A Day in the Life:

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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/ 

So what is it with flavourings these days?

I mean I bought a chicken and mushroom pasty over the weekend and, whilst I kind of know what they mean by calling it chicken, that is I couldn’t think of anything else that it most closely resembled, it was to chicken what a telephone directory might be against a book that had a beginning, a middle and an end.

Perhaps it had simply been assembled in a factory that had had a chicken in it. You don’t have to leave the feathers in to persuade me that it had originally come from a winged fowl but get real, a glance in the right direction would surely do some good and beef and onion, for example when applied to crisps, is even worse.

Not surprising, perhaps, that a number of ‘meat’ flavoured crisp packets these days have ‘suitable for vegetarians’ emblazoned on them. On to the news:

The News:

Pub, Restaurant & Drinks Producer News:

• Greggs updates on Q4, says it has had ‘a good finish to an excellent year’ with total 52wk sales +5.2%, LfLs +4.7%

• Greggs Q4. Says LfL sales in the quarter +2.3%, a slowdown reflecting stronger comps towards end-2014. Group has completed 202 refits in 2015, plus 20 conversions of larger bakery cafés. It has opened 122 shops in the year and closed some 74 units.

• Greggs Q4. Says full year results anticipated to be in line with previous expectations. CEO Roger Whiteside comments ‘2015 saw us deliver another excellent year of progress as we continue to transform Greggs into a modern, well-invested food-on-the-go retailer.’ He adds ‘we anticipate that we will report full year results for 2015 in line with our previous expectations. In the year ahead we will continue with the implementation of our strategic plan to enable the business to compete more effectively in the food-on-the-go market.’

• Greggs: Q4 LfLs ‘slowed to 2.3% in Q4 as we came up against stronger comparatives + impact of weaker footfall in some shopping locations.’

• Greggs says ‘sales over the Christmas period were in line with the overall trend for Q4’. That is slower than rest of year. Greggs adds ‘sales growth has been particularly strong in sandwiches and drinks, including our healthier options ‘Balanced Choice’ range including new salads and ‘no added sugar’ drinks.’ It says ‘our new hot food menu, with an improved hot sandwich range and fresh soups, is also selling well as customers become increasingly aware of our new food-on-the-go options.’

• Greggs says breakfast-on-the-go is ‘our fastest growing part of the day with sales of coffee continuing to grow strongly.’ It will add ‘flat white’ and an improved ‘mocha’ to its coffee menu this year.

• Greggs outlook. Says ‘since our last update, trading has been broadly consistent with our plans’. Says numbers in line. It adds ‘in the year ahead we will continue with the implementation of our strategic plan to transform the business so that it can be ever more competitive in the food-on-the-go market, whilst also driving efficiencies and adding capacity for further sustainable growth.’

• Just Eat updates on FY order intake, says ‘the momentum reported during the year has continued’. It adds ‘this ongoing strong performance puts us in an excellent position for the full year results.’ It has reported order growth in the full year (LfL) of 46% compared with 47% in H1. David Buttress, CEO, reports ‘I am delighted with our growth through 2015, which provides an excellent base for further development of our business. We enter 2016 with continuing confidence.’

• BC Partners-backed Cote has acquired South American concept Limeyard and American diner Jackson & Rye, and plans to roll out both concepts. Jackson & Rye currently has three units in Chiswick, Richmond and Soho, while Limeyard has one site in Ealing. Cote is understood to be looking for more M&A opportunities to operate alongside its existing 71-strong brand.

• Morrisons sales improved in the nine weeks to 3 January (ex-fuel: +0.2%, inc. fuel: -0.6%), with like for like number transactions up 1.3%. Online sales are also up 100% year on year in an improved display from the grocer since bringing in new management. Sales contribution from net new space was down 1.4%, following the disposal of 140 M local stores and previously announced supermarket closures.

