Langton Capital – 2015-10-03 – Just Eat, Texas Roadhouse, restaurant failures & other:
A Day in the Life:
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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/
So who thought it was a good idea to ensure that hamster wheels squeak all night?
And why do they have to be so loud?
In fact, the volume at which they make themselves known is pitched at about the same level as a jumbo jet taking off but the noise is somehow much more annoying in that its incessant and, in the few moments when one or the other of the little beasts isn’t belting around at top speed, you can’t help picturing one of them wrinkling its nose and sniffing the air in order to ascertain whether or not it’s disturbing people sufficiently.
So maybe I should oil the wheel, you say? Yes and, if anyone knows a rat-poison-based grease out there that would do the job, please let me know. On to the news:
Pub, Restaurant & Drinks Producer News:
• Just Eat updates on Q3, says has seen ‘another period of excellent growth’. Has ‘delivered orders ahead of management expectations’. Adds that it has seen ‘an acceleration in order momentum over the period.’
• Just Eat reported sales +64% in Q3 or +48% LfL. Year to date reported sales +57%, LfL sales +47%. Says has seen ‘continued success with our marketing campaigns and product improvements across multiple geographies’. This ‘has driven growth in active users, order frequency and online restaurants’.
• Just Eat Q3: UK order growth +50% y-o-y. Says it was ‘benefitting marginally from poor weather over the summer’. Now 74% of orders (Q3) were made via mobile devices, of which more than 41% were by app. It made two small acquisitions in Q3 and Menulog, bought in June 2015, is being integrated.
• Just Eat ups guidance. Expects FY revenues of above £240m (previously £230m). EBITDA should be in line. it says ‘supported by this improved revenue performance, the Group continues to drive growth with increased investment in areas such as improving the customer experience, bringing greater choice to our consumers and driving the channel shift to mobile. As such EBITDA for the full year remains on track and in line with current expectations.’ CEO David Buttress reports ‘JUST EAT delivered a strong quarter of organic order growth. Our strategy of investing in technology and marketing to drive growth has delivered orders ahead of management expectations with an acceleration in order momentum. In the context of this performance, we are raising our revenue guidance for the full year.’
• Texas Roadhouse reports Q3, says sales $438m +15%, net income $30.6m, EPS 29c vs 27c last year
• Texas Roadhouse reports ‘comparable restaurant sales increased 6.9% at company restaurants and 7.7% at franchise restaurants’. Says ‘restaurant margin, as a percentage of restaurant sales, decreased 22 basis points to 16.6%, primarily driven by higher labor costs.’ Wages up along with healthcare costs. This ‘more than offset the impact of higher average unit volume’.
• Texas Roadhouse opens 10 restaurants in quarter. CEO Kent Taylor says overall ‘we are pleased with our third quarter results’. He says ‘our new restaurant pipeline is strong and we remain on track with our development plans for 2015 and 2016. The consistency of our business and our healthy cash flow generation allows us to fund our new restaurant growth through internal cash flow, while also returning excess capital to our shareholders through dividends and share repurchases, driving further shareholder value.’
• Texas Roadhouse starts Q4 some 5% ahead in LfL sales. Food cost inflation now 5%, however. Sees LfL sales rising into 2016.
• Kona Grill Q3: Restaurant sales +19.6% to $35.9m with LfL sales +1.6%. Net loss of 13c per share vs 2c earnings last year.
• Kona Grill marks ‘tenth consecutive quarter of positive same-store sales’ with positive comps in 20 of the past 21 quarters. CEP Berke Bakay says ‘the combination of softer sales than anticipated, a larger proportion of non-comparable base restaurants this year versus last, along with higher labor costs due to a tighter labor market, and training costs and other expenses associated with the reopening of our Denver restaurant resulted in deleveraging of our restaurant operating profit margin.’ Re the outlook, he adds ‘Kona Grill remains a long-term growth story and we are excited to be executing our development plans.’
• Nearly two-thirds of UK operators responding to Horizon’s latest Eating Out-Look survey say their food sales have increased year-on-year. The figure is lower than last year, however, and the third that reported no real change represents an increase on 18% twelve months ago. Over 70% of the operators, which included representatives from the restaurant, hotel, pub and bar, and contract catering sectors, were optimistic that food sales would rise over the next 12 months, compared to 90% last year.
• Horizons’ analyst Liz Land commented: ‘Having recovered from the economic downturn, the eating out market is now levelling out and growth is likely to be much more conservative illustrated by the declining number of operators still expecting to see sales growth. Feedback from the market suggests that consumers are still being cautious over spending. This demonstrates the need for operators to keep their prices competitive.’
• Morgan Davies-led Barburrito has agreed to acquire five-strong Scottish rival Punto Mexican Kitchen for an undisclosed amount. Pinto’s sites are based in Glasgow and Edinburgh and will be integrated into the Barburrito brand at a cost of £300,000 over the next half year. The deal, which Morgan Davies has described as ‘transformational’, takes Barburrito to 17 sites.
• Accountancy firm Moore Stephens claims that the number of restaurants going out of business last year was 50% higher than during the recession. Some 1,294 restaurants became insolvent in 2014/15 compared to 865 in 2009/10, despite various reports of increasing consumer spending power. The result may be due to increasing competition, innovation and a greater focus on quality and value, with an influx of new entrants pushing others out. Rising rent pressure, described as ‘extremely high’ and competition for staff are also key factors.
• Google has announced plans to start a drone delivery service for packages in 2017.
