brand from next year.
• Sunday Times reports the clock is ticking for a £1bn Moto bidder, suggesting that Equity Partners Infrastructure is front-runner. The New Zealand investor, which has a 17.5% stake in Moto, is thought to be trying to exercise its right to first refusal.
• Sportech announced Friday that it had received a proposal from Contagious Gaming re a bid for the company. It reports ‘the proposal is subject to due diligence, Contagious Gaming raising suitable financing and Contagious Gaming receiving a significant level of support for the proposal from Sportech shareholders.’ It says ‘a further announcement will be made when appropriate. In the meantime, Sportech shareholders are advised by the Board to take no action. There can be no certainty that any formal offer for the Company will be forthcoming, nor as to the terms of any such formal offer.’
Finance & Markets:
• A top official at the Bank of England has warned that interest rates might have to rise sooner than expected. Kristin Forbes, a member of the Bank’s rate-setting committee, said that BoE models might not be able to adequately anticipate the pound’s impact on inflation.
• Germany’s finance minister has said the global economy faces a financial bubble from central banks injecting cash into economies. The ECB launched a €1.1 trillion bond-buying scheme in January to aid Europe’s recovery which could be extended beyond 2016 if required.
• China data suggests slowdown. Factory output numbers came in below estimates on Friday with growth of 6.1% v hopes of 6.4%
• Global markets: UK + Europe down Friday, Wall St up but Far East down on weak China in Mon trade. China comp now down 40% since June
• Oil price dipping on weak Asia demand, China fears. Brent at around $47.75 per barrel
Langton Licensed Retail Index – Major Movers
The LRI underperformed this week, falling 0.46%, as company results held some constituents back. The wider market was up 1.15% with the financial and basic materials sectors driving the gains.
Whitbread had their Q2 update last Tuesday, where like for like sales growth at both Costa and Premier Inn slightly missed consensus estimates for the 11 weeks to August 13. CEO Andy Harrison’s warning that the National Living Wage could cost the company an extra £15m-£20m per year also looks to have put pressure on the shares which ended the week down 1.36%.
JD Wetherspoon produced its full year results on Friday, which were fairly poorly received by the market, with the shares down 7.25% undoing the previous week’s bounce. The group saw profits down £20m (£13m of which was a property write down) and suggested that the National Living Wage would cause pub closures.
Greene King on the other hand saw its shares up 3.07% following the group’s Q1 update on Tuesday, with the group seeing LfLs up 1.3% for the 18 weeks to 6 September. Scotland remains tough for the group following the instigation of more stringent drink driving rules north of the border.
Mitchell’s & Butler were down 1.62% this week. The group is perceived as having a larger exposure to the minimum wage moves than its competitors, and as such the move may reflect the comments made by JDW and Whitbread.
Fuller’s and Young’s recorded gains of 2.56% and 1.93% respectively as the Coffer Peach Tracker found that pubs in London were experiencing stronger LfL growth than the rest of the country, and were outperforming restaurants in the capital.
Will Brumby – firstname.lastname@example.org
Retail Roundup from Nick Bubb:
Grocer 33 Watch: The widely followed Grocer “33” weekly supermarket pricing survey in Grocer magazine on Friday afternoon showed that Tesco raised its game and didn’t lag so much behind Asda last week. Asda’s winning £79.29 basket was £3.22 cheaper than Tesco, but Tesco was still ahead of Morrison’s and Sainsbury. The Waitrose basket of £95.38 was way off the pace, as usual, but much of that was due to the price of fillet steak, which, at £35.99, was £5-£6 more than at its rivals. There was also better news for Tesco in the separate Grocer “Mystery Shopper” survey on Service and Availability, as their store in Beckenham easily topped the rankings, with an impressive score of 84 out of 100.
