Langton Capital – 2016-03-09 – Restaurant Group, Pizza Express, economy & other:
A Day in the Life:
Just a sign of how things are evolving in the on trade.
Langton visited a (rather trendy) hostelry in Shoreditch where, apart from being the eldest people there by a couple of decades, we sampled a couple of beers – at £5.80 a pop, I feel compelled to say.
Whilst blocking the bar, we were able to observe the drinking habits of a certain type of Shoreditch resident a typical one being the bearded & woolly hat weating hipster who came in with his three mates, ordered a coffee, said no, he wasn’t buying a round as his colleagues would all be buying their own drinks & then proceeded to pay on a contactless debit card.
And nobody raised an eyebrow cementing in my mind that there’s not choice other than to evolve and stay relevant as far as your customers are concerned. On to the news:
Restaurant Group – FY Numbers:
Full year results – 52w to 27 Dec 2015:
The Restaurant Group has this morning reported full year numbers to 27 December and our comments are set out below:
Full year numbers:
• Total revenues are up by 7.9% at £685m
• LfL sales for the year (as previously reported) were up by 1.5%
• EBITDA of £128.0m was some 9.4% higher than last year
• Operating profit was up by 10.5% and profit before tax was some 11.2% higher at £86.8m
• EPS was up by 12.8% at 33.8p and the group is paying a full year dividend per share of 17.4p, up by 13%
More on trading:
• The group opened some 44 new sites in the year and it says these ‘sites [are] generating consistently strong returns on investment’
• It broke the 500-unit line during the year and says that it has a strong pipeline of new sites to open this year and beyond
• Company somewhat spoils the party by saying LfL sales in first 10wks of current year are down by 1.5%
• It says ‘the more challenging trading conditions we saw at the end of last year have continued into the early part of 2016, reflecting a softening in consumer demand and weaker overall consumer confidence.’
• It says ‘whilst still early in the year, our assessment is that this more challenging environment and recent trading patterns are likely to persist.’
• Group adds ‘although total sales will continue to increase as our new restaurants open and deliver good returns, in the current environment consistent like-for-like sales increases are likely to be difficult to generate.’
• Overall, tries to remain optimistic, saying ‘however, notwithstanding this backdrop, we are confident that the underlying strengths of our business and brands, combined with the mitigating actions we are taking, will ensure that TRG continues to making profitable progress in 2016 and the years ahead.’
• CEO Danny Breithaupt reports ‘TRG has made good progress in 2015 and, despite difficult trading conditions, delivered double digit growth in profits and earnings per share.’
• He says ‘our strategy of improving the balance of the portfolio is starting to take shape. During the year we opened 44 new restaurants and pubs, taking us past 500 sites for the first time, an important milestone for the business. Our new sites are set to deliver strong returns.’
• Mr Breithaupt goes on to say ‘in common with most consumer businesses we will again have some challenges to face in 2016. However, I am confident that the underlying strengths of our business will enable us to successfully navigate our way through this more challenging external environment.’
• The CEO concludes that the staff have been critical to the group’s success and says ‘I look forward to leading them through what I am sure will be another exciting year for TRG in 2016.’
Langton Comment: Restaurant Group has reported numbers in line with those flagged at its full year update but it has once again reported that trading has been ‘difficult’ and that there will be some ‘challenges to face in 2016’.
As mentioned in earlier emails, observers, shareholders etc. are on a journey with RTN from a stock where it was assumed expansion would be effortless and never-ending to a place where trading may be a little more ‘difficult’, ‘challenging’ and the like.
This has seen the PER fall from perhaps 22x or 23x current year earnings to the 15x 2016 EPS at which the group’s shares trade today.
And this has clearly meant that the shares are less expensive than they were but, if growth is to abate further and the EPS numbers come under (downward) review, then we may see further weakness.
For the moment, whilst we acknowledge the merits of RTN, we would seek to make investments elsewhere.
