Langton Capital – 2015-10-05 – Daily Wrap: The Rugby, young people, Tesco, Amazon, LRI & other:
Leisure Wrap & Other:
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. As always, contact us if you’d like further details:
Rugby & leisure:
• We won’t labour the point but England’s exit is not all bad news.
• Food led pubs were suffering when England played & they should bounce back – or at least avoid further dips.
• Ditto cinemas, bowling alleys and the like.
• And holidays traditionally pick up on an England exit – though this is more the case for football tournaments, which are typically held in June & July.
• And MARS & GNK’s wet-led pubs will still be benefitting via their Welsh & Scottish outlets. The former are particularly important for Marston’s.
• And, at the end of the day, what did we expect?
• So the young don’t cook says The Telegraph.
• That’s simplistic but directionally correct and trends tend to move from West to East across the Atlantic.
• Hence it is unlikely that fast food volumes will decline over the next couple of decades or so.
• And it is unlikely that they will remain constant meaning that, by a process of deduction, they are likely to rise.
• So the fast food industry (and the catering industry as a whole) should expand over time but, as new entrants keep making their presence felt, this is absolutely not the same thing as saying that LfL volumes should continue to rise.
• This confirms us in our view that evolution remains the only constant and that, for companies that decline to adapt, their markets are likely to contract
Interest rate trends:
• Weak US employment data on Friday has firmed up the markets & pushed expectations of a Fed rate rise all the way out to the end of Q1 next year.
• Expectations in the last fortnight, therefore, have moved from a rate rise in Sept 15 to Dec 15 and now to March 16.
• The markets have taken this as good news – but this is by no means an easy call.
• Because average rates are only average rates because the spot rate spends 50% of the time below the average & 50% above.
• Hence low rates for longer imply high rates for longer.
• This apart from the issues re moral hazard, punishing savers, bailing out the profligate etc.
• However, for the moment, let’s go with it. This is ‘good’ news.
Langton’s Leisure Retail Index:
• The Leisure Index underperformed the market last week falling 0.79% while the All-Share was up 0.27%, as oil and gas stocks pushed the market higher.
• The index saw M&B continue to drop following its shocker week last week, down another 3.54%, with Greene King down another 1% seemingly in sympathy. JD Wetherspoon and Marston’s however fared markedly better up 3.12% and 3.38% respectively. England’s exit from the Rugby World Cup will have impacted wet led trading, however with most operators pushing more on the food led businesses trading at the big pubco’s is unlikely to have been too badly affected.
• Punch and Enterprise were down 1.65% and 3.15% respectively. Tenanted pubs are typically wet led, and as such may have been down in anticipation of England’s exit from the competition. Today’s non-reaction of the shares suggests this was already in the price.
• Revolutions Bars was up 1.95% after decent interims which saw revenue up 2.9% and Like for Likes up 3%.
• Whitbread shares were down 1.95%. The group has announced it will raise wages to above the National Living Wage without raising coffee prices this year. Will Brumby – email@example.com
Tesco H1 numbers on Wednesday:
• Tesco is expected to reveal a common branding strategy for its businesses when it updates on its H1 results this Wednesday, hot on the heels of Sainsbury’s well-received Q2 figures last week. Shares in the UK’s largest retailer rose c.7% last week as the listed grocers rallied as a result of Sainsbury’s statement, which could exacerbate any negative reaction should Tesco go on to disappoint just one week later.
• The group is currently valued at c19 times earnings and 2.1 times book value despite its share price having more or less halved since mid-2013 to 185p. It boasts a market cap of £14.6bn, although it is not hard to remember when this figure was pushing £20bn.
• The group has been busy lately further simplifying its SKUs and ending the practice of 24-hour stores. However it is worth bearing in mind that Tesco’s FY 2015 loss of £6.4bn was one of the UK’s five biggest corporate losses ever – a turnaround of this magnitude will require a lot of, well, turning around.
• The argument also remains that, as the UK’s market leader, Tesco also has more sales to protect from the relentless advance of the discounters (Aldi and Lidl), new competition (B&M Retail, new c-store entrants) and online (Ocado, Amazon Fresh and, recently, Aldi). Tesco has further to fall than its competitors as it is coming from a higher base.
• The latest Kantar figures show that, so far in 2015, Tesco has lost more market share than any of its competitors:
04 January 2015 13 September 2015 Difference
Tesco 29.1% 28.2% -0.9%
Asda 16.8% 16.7% -0.1%
Sainsbury’s 16.9% 16.2% -0.7%
Morrisons 11.3% 10.7% -0.6%
Aldi 4.8% 5.6% +0.8%
Lidl 3.5% 4.2% +0.7%
While UK sales may show some signs of stabilising at Tesco, the apparent ruling out of the sale of its central Europe business means that a rights issue might be in order should the group’s credit rating and balance sheet deteriorate further. Jack Brumby – firstname.lastname@example.org
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Commodity price trends maintained, cocoa expensive, corn & wheat off the bottom but other softs very weak.
• Amazon; will the incumbents cry ‘foul’. If, as our colleague Nick Bubb mentioned earlier this morning, Amazon Fresh is undercutting even ASDA, would the incumbents be right to suggest that the American giant is cross subsidising? Is it paying for food delivery losses from profits elsewhere in the business and, if it is, is this legal? Amazon may have built its business on a mountain of losses – but it has nonetheless built a massive business.
• Amazon Dash. This is worth knowing about. If Amazon can tap into requirements (new printer ink, washing powder or whatever) via the internet-of-things, will it be able to cut out traditional retailers altogether? Disruptive technology in its purest form but it’s hard to see how the above would work for clothing. Or bread or most foodstuffs.
• Sterling a shade firmer.
• The FT tells us over the weekend that PE firms have been active in the restaurant space and that prices are high. But that some people think they are not.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Lynx Purchasing urges operators to hold their nerve on Xmas pricing. Says lower prices should feed through.
2. DP Poland has opened its commissary after passing its inspection in Poland and can provide the ingredients for as many as 50 stores going forward
3. Telegraph suggests younger consumers eat out more ‘because they don’t know how to cook’. It’s simply lower down list of things to do
4. FT suggests private equity still has appetite for more restaurant deals. It points to recent transactions, says more to come.
5. England’s rugby exit not all bad news. Wet led pubs will suffer (or at least lose the upside) whilst food led operators will be relived.
6. Various: ABInBev deal meant to be ‘this week’. Again. Carrier bags now cost 5p in England. Guardian names Wahaca as latest tips ‘abuser’
7. London Pub Company Remarkable has partnered with street food operator The Bell and Brisket at its Shoreditch pub,
8. Morrisons is winding down a scheme to price match Aldi and Lidl in favour of a loyalty card scheme
9. Sir Richard Branson has weighed in on the Uber debate, telling London’s taxi businesses to ‘accept’ that there is a new model
10. US payroll growth slowed over last 2mths, casting doubt rate rise by end of year
a. World Bank cuts Asia Pacific growth forecast. But everything’s relative, cutting only to 6.5% this year + 6.4% next
b. IEA says Corbynomics could be immensely destructive. Says we need to learn from past. Mr Corbyn may say that’s what he’s doing
c. Greek PM Alexis Tsipras has said Greece must enact its bailout programme quickly if it is to regain access to market financing. Well d’oh!
d. FT reports prices for London’s most expensive properties fallen in year to August following rise in stamp duty