• MRW. The grocer has cut prices (excluding fuel) by 3.2% this year and 7% over the past two years and is continuing to clamp down on multi-save promotions. Morrisons has also been busy trimming the fat, with 800 head office roles having been removed since the start of 2015/16 and consultation beginning on the closure of another seven supermarkets. Head office restructuring and store closure costs of £60m are now anticipated after incorporating these new costs.

• MRW. Looking forward, Morrisons still expects H2 underlying profit before tax to be higher than H1 and expects FY underlying PBT to be in the range of £295m-£310m (before the £60m of costs).

• MRW. The group’s balance sheet remains strong, although its debt reduction target for 2015/16 has been further reduced and net debt guidance is now for £1.65bn-£1.8bn. It is continuing to focus on its cash flow improvement programmes and now expects benefits from working capital and property disposals to exceed expectations.

• MRW. CEO Dave Potts commented: ‘We are pleased with our improved trading performance over the Christmas period. While there is of course much more to do, we are making important progress in improving all aspects of the shopping trip, and our customers tell us they are pleased with the changes. In addition, we have made further progress in debt reduction, and our financial position is strong and getting stronger.’

• Kona Grill reports Q4 sales, says LfL numbers up by 3.2% on top of 3.1% increase in the same quarter last year. Announces total restaurant sales up 20.6% to $38.1 million vs $31.6 million for the same quarter last year.

• Kona Grill full year sales + 20.1% to $143.0 million, compared to $119.1 million for fiscal year 2014. Group says ‘the increase was driven by sales associated with the opening of seven restaurants during 2015, four of which were opened in the fourth quarter, incremental sales from five restaurants opened during 2014 and same-store sales growth of 2.0%.’ Berke Bakay, President and CEO of Kona Grill, says ‘we are pleased to drive 3.2% same-store sales growth during the fourth quarter, especially given recent trends in the industry. With positive same-store sales growth in 21 of the last 22 quarters, we continue to take market share with our innovative food and drink offerings and contemporary design. Our strong sales momentum, track record of execution and a robust development pipeline make us uniquely positioned as one of the fastest growing and exciting restaurant
concepts in the country.’

• The D&D London Restaurant group has posted a 4.2% increase in like for like sales over December despite tough comps, suggesting a good Christmas in the capital. Chairman and CEO Des Gunewardena commented: ‘It was good to see strong Christmas trading across the group… We were particularly pleased with 4% underlying like for like sales growth given the strong prior year comparative.’

• Japanese brewer Asahi is assembling a £2.4bn takeover bid for AB InBev brands Peroni and Grolsch. Even after Peroni and Grolsch are offloaded, and after the sale of SAB Miller’s 50% share in its US business Miller Coors to Molson Coors, the resulting ‘megabrewer’ from SABMiller and AB InBev’s merger will be expected to be behind two in three beer sales worldwide.

• Canadean’s latest Global Beer Trends report predicts Africa will maintain its pace as the fastest growing global beer market. South Africa is the biggest volume contributor, followed by Nigeria and Angola. The continent is expected to achieve an average growth rate of 5% from 2015 to 2020, compared to 3% from second-fastest Asia. Mature markets in Europe and North America will grow by 1% or less over the same period.

• London Underground staff are ready to stage three 24-hour strikes on 26 January, 15 February and 17 February over pay and night tubes. London Underground, which has already offered a four-year pay deal and committed to hire part-time drivers to make up for the extra hours, has criticised the unions’ position as ‘absurd’.

Leisure Travel:

• Saga updates on period to 11 Jan, says ‘Group has delivered on the strategic objectives outlined for the year’. It has grown its core business and trimmed its operations in line with plan. Lance Batchelor, Chief Executive Officer, reports ‘in the second half of the year we have continued to deliver on our strategy and are progressing well across all our key initiatives. Our core businesses are growing, the motor insurance panel is developing well, we have signed the contract to build our new ship and we have launched into the wealth management market.’ He says ‘whilst doing all of this we have remained focused on our financial performance and current trading means that we expect to deliver results in line with market expectations for the full year.’