Pub, Restaurant & Drinks Producer News:
• Independent pubs saw sales decline by 5.5% in 2015 compared to a 4.7% rise for branded chains, according to the NPD Pub Tracker. Cyril Lavenant, director of Foodservice at NPD, said: ‘The figures confirm that independent pubs are still struggling to increase their relevance in the highly competitive foodservice market. 2015 saw healthy growth for the foodservice market in general as both promoted and non-promoted visits have increased. In contrast, promoted visits to pubs declined in both branded and independent outlets.’
• Las Iguanas chief financial officer Kieron Pollock is to step down and the chain’s senior management is set to be restructured, writes Propel.
• Hony Capital-backed PizzaExpress grew LfL sales by 0.5% across its UK and Ireland stores for the 28 weeks to 10 January. The group said demand for its delivery service has been strong since its September roll out, while its chicken concept Reys has received positive feedback and its recently acquired Firezza has ‘lots of potential’. Management acknowledge the ‘challenging market backdrop’, however, as rival pizza operators continue to expand.
• Pizza Express. CEO Richard Hodgson says group has performed well ‘despite a more challenging market backdrop’. He says ‘our retail business continued to trade well, with pizzas and bread continuing to grow ahead of the market in both volume and value.’ The group continues to expand and plans to open between 15 & 20 units in both China and the UK per annum going forward. This year to date, it has opened 8 in China and 13 in the UK.
• Costa is extending its partnership with salad operator Chop’d to a total of 18 sites across the capital.
• Shake Shack’s better-than-expected Q4 performance was not enough to keep its highly-rated shares from falling 7% in after-hours trading. Net income came in at $1.2m for the quarter, or seven cents per share, up from a net loss of $1.4m, or five cents per share, in the same period last year. Revenue rose 47% to $51.1m.
• South West MPs have urged MPs to lobby the Chancellor, or sign Early Day Motion 919, calling for a further cut in beer duty in the Budget next week.
• A recent poll of The Association of Valuers of Licensed Property (AVLP) shows that 72% of members feel the licensed property market is more buoyant now than a year ago.
• US wine exports hit $1.61bn in 2015, up 7.6% YoY, while volumes rose 4.1% to 461 million litres as trade to the UK and EU remained strong. Some 90% of the country’s wine exports come from California.
• Champagne shipments to the UK increased by 4.5% in terms of volume last year, confirming it as the drink’s largest export market.
• UK hotel sector investment is anticipated to remain high this year, but an international law firm warns that operators must work hard to secure a ‘decent return’ on capital. The results of Berwin Leighton Paisner’s European Hotel Market Survey suggests that London in particular is in for a busy year of M&A activity.
• Thomas Cook has now cancelled its Sharm el Sheikh programme for the whole summer season and will not return until 1 November at the earliest.
• Global passenger demand for flights rose by 7.1% YoY in January, while collective airline load factor rose 1.1% to 78.8%, the highest ever recorded for the first month of the year. The strong start to the year was ahead of the 2015 full-year growth rate of 6.5%, according to latest Iata figures.
• The Hinduja Group will convert the Old War Office in Whitehall into a five-star hotel after acquiring the site from the Ministry of Defence for £350m.
Finance & Markets:
• Governor of the Bank of England Mark Carney has said that the Brixit debate is the main medium term risk to UK stability. He will not indicate support, one way or the other, saying only that the Bank stands ready to attempt to achieve monetary stability, whichever way the debate goes.
• IMF warns risk of ‘economic derailment’ across the world. Says we (or somebody) must take steps to boost global demand. No2 at the world body David Lipton said ‘the IMF’s latest reading of the global economy shows once again a weakening baseline. We are clearly at a delicate juncture.’
• Chinese exports fell by 25.4% last month. They were impacted by the Chinese New Year. Imports were 13.8% lower.
• UK and European markets were lower yesterday. US also down and Far East down in Weds trading.