Morrisons Store Clsoure watch: We noted on Friday that Morrison’s hadn’t provided a list of the extra 11 stores that it said on Thursday are to be closed, but, thanks to Retail Week, we can confirm that the 11 supermarkets are Burnham on Sea (Somerset), Castletown (Sunderland), Clevedon (Somerset), Little Hulton (Greater Manchester), Northallerton (North Yorkshire), Oldbury (West Midlands), Salford (Greater Manchester), Shildon (County Durham), Streatham (London), Tyldesley (Wigan) and West Bromwich (Hawthorns, West Midlands). As far as we can gather from comments on Twitter, these seem to be either poor sites or stores hit by new competition, eg the Streatham store, which only opened in 2010 in an ex-Safeway site, but was hit by a big Tesco opening nearby.
AO Watch: A severe bear squeeze developed in AO.com (aka AO World) last week, based on various City meetings with CEO and founder John Roberts in which he apparently revealed that Amazon had made a takeover approach pre-IPO last year…and it was announced on Friday afternoon that his fair-weather friends at Odey had increased their stake by 650,000 shares to a total of c44.6m (10.6%). However, that didn’t the shares boiling over by c6% on Friday, so that the shares were “only” 14.5% up last week at 153p at the close on Friday (having hit as low as c120p three weeks ago), and it will be interesting to see if the bears can get on top of AO again this week, ahead of the analysts trip to HQ in Bolton on Monday next week, Sept 21st.
Nick Bubb – email@example.com
This was produced for distribution last week: 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:
Thomas Cook ,TUI, Dart Group & August – domestic v overseas leisure spend:
• The evidence suggesting that consumers travelled overseas more in August 2015 than they did last year is now pretty compelling.
• This week, we’ve had comments to that effect from WTB, GOAL, the Peach Tracker, Homebase & the BDO Retail Tracker.
• JDW this morning did not mention the lack of customers per se but it did accept that current trading (the 6wks to 6 Sept) had slowed a little further.
• Add to that the fact (see today’s email) that we have Gatwick, Stansted and Heathrow all saying that they had record months in August and it does look as though there was a bit of an exodus (of consumers and of their money) overseas this summer.
• This is not so good for the UK’s pubs & restaurants (though it may only be a return to more normal spending patterns after the staycation boom of recent years) but it is definitively good news for the tour operators, TCG, TUI and Dart Group.
• The latter, which is a March year end, has already updated on summer trading. It reported:
o “The good start to the financial year has continued with strong summer 2015 trading in our Leisure Travel business.
o “Demand for our package holiday products continues to grow and as a result the number of package holiday customers as a proportion of overall flown customer numbers has increased.
o “The business has also achieved higher airline ticket yields and load factors than in summer 2014. This performance is against a backdrop of slightly lower seat capacity.
o “Early indications for winter 15/16 Leisure Travel bookings are satisfactory.”
o Dart Group (Jet2) concludes “In view of the continued strong demand for our Leisure Travel package holiday and flight-only products, the Board is optimistic that Group performance for the financial year ending 31 March 2016 will materially exceed current market expectations.”
• With the above in mind, Langton is looking forward to hearing when TCG and TUI (both September year ends) update on Q4 trading later this month.
• The groups both have sizable Continental European business but, as far as their UK businesses are concerned, trading should have been good.
• Recent share price weakness has been caused by concerns re Tunisia and Greece. Some stock will have been moved from North Africa and the Eastern Med to the Western Med and the Canaries but, overall, we would hope to see that TCG and TUI have traded somewhere between ‘well’ and ‘very well’.
Credit crunch: US housing bubble officially over?
Date from the US Census Bureau shows that home ownership levels in the US are back down at 50yr lows:
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Food costs: The UN reports that global food prices fell by 5.2% in August, the steepest drop in seven years. We’ve been commenting on food price falls for some time. Cocoa and OJ may currently be bucking the trend but food input costs should fall. JDW said as much today. This helps companies both through their own cost-line and because their customers have a little bit left over at the end of the week to spend down the pub.
• Morrison’s: Interesting to see Group CFO Trevor Strain putting some more money into the company whose beans he counts. Mr Strain yesterday bought 58,453 ordinary shares at 169.8p. His total shareholding following this purchase is a still relatively modest 97,794 shares.