• Travelodge has announced plans to invest £140m in opening 19 new hotels in 2016, which would create as many as 450 new jobs. The sites are intended to grow the hotel brand’s corporate customer base and will be opened in London, Glasgow and Bristol among other places. Peter Gowers, Travelodge Chief Executive said: ‘The value hotel market continues to go from strength to strength, boosted by ever more cost-conscious businesses and the growth in independent leisure travel.  To meet the growing demand Travelodge is continuing to invest in upgrading and expanding our network.  These 19 new hotels, many with our new bar café restaurants, mark another important step in our drive to deliver greater quality for our customers.’

• Skyscanner has raised a further $192m from new investors, in a move that sees the Edinburgh-based online travel site valued at >$1bn, perhaps as much as $1.6bn. The group is now one of the small club of British ‘unicorns’ — private technology companies worth more than $1bn. The group will use the investment to fund acquisitions and to expand internationally. CEO Gareth Williams told the FT the investment will also provide “a measure of liquidity” to existing shareholders. He adds ‘we’re fundamentally a profitable company with organic growth. We’re in a $500bn sector globally, so wanted to make sure we have the funds to accelerate growth.’

• UK hotel investment reached a nine-year high last year, with total transaction volumes reaching £8.1bn after a series of high profile deals. The figure, up 31.6% year-on-year, was helped by major acquisitions including Lone Star Fund’s purchase of the 31-strong Jury’s Inn chain for £680m and Fraser Hospitality’s c£363m deal for Hotel du Vin and Malmaison.

• UK hotel market. Portfolio transactions continued to dominate the UK hotel market for the second year in a row, accounting for 59.3% of sales in 2015 (2014: 52.9%). London was strong, with transaction volumes doubling from £1.8bn in 2014 to £3.6bn, although the regional hotel market saw its share of transaction volumes fall from 71% to 55.6%.

• US hotel market. More than 100,000 new hotel rooms across 865 hotels are scheduled to open in the US this year, with the most active cities set to by New York City and Houston.

• Research from Deutsche Bank suggests AirBnB is expanding its market as opposed to simply stealing market share from hoteliers. Their report finds the RevPAR has remained stable in many major cities that have experienced strong AirBnB growth, though the ‘community marketplace’ for accommodation could move into more direct competition in the future.

• Air France has said the November terrorist attacks in Paris led to a €70 million drop in revenues in December, compounding a €50 million drop decline in November.

Other Leisure:

• Cineworld updates on FY to end-Dec, says total revenues +12.3%, UK & Ireland +11.6%. Profits ‘in line with expectations’. Group says it ‘achieved strong revenue growth for the period’ and says ‘there was admissions growth in both the UK & Ireland and CEE & Israel. In the fourth quarter there were three strong film performances, “Spectre”, “Hunger Games: Mockingjay Part 2” and “Star Wars: The Force Awakens”.’

• Cineworld says ‘there is an attractive film slate for 2016 which includes “Fantastic Beasts And Where To Find Them”, “The BFG”, “Star Wars: Rogue One”, “Finding Dory” and “Captain America: Civil War”. With a strong balance sheet and our plans for continued expansion, we look forward to delivering further value to shareholders in the forthcoming year.’

• Gym Group updates on year to end-Dec, says numbers expected to be in line with consensus market expectations. It says they reflect ‘a further year of strong growth in both revenue and EBITDA.’

• Gym group opens 19 gyms in 2015 to take total to 74 sites. Says membership, at 376k, is +28.3% on last year. Group finished the year with debt of £7.1m ‘which is lower than anticipated’. Gym Group has a pipeline of 12 sites with a target of 15 to 20 openings for 2016. John Treharne, CEO of The Gym Group, says ‘2015 was an important year for The Gym Group with significant expansion of our estate and a successful IPO.’ He adds ‘the excellent performance in 2015 has established a strong base from which to execute our planned rollout programme. We operate a 24/7 business model that delivers state of the art, well-maintained gyms which are affordable for customers and well suited to today’s marketplace. Member satisfaction remains very high. We plan to continue to disrupt the market and to deliver strong returns for our shareholders.’

