Langton Capital – 2015-10-20 – Whitbread H1 numbers, IHG Q3, grocery stocks & other:
A Day in the Life:
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We had another gerbil bite the dust over the weekend and, after a suitably brief period of mourning, the thing was buried in the mud near the fruit garden, a move that led me to conclude that, after having seen 5 kids through childhood, adolescence and the like, our garden must now be about 80% gerbil and 10% hamster.
And then there are the dog’s ashes to add to the mix as well as the feathers and beaks of the various chickens, ducks and turkeys that have been ingested over the years by the local fox. All of which goes to suggest that the organic composition of the soil that surrounds our little patch of Yorkshire must be rather substantial to say the least. All a propos of nothing, of course. On to the news:
H1 numbers: 6mths to 27 August 2015:
Whitbread has this morning reported H1 numbers for the 6mths to 27 Auguts and our comments are set out below:
Results in brief:
Whitbread has reported sales up by 11.3% at £1,439.6m
Underlying PBT is £291.3m, up some 13.8% on last year
EPS on an underlying basis is +14.0% at 127.3p and the H1 dividend is 28.5p per share, up some 13.1% on last year
In hotels & restaurants, Whitbread reports that the business ‘delivered a good performance in the first half of the year with revenue increasing by 8.8% to £926.9 million.’
It says Premier Inn ‘grew total sales by 12.6% to £642.1 million with rooms available growing by 8.0%, total revpar growing by 4.6% and occupancy remaining high at 83.7%.’
PI continues to take share in UK. Group says ‘we plan to invest around £130 million this financial year in maintaining and improving our product and improving our customers’ experience.’
This year the group will refurbish some 13,200 rooms. The group is making ‘good progress’ towards its 5yr milestones for 2018 and 2020 of c.75,000 and c.85,000 UK rooms respectively.
It has a total of 59,957 UK rooms today and will open a further 4,681 rooms in H2 to make a total of c.5,500 new rooms for the year.
The pipeline stands at 14,308 UK rooms
WTB says ‘our new ‘hub by Premier Inn’ hotel in St Martin’s Lane continues to perform well with an ARR for the first half of the year of around £100, which is a 16% discount to comparable Premier Inns.’ It has occupancy at 95.6%
PI Germany is ‘making good progress’ with the first unit due to open in Frankfurt in March next year. The group has acquired a second site, in Munich and is in negotiations on 8 more
PI International is also ‘making progress’ with LfL occupancy growth +2.8ppts and LfL REVPAR +1.8%. The market in the Middle East has been softer than that in India
Restaurants ‘outperformed a soft pub restaurant market with total sales growth of 1.2% and like for like sales growth of 0.1%.’
Whitbread says margins rose ‘despite modest top line growth’ and it says ‘we have also made good progress in rejuvenating our brands with 56 Beefeaters converted to the new format and 13 Table Tables converted to Whitbread Inns.’
Whitbread reports ‘Costa delivered another excellent performance during the half year, with total sales growth of 16.2% to £514.6 million and system sales up 14.9% to £755.4 million.’
UK sales grew 16.5% to £453.5 million and international sales by 14.2% (13.8% at constant currency) to £61.1 million.
UK like for like sales continued to be strong at 4.4% and Costa Express had a good first half with the installation of 416 new units.
Underlying operating profit increased by 28.4% to £67.3 million and the group says ‘our strong trading performance increased return on capital by 1.9% pts to 48.2% since the full year.’
The group concludes ‘our strong growth keeps us on track for our 2018 and 2020 growth milestones and we expect to open around 220 net new stores worldwide this year and install 700-800 Costa Express machines.’
Whitbread says ‘trading momentum in the early weeks of the second half has been consistent with that seen across the first half.’
It concludes ‘we remain on track to deliver full year results in line with expectations.’
Whitbread reports ‘cash flow from operations continues to be strong’
It has net debt of around £725.9m (2014: £467.2m) to give an adjusted net debt to EBITDAR leverage ratio ‘in line with expectations’
CEO Andy Harrison reports ‘Whitbread has once again delivered double digit revenue and underlying profit growth.’
He says ‘our two leading brands have delivered strong organic growth and continue to win market share.’
Mr Harrison concludes ‘we continue to focus on driving long term organic growth, financed from our own resources and delivering a good return on capital to create substantial value for our shareholders.’
Langton Comment: Whitbread’s shares peaked ahead of FY numbers back at the end of April but they, along with the wider market, have slipped since.
Today’s numbers suggest that the group is delivering on its promises and that it remains on track to hit its 2018 and 2020 milestones.
Hence forecasts would appear to be underpinned. The group’s targets should be achievable and Whitbread has scalable brands. Nonetheless, there remains 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.
Whitbread has to cope with a resurgent Travelodge and the slowing Chinese economy could impact its Costa roll-out in the Far East.
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.
Pub, Restaurant & Drinks Producer News:
• Online wine sales could grow by nearly 12% each year over the next four years, according to Rabobank’s latest Wine Quarterly report. The continued growth of e-commerce platforms is ‘almost unquestionable’, with sales revenue increasing 11% in the first quarter of 2015 compared to a 3.5% rise in total wine sales value.