• Asda and Tesco lost share of the entertainment market in the past quarter, down 11.2% to 9.2% and 0.3% to 15.7% respectively. Sainsbury recorded the biggest gain of the grocers, up 0.9% to 8.2%, while Morrisons saw its share grow 0.2% to 3.4%. HMV, Game and Argos all also increased their shares of the market for music, videos and games.
Travel & Hotels:
• Review into Thomas Cook post Corfu deaths suggests may have lost touch with customers, 25% of complainants take their complaint to law
• Greek minister of tourism Elena Kountoura said 18 million tourists are expected to visit the country in 2015, compared to 15.3 million in 2014. British tourists are thought to have contributed to the success, growing 25% from 1.4 million to 1.8 million.
• Visitor numbers to Turkey have fallen by 2% in the first nine months of the year. London Turkish Tourism Office attaché Ali Selcuk Can said of the decline: ‘It is difficult to explain the drop. There are different kinds of issues in some of the neighbouring countries that have affected tourism. We are trying to emphasise there is no security issue within Turkey but we have seen the drop anyway.’
• Sportech’s appeal over a £97m VAT repayment claim due to be heard this week has been pushed back. The Court of Appeal will notify the group once a new date has been set.
Finance & Markets:
• Global manufacturing growth rose to a seven-month high in October but remained low despite factories steeply cutting prices. JPMorgan’s Global Manufacturing Purchasing Managers’ Index, produced with Markit, registered a 51.4 in October compared to 50.7 in September. Anything over 50 indicates growth.
• US manufacturing grew at its slowest rate in two years in October after factory activity declined for the fourth month in a row. Data from the Institute for Supply Management also shows manufacturing jobs fell by 8% month-on-month in October.
• The UK’s manufacturing sector’s PMI better-than-expected reading of 55.5 in October was its best month since June 2014. The increase from 51.8 is also one of the most substantial rises since the survey began, despite a struggling steel sector.
• World markets: UK + Europe up yesterday with US up in later trade. Far East up in Tues trading
• Oil price down a little (though up in last few hours), trading at around $48.80 per barrel.
Retail Roundup from Nick Bubb:
ABF/Primark: Today’s final results for the year to Sept 12th from the conglomerate Associated British Foods (ABF) are dominated, as usual, by its Primark subsidiary, but mighty Primark doesn’t look to have been in such good form over the last year, with operating profits up by “only” 2% to £673m, on the back of 8% sales growth to £5.35bn (+1% LFL). ABF blame the fall in Primark’s impressive operating margin from 13.4% to 12.6% on the fact that trading was exceptionally good in the previous year and that stock mark-downs returned to more normal levels. ABF do not single out the recent opening in Boston in US for mention, but they are committed to opening a further 7 stores in the US in the next financial year.
Pendragon: After the bullish trading update from its great rival Lookers on Friday, the car dealer Pendragon has followed suit today with its own update and, although the statement is overly verbose (“New gross profit” is the gross profit on sales of new cars, in case you’re wondering), the key point is that “the performance of the Group is in line with expectations for the full year, which were upgraded in August”. Interestingly, Pendragon also say that “We believe the UK new car market has reached its natural level” (c2.6m cars).
John Lewis Sales Watch: The weather on Saturday was unhelpfully benign, in terms of selling Autumn Fashion, whilst the Rugby World Cup Final will have been a distraction for many shoppers, but the weather at this time last year was also very warm and the comp was therefore soft, so we would still expect trading at that great High Street bellwether John Lewis to look reasonable last week. We would pencil in +2%/3% LFL sales overall (ex the impact of the new Birmingham store), ahead of Friday morning’s official figures for w/e Oct 31st. Nick Bubb – email@example.com
This was produced for distribution Friday 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:
London rents, property bubble etc.:
• UBS would have it that London property is the biggest property bubble in the world. Fleurets report that higher London property prices are driving rents in the capital – see earlier email.
• There’s a bit of a trend developing but these things tend to be finite.
• Higher asset prices, paid admittedly by consenting adults, have been incentivising new owners to charge higher rents
• Demand has been there with new entrants, especially in the casual dining arena, competing for space
• Whilst good operators – and particularly good new entrants – can make excellent returns, there is the potential for this to end badly.
Fulham Shore & Bukowski:
• As mentioned in earlier emails, we see chicken, pizza and burgers as the staple products across casual diners
• No coincidence that Soho House has Chicken Shop, Pizza East & Dirty Burger.
• Fulham Shore (currently largely pizzas) has made it plain that it is to expand into the burger market
• This is arguably somewhat crowded already but, as we have maintained for some time, new entrants often cause more trouble for incumbents than they do for themselves
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Price of basic foodstuffs taking another header into the dirt. Wheat, pigs, soybeans all lower.
• Orange juice price, perhaps strangely, hitting recent highs:
• Majestic Wine share price truly off the top. Now 334p, was 470p 3mths ago hence down by nearly 30%. Question perhaps is why did the shares rise quite so much on the acquisition of Naked Wines in the first place? Defending market share against the food retailers, not least Aldi & Lidl, must be something of a challenge.
• Evolution continues apace. Burger King trying alcohol with their burgers in the UK. Will be interesting to see if other operators follow suit. McDonald’s currently serves alcohol in a number of European territories.
• New car registrations out on Thursday. Will give us a view on the big-ticket, small-ticket spending debate.
• November is a big month for pub figures. Including early Dec, we will be hearing from JD Wetherspoon, Revolution, Punch Taverns, Young & Co., Enterprise Inns, Fuller’s, Mitchells & Butlers, Marston’s and Greene King.