Finance & Markets:

• World markets: UK & Europe down yesterday. US better & Far East mostly higher in Tuesday trade

• Oil price tests new lows, trading at around $31.10.

• Eurozone investor confidence fell a little in January. Hits 9.5 vs prior year 15.7.

Leisure – The Week Ahead

The LRI was slightly better than the wider market last week, down 2.10% versus the all-share’s 2.82% drop, though this outperformance won’t come as much of a surprise in a rout driven by mining and oil weakness.

Pubs

It was a mixed bag for the big pub companies last week, with Greene King and Wetherspoons slightly outperforming the market, down 1.19% and 1.66% apiece, and Marston’s one of the few risers in the LRI, up 0.73%.  The somewhat troubled M&B meanwhile had a rougher time of it falling 5.3% as investors retreated from uncertainty in a falling market.

In the London pub groups the recent Fuller’s outperformance against Young’s looks to be undoing itself with Fuller’s dropping 4% last week while Young’s was up 3.35%. 

There was a similarly mixed performance from the tenanted pubcos last week, with Enterprise seeing a 4.52% fall last week, while Punch outperformed, down just 0.81%.   The first consultation period for the MRO has been extended ‘well into the new year’, giving tenants time to focus on Christmas trading.

Other Leisure

Whitbread continued to shed value, this week losing 4.07% of its value.  Alison Brittain had her first outing as CEO at the group’s Q3 pre-Christmas, but it came at a time when the hotel market, particularly in London, is looking increasingly toppy, with occupancy beginning to dip and thus revPAR growth being sustained by rate rises.   This obviously can’t go on forever, and investors may have to come to terms with the fact that above inflation revPAR growth in what was originally thought of as a budget hotel chain is perhaps unsustainable.

Patisserie Valarie was the LRI’s best performer, up 1.51%, as investors flock back to their known favourites following a period of profit taking in the wake of Chinese waves in global stock markets.  Domino’s looks to have benefited from this too rising 0.1% in the falling market last week. Will Brumby – will.brumby@langtoncapital.co.uk

Retail Roundup from Nick Bubb:

Morrison’s: The Xmas trading update today was expected to show that sales were at least 2% down LFL, despite weak comps, but over the 9 weeks to Jan 2nd they were actually up, by 0.2% (albeit Online growth drove 0.9% of that). Price deflation was a hefty 3.2%, but LFL transactions in the supermarket were up by a useful 1.3%. Conf call 9am.

Greggs: Today’s pre-close shows that Greggs is still “on a roll”, despite talk of weak High Street footfall before Christmas and the price deflation affecting the big supermarkets, although Q4 sales growth did slow to 2.3% LFL against tougher comps.

Debenhams: The High Street was a tough place for fashion retailing at Christmas, but today’s long-awaited trading update from Debenhams isn’t as disappointing as many had feared, with LFL sales up by 3.7% over the last 9 weeks, even though Online was only up by 15%. And Debs claim that they had less discounting and a lower level of promotional activity! Interestingly, they note “a planned reduction in stock levels across clothing, particularly in weather-sensitive categories” and that Clothing is only 45% of total sales, with Beauty and Gifts doing well. Conf call 8.30am

AO World: The update from AO.com for its third quarter (the three months to December 2015) also looks good, despite the BRC warning about generally poor Electrical sales in December, with UK Online sales up by 35% over the period. AO flag that “We were pleased with the performance of the business through Black Friday week, drawing from the insights of 2014”.

Boohoo:
Given the impact of High Street discounting in fashion and the warm weather, Online clothing retailing wasn’t “a walk in the park” last month, but, on the back of the general Online shopping surge and the greater consumer confidence in parcel delivery networks this Christmas, it was still a good area to be in. And if there were any doubts about Boohoo’s ability to trade their way through these conditions (even though we selected Boohoo as our prestigious “Stock of the Year”), they have scotched them with today’s revelation that UK sales soared by 45% in the 4 months to Dec 31st! The comps were relatively weak, but the City had expected sales growth of “only” around 35%. It should be pointed out that gross margins have taken some of the strain, via increased promotional activity, but, even so, it would be surprising if some
full-year profit forecasts in the City are not edged up, notwithstanding Boohoo’s comment that “We are trading in line with current market expectations for EBITDA”. 

BRC-KPMG Retail Sales Watch:
We flagged yesterday that December (the 5 weeks to Jan 2nd) should have been lifted by the apparent “Sales bonanza” in the last week of the period, w/e Jan 2nd , and that we would therefore pencil in modest overall growth of c0.5% LFL. We also flagged, however, that after two months in a row of slightly negative LFL sales, not helped by continued weak Food trading, it wouldn’t pay to be too bullish, even though Online Non-Food was bound to be strong. And the outcome was…a mere 0.1% LFL growth overall, which implies that things were running down until the New Year Sales kicked in. As Food was still negative LFL (although not quite as bad as in November), the disappointment came in Non-Food sales and although Clothing was weak, given the mild weather etc, the 2 worst performing subsectors were Electrical Appliances (ie white goods) and Other Non-Food (which is
dominated by Electronics): which implies that “Black Friday” pulled a lot of trade forward…Interestingly, Online sales contributed 3.0 percentage points to the year-on-year growth of Non-Food total sales in December, the highest on record, with Stores suffering negative LFL sales…Online Non-Food sales were up by a healthy 15% in total (to account for nearly 20% of overall Non-Food sales) and David McCorquodale, the Head of Retail at KPMG, wittily said: “With 190% of average rainfall falling in December, many consumers chose to login rather than walk in over the festive period”.  

John Lewis Sales Watch: Moving on from December, how has January (the 4 weeks to Jan 30th) started for that great bellwether, John Lewis? Well, we will find out officially first thing on Friday morning, but the comps for last week were quite soft, so if the momentum carried on from the bumper start to Clearance, particularly Online, then we wouldn’t be surprised to hear of double-digit sales growth for w/e Jan 9th…The month (and the year) is yet young, however.

House of Fraser: It was striking that Online sales topped 40% as a proportion of total sales for John Lewis in the 6 weeks to Jan 2nd, but House of Fraser has also been moving apace Online and in the same period they managed to grow Online sales by as much as 33%, which will have moved their overall Online sales percentage up to about 22%. That was the main driver of the 5.3% overall LFL sales growth that HOF reported yesterday and although that will have meant that the physical Stores were only flat LFL, that was a good performance, given the negative Store LFL sales seen elsewhere…And it was also a good performance to improve gross margins by 40bps in such a promotional environment on the High Street, given HOF’s much greater exposure to Fashion sales compared to John Lewis…Nick Bubb – nicholas_bubb@hotmail.com

Monday Wrap:

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:

Capacity issues, London and other:

• Today we cover both 1) the FT’s comment that over-capacity could be becoming a major issue for the casual diners (see various prior emails) and 2) press comment on the likelihood of a 3dy tube strike.

• Neither of these bits of news are likely to be welcomed by the capital’s casual diners.

• New entrants, some sensible, some not, have both a) increased competition & therefore the number of operators wishing to take a slice of the cake and b) bid up the cost of property, rents etc.

• Good existing operators can arguably deal with a) because they are good at what they do but they will have a problem with b).

• Hence when new entrants bid up the cost of property and push rents to hitherto unheard of levels, they may be causing problems for even the best of operators.

• With this in mind, it is not surprising that operators have in some cases been looking to the regions for expansion opportunities.

• Meanwhile, in London at least, branded casual dining is becoming a crowded market.