• The latest Consumer Tracker from Deloitte shows UK consumer confidence rose to a record high in Q3 2015. Ben Perkins, head of consumer business research, said: ‘The outlook is positive for the rest of the year. Consumers are planning to increase their spending on discretionary items in the fourth quarter of 2015. The leisure sector in particularly has profited from the falling cost of many essentials, as consumers are choosing to eat and go out.’
• A study has found that hangovers cost the US economy $77bn (£50bn) each year due to the low productivity and days off work they cause. The study, from the Centre for Disease Control and Prevention, found that the figure rises to $249bn when alcohol-related crime and healthcare is included in the calculation.
• Harrods has revealed that profit in the year to January 31st grew by 4.2% to £146.3m on the back of a 1.2% sales increase to £1.4bn.
• Australian wine exports enjoyed their best period of growth since 2007 in the 12 months to the end of September. Figures released by trade association Wine Australia show a 31% rise in exports to AUD 644m ($468.6m), demand from Asia particularly strong.
• Recovery specialists Begbies Traynor have suggested that there are some green shoots showing in the UK grocery industry. It says ‘the industry shows the first tentative signs that it has adjusted to today’s new low margin environment.’ Begbies Red Flag Alert research for Q3 2015, which monitors the financial health of UK companies, shows that UK food retailers experienced their first quarterly decline in ‘Significant’ financial distress in over two years. It says the measure fell 5% ‘to 5,002 struggling businesses over the past three months (Q2 2015: 5,258).’ The specialist’s retail expert Julie Palmer reports ‘the declining fortunes of the UK food retail industry and its supply chain over the past nine quarters directly mirror the meteoric rise in popularity of the German discounters Aldi and Lidl, whose no frills, low price
• Begbies on the UK grocery market. It says ‘while the major supermarkets have taken drastic action to readjust their ailing business models by slashing prices in a bid to compete, the UK’s damaged food supply chain remains the biggest loser from the changing food retail environment, with levels of financial distress in this sector nearly tripling in just over two years as a result of intense margin pressure.’ It adds ‘whilst the UK grocery sector is not out of the woods yet, our latest quarterly findings indicate that it is seeing the first green shoots of recovery. After a protracted period of job cuts, price readjustments and forced efficiency improvements, businesses across the sector now appear to be better equipped for the new normal of a low margin landscape.’ Begbies concludes ‘the big test over the coming months will be the extent to which
• Commenting on the publication of a report published by the Mayor’s London Music Venues Taskforce, ALMR Chief Executive, Kate Nicholls said: ‘This report raises important issues not just for grassroots music, but for all those involved in the vibrant night time economy. The report mirrors many of the issues we have been raising with the Mayor’s office through our work on the strategic LMR and its members contributed to the Task Force and we support its key recommendations.’
• Tortilla has joined Leon, Abokado and others in signing up to Jamie Oliver’s health campaign by adding a 10p levy to all of its sugary drinks.
• ASDA cutting costs. Has shelved its planned expansion in London + roll-out of click and collect sites.
Holidays & Leisure Travel:
• Intercontinental Hotels updates on Q3, says comp. REVPAR +4.8% with rate +3.6%. Co now has 727k rooms, up 4.3% on last year
• IHG Q3: CEO Richard Solomons says result ‘demonstrates both our ability to drive growth through leveraging scale and execution’. He adds ‘there is increasing momentum across our portfolio of preferred brands. Holiday Inn delivered a record level of room openings, and we are expanding our global luxury footprint, particularly in Greater China where nearly a quarter of our 5k room signings in the region were driven by InterContinental Hotels & Resorts. We continue to expand the presence of our newer brands.’
• IHG Q3: CEO says ‘the completion of the sale of InterContinental Hong Kong marks the successful conclusion of our major owned asset disposal programme, with over 95% of our profit now from the fee business. Our innovative commercial strategy continues to deliver lowest cost revenues into our hotels, and we are on track to deliver a next generation cloud based Guest Reservation System for roll out in 2017.’
• IHG Q3: ‘Looking ahead to remainder of this year, we are encouraged by current trading trends and remain confident in the outlook.’
• UK hospitality industry calls for easing of visa regulations for Chinese visitors. ONS suggests 64k Chinese citizens had visas in Q2. Various campaigns have had some success but the number of Chinese visitors is deemed low compared to the size of the potential market. The UK received 7.4m visitors from continental Europe in Q2 as well as nearly 1m from the US and 152,000 from India.
• Amazon’s hotel-booking service, Amazon Destinations, is closing down after just six months in operation. Existing reservations will still be honoured by the booked hotel.
• Oprah Winfrey is paying $43.2m (£27.89m) for a 10% slice of Weight Watchers and will become a board member as part of the deal. In return, Weight Watchers will have the right to use the chat show host’s name and image on its goods and advertising.
Finance & Markets:
• World markets: UK mixed, Europe up and US shares higher yesterday. Shares in Far East mostly up in Tues trading
• Oil price lower over last 24hrs at around $48.70 per barrel of Brent crude. Price rallying a little after high-stocks sell-off
Retail Roundup from Nick Bubb:
Today’s Press and News: The big story in all the papers is the news that Asda is to scrap the expansion of its click-and-collect service and put the brakes on the rollout of small stores, as it aims to revive its flagging sales by a “back to basics” focus on the core supermarket business. The Guardian Business editorial notes that the economics of “click and collect” groceries for supermarkets is terrible and it’s not surprising that Asda has scrapped the idea. The Daily Mail flags that Bonmarche moved its listing from AIM to the main market yesterday, amidst much fanfare. Apart from the ASOS results today, the other Retail news is that the convenience store chain McColl’s has announced that it is selling 100 small newsagent stores.
News Flow This Week: The latest Kantar and Nielsen Grocery market share figures (for the 4 and the 12 weeks to Oct 11th) come out later this morning, whilst tomorrow morning brings the Home Retail interims. On Thursday we get the Debenhams finals, the Mothercare Q2, the Travis Perkins Q3, the Inchcape Q3 and the ONS Retail Sales for September. Then on Friday morning Sainsbury are taking analysts to see a couple of their new concept stores in London. 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:
Whitbread numbers tomorrow:
• In what will be CEO Andy Harrison’s final H1 statement (he leaves the business in February next year), Whitbread reports H1 numbers tomorrow.
• The group has already updated on Q1 and Q2 saying as recently as 8 Sept that total sales were up 11.8% (LfL +3.9%) for the first 24wks of H1.
• At that point, Mr Harrison said the group was ‘on track for full year expectations’ and said ‘we are continuing to deliver our ambitious organic growth plans with another good quarter’.
• Premier Inn grew total sales by 11.6%, restaurant sales were up by 0.6% LfL and Costa grew UK LfL sales by 4% and total sales were up by 16.2%.
• The group should have a limited capacity to surprise but, though we accept that Whitbread is a quality company and believe that it has true growth potential overseas, there are a number of grey clouds on the horizon.
• The shares are not cheap, Travelodge is somewhat resurgent, CEO Harrison is leaving the company and Costa is facing domestic and international competition.
• Furthermore, China is slowing (and government spending rather than consumption is taking a larger share of GDP) and, though the potential to expand is huge, this slowdown has to be taken into account when determining future likely sales growth.
• Whitbread’s shares were less than £8 in 2008, they were £15 in 2011 and they hit a high of near £55 in Q2 this year.
• They are currently around £47 and, whilst we do not see grounds for a serious setback, there may still be some holders inclined to take profits.
Sanity v vanity:
• A number of McDonald’s franchisees in the US are alleging that its all-day breakfast offer is a disaster.
• This may be somewhat flowery but it does bring to front of mind that there should be a good reason for driving sales and that, if this cannibalises other products or fails to generate a margin, then it may not be a good idea.
• Profit, as they say, is sanity whilst sales can be vanity.
• JD Wetherspoon has on occasion been accused of driving sales over profits but, in its defence, it can be right to take market share and to shore up barriers to entry thereafter.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Vianet has confirmed today that pub trading remains tough. This is not new news. The fortunes of Vianet’s original business remain tied to pub numbers and beer volumes in the off trade – and both are under downward pressure. Pub operators know this and they are making their decisions accordingly. We hear from Punch Taverns (FY numbers) on 12 November.
• Corn & wheat prices down a little as they fumble a rally. Cattle prices up after a sustained dip. Coffee & cocoa prices reverse trend in that the former price is rising a little & the latter falling. Both movements are only partial reversals of earlier established moves.
• China GDP growth slower but better than expected. Some observers pointing to sharp upturn in element of growth coming from government spending. There are only so many bridges etc. that you can (or should build). This may have an implication for some operators such as Yum, Costa and others. Certainly Burberry and Hugo Boss have felt the squeeze.
• PwC tells us that shop closure numbers are at multi-year lows. This isn’t necessarily proof that we are at the top of the cycle but, with the recession now 6yrs behind us, it’s perhaps proof that we are certainly no longer at the bottom.
• Pizza, burger, chicken. There’s little to be gained in reinventing the wheel. Perhaps you could make it better (Franco Manca in pizzas, Chicken Shop or better burgers etc.) but if you make it square, oblong or triangle-shaped, it will not function as well. Operators perhaps know this but the search for the next pizza product – via Mongolian tapas etc. – goes on.
• US v Euro stocks. Interesting to see some US stocks (Netflix, Walmart & others) undershooting, Swiss Franc stock Nestle in the same camp & Euro stocks such as Unilever beating expectations; it couldn’t be something as simple as currency conversion, could it?
• Interesting to see analysts at Profitero finding that the groceries sold by Amazon in the first week of its service in Birmingham were some 45% cheaper on average that the Ocado equivalent. True, the range is narrow but come on… And Ocado is on a forward multiple of 181x falling to 123x November 2016…
• Black Friday, as Nick Bubb mentions this morning, does not expand the retail cake. It’s rather a question, as ex-CEO of Citigroup Chuck Prince said, of feeling that you must dance as long as the music is playing.
• Interesting to see Fuller’s and Young’s share prices moving in opposite directions last week. See our LRI for fuller details.