Langton Capital – 2016-03-09 – Daily Wrap: Restaurant Group & 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:
Restaurant Group – Analysts’ Meeting:
Following the release of its FY numbers to 27 Dec, the Restaurant Group hosted a meeting for analysts and our comments are set out below:
Full year numbers:
• See earlier email. Group hit targets but attention moved quickly on to current trading
• LfL sales for the first 10wks of the current year are down by 1.5%
• RTN does not give a detailed brand breakdown but Frankie & Benny’s (52% of outlets) did more than 100% of the damage
• The group’s other brands (excluding Garfunkel’s), namely Chiquito, Coast to Coast, Brunning & Price, the concessions (largely airports) and Joe’s Kitchen were in growth
Where was the hit?
• Internet shopping: Retail parks are down on reduced footfall – internet shopping etc. – and this may persist
• Skewed film releases: Leisure parks were down due to the nature of film releases in Jan & Feb. This year benefitted from the tail-end of Star Wars but last year, Fifty Shades of Grey brought viewers (and diners) out mid-week for several weeks. This may be temporary.
• Cannibalisation: A feature within both of the above is cannibalisation. The group says around 1% of its LfL sales miss was due to new units eating into revenues at existing sites. This will persist.
Other points re trading:
• RTN maintains that cinema attendances were 8% down in January.
• The group was materially impacted by the cancelling of ‘Orange Wednesday’ (cheap cinema tickets) just over a year ago.
• Q1 was the strongest last year so comps are tough.
• Costs this year, ex-wages, look to be benign.
• Recently opened units have been performing as strongly as ever. The point here, however, may be that some other units may be suffering as a result of others opening.
• Pricing: Whilst the group would not be specifically drawn, analysts were left with the impression that prices at RTN were top quartile
• Cannibalisation. The group highlighted Stoke. It had two, c40k per week units. It opened three more on a new location (of 6 units in total). This hit sales at the two existing units by around 15k each – but the group generated 95k of additional income overall. This is both 1) reassuring and at the same time 2) worrying.
• Discounting: Whilst not majorly involved itself, RTN CEO Danny Breithaupt says that he has never before seen as much discounting as he did in January and February 2016
• Overall, the group is highlighting the fact that it is still growing in terms of total sales. The verdict on whether this is what shareholders bought into or not may be being delivered by the share price
• RTN says its competitors are improving.
• Slide 24 shows that leading brands have opened c370 new restaurants in the last year.
• Relatively new entrants such as Bill’s, Turtle Bay and Franco Manca have increased the number of units in operation by 106%, 170% and 533% respectively,
Balance sheet, debt etc.:
• RTN remains lowly geared. This is as it should be for a leasehold-based business with a £74m per annum rental liability. Fixed charge cover, at 2.7x (2014: 2.7x) is not a problem.
• The new openings pipeline is secure (around 40+ per annum) but, given the group’s comments on cannibalisation, this may not be quite the bull-point that it has recently been.
• The group still intends to expand to 850+ units. It intends that Frankie & Benny’s (currently 52%) fall to around 40% of total unit numbers
Langton Comment: Restaurant Group is being impacted by reduced retail footfall (possibly permanent) and by latterly unhelpful blockbuster release schedules (hopefully temporary).
It may also be eating its own lunch but, and herein lies the problem, it’s hard to see what else it can really do because it is better that it does this itself as the alternative would be to stand back and allow a third party to take market share.
And therein lies a problem.
Because this may become a feature of RTN going forward and that may not be what holders had bought into.
If the group is to become more of a reasonable-PER or even a yield stock, then its shares may slide a little further. On numbers that may be downgraded, the group’s shares are currently trading on around 12.2x 2016 numbers with a yield of 4.3%.
That’s what happens if you start off highly rated and then your shares fall by 40%.
Overall, we continue to acknowledge the merits of RTN but, until we have a little more clarity on trading, it will be tough to call the business model and we would seek to make investments elsewhere.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Restaurant Group FY number look in line. Group uses words ‘difficult’ and ‘challenging’ on Page One.
a. RTN FY. LfLs 1.5% for the year, confirming earlier guidance. But current trading LfLs down 1.5%
b. RTN FY, group says ‘more challenging trading conditions we saw at the end of last year have continued into the early part of 2016’
c. RTN is seeing ‘softening in consumer demand & weaker overall consumer confidence.’ Says is ‘likely to persist.’
d. RTN: Says ‘LfL sales increases are likely to be difficult to generate.’ Numbers will be under review, shares likely soft
2. Hony Capital-backed PizzaExpress grew LfL sales by 0.5% across its UK and Ireland stores for the 28 weeks to 10 January.
3. Costa is extending its partnership with salad operator Chop’d to a total of 18 sites across the capital.
4. Shake Shack’s better-than-expected Q4 performance was not enough to keep its highly-rated shares from falling 7% in after-hours trading
5. Poll of The Association of Valuers of Licensed Property shows that 72% of feel licensed property market is more buoyant now than year ago
6. Thomas Cook has now cancelled its Sharm el Sheikh programme for the whole summer season
7. Governor of the Bank of England Mark Carney has said that the Brixit debate is the main medium term risk to UK stability.
a. IMF warns risk of ‘economic derailment’ across the world. Says we (or somebody) must take steps to boost global demand