• This provides opportunities for some operators, frequently new entrants themselves, that are able to accept lower margins and to provide customers with a high quality product at truly good value

• Elsewhere, there are perhaps too many operators trying to enforce 68%, 70% or 72% margins whilst providing their customers with an increasingly mediocre product

• Consumers are unlikely to appreciate being made a fool of and a ‘strong brand’ can only go so far.

Online retailers, SBRY & Home Retail, etc.

• Suggestions over the weekend that SBRY was interested in Argos’s delivery expertise.

• Which is a relatively new one on me but the group has apparently been impressive in recent months with 24hr delivery now possible.

• Independent apparently saying that SBRY sees the purchase of Argos’s delivery capability as the best hope of stopping the Amazon juggernaut. See Nick bubb.

• Tanks vs small boy with catapult or would the combined entity really have a chance of turning the tables?

• And a related thought. If SBRY is buying Argos for its home delivery, which has been put in place only relatively recently, then why doesn’t it build a similar model itself and avoid paying 1) for Homebase and 2) any premium?

Craft brewers etc.

• Perhaps it was always likely (see Innocent Drinks, Pret etc.) that alternative operators would ‘go mainstream’ and, in many cases, be taken over by established operators.

• Certainly craft brewing may be going this way.

• But that perhaps misses the point that many consumers are taking to craft brews because they are not ‘mainstream’ and, given the number of craft brewers out there, it is a simple task to move from Camden or Meantime to Truman or York Brewery

• Following this argument through, it could be that the majors are buying something intangible that, like a puff of smoke, may be gone when you try to grasp it

Holiday companies’ costs:

• We notice that TUI is amongst Friday’s risers. That’s perhaps not saying too much (as it was a down day) but the shares were up by around 2.8% in a market that was generally lower.

• Oil is clearly a lot cheaper than it was a year ago.

• Fuel costs are typically locked in for around a year in advance.

• At any point, an operator may have secured 100% of its current season’s oil, perhaps 50% to 66% of the upcoming season and 33% to 50% of the season after that.

• This means that lower oil prices will take a while to come through to the bottom line.

• We would also mention here that Thomas Cook has recently said that 75% to 80% of any reduction in costs tends to be handed on to customers.

• Hence lower oil prices, though good, will take a while to feed through and will not fall through to the bottom line $ for $. Not by a long chalk.

• Having said the above, we not that Sterling has been markedly weak against the Euro.

• It is giving back (it’s the upper line, the US$ is the lower line) some of the last year’s gains.

• This will impact holiday companies as, very roughly, perhaps around 1/3 of their costs are in Euros (beds), 1/3 in dollars (aviation) and 1/3 in Sterling (head office & retailing etc.)

• Of course exchange rates are also locked in because, though printed brochures are not what they were, the groups wish to lock in costs at the same time as they make promises on prices.

• For the holidaymaker, however, the impact of any change in currency is more immediate as he/she will notice it as soon as they land at the airport

• This may impact 1) the amount of cash that they bring home from their current holiday (this could influence spending at pubs & restaurants) and 2) their inclination (or financial ability) to book another holiday over the medium term

Random information, hopefully not all of it useless:

• A somewhat tacky point but staycations could rise (again) in number if consumers decline to travel overseas in the light of increased terrorist activity

• ASDA is to put another £500m back into customers’ pockets.

• FT carries an interview with Waitrose MD Mark Price in which he made gloomy noises about future industry margins. See Nick Bubb. In this, Waitrose makes common cause with ASDA whilst Sainsbury CFO has been suggesting that 2016 could be the year of grocery recovery.

• Crude price fell by 10% last week alone.

• Oil price low & testing new lows. High natural gas price therefore somewhat anomalous.

• Sugar price strong, most other soft commodities extremely sickly.

• Oils, miners & financials extremely weak on Friday.

• House builders looking strong. Some concerns re level of house prices.

• S&P last week had its worst week in 4yrs.

• Gold rally. Still need a microscope to register its ‘bounce’.