• Oil price off the top a little, trading at around $39.75 per barrel.
Retail Roundup from Nick Bubb:
Lookers: After the upbeat news from Vertu Motors yesterday, today’s focus in the Motor sector switches to Lookers, via their strong-looking finals and Andy Bruce, the CEO of Lookers, says: “We have delivered another strong trading performance in 2015, our seventh consecutive year of increased profits, which provides further evidence that our business model is both resilient and expansive through the cycle…we are ideally placed to take advantage of growth prospects across all areas of the business as well as consolidation opportunities in the sector, not least because businesses of scale will be the winners in our sector. This gives us confidence that we will deliver another improved performance in 2016”.
Retail Business Technology Expo (RBTE) Watch: This free-to-attend conference and expo runs over the next two days at London Olympia. Over 15,000 visitors are expected to head through the doors during the course of the two days, for a top-level conference programme and an exhibition of over 350 “technology solution providers”. The key presentations today are from John Lewis’s Head of Omnichannel (Mark Lewis), Hammerson’s Head of Multichannel (Sophie Ross), Sainsbury’s Director of Online (Robbie Feather) and the Screwfix CEO (Andrew Livingston).
John Lewis Partnership Sales and Profit Watch:
BDO High Street Sales Tracker: The weekly High Street sales index of medium-sized Non-Food chains assembled by the accountants BDO again paints a better picture of underlying Fashion store trading momentum last week, given the earlier fall of Mothering Sunday. Helped by a very weak comp, overall Fashion store LFL sales were up by 2.7% on last year in w/e March 6th and Total store LFL sales were up by 5.6% (including a few Lifestyle and Homewares retailers), whilst overall Non-Store/Online sales were up by as much as 29.7%, boosted by the Mothering Sunday trade.
Grocery Market Share Watch:
Today’s Press and News: We haven’t had time to read all the papers yet, but the FT follows up the story it helped to fuel yesterday about “a mystery shareholder” in Burberry with a detailed background piece on the problems of the company under new CEO Christopher Bailey, noting that the new investor is most likely to be a private equity or sovereign wealth fund. And the FT market report leads with the news that Tesco hit a five-month high yesterday, on growing confidence that its sales and profit margins have stabilised, after the latest Kantar data and Macquarie and Bernstein both advised buying the shares ahead of next month’s final results. The surprise news today is that Hotel Chocolat Group is to float on AIM, whilst Vertu Motors is raising £35m via a placing.
News Flow This Week: Tomorrow brings the Morrisons finals, the John Lewis Partnership finals and the much-awaited Home Retail Q4 trading update. Nick Bubb – 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:
• Shares threatening at the time of writing to fall once again following the group’s trading update on 3 March
• Price now down to around 3680p from 4049p last Wednesday (down 9%).
• Shares hit their high of 5440p in April last year. They are now a third lower than their 12mth high.
• Whitbread’s world hasn’t stopped spinning but, ahead of clarity (for better or worse) at the group’s April FY numbers, there remains a degree of uncertainty
• Both the EPS and, perhaps more importantly, the rating attached to it, remain under review
• The shares could become cheap but, for the moment and with the UK hotel market (despite PwC comments this morning) looking to us at least as though it is past the peak, we remain on the side-lines
• Re Costa, we accept both that 1) the weather impacted Q4 and 2) that LfL sales aren’t the only way to grow revenues – you can open new stores as well
• However, the market seems to have ignored the ‘don’t shoot the messenger’ request
• That may be unfortunate but it is what it is. Short term bounces aside, WTB shares may remain somewhat speculative ahead of its 26 April numbers
• PwC expects REVPAR in London up 1.9% this year and 2.7% next.
• This, to us at least, looks a little ambitious.
• REVPAR could move higher this year – courtesy of rates, occupancy is falling – but the exit rate come Dec could be rather poor
• Suggesting that 2017 may be more of a challenge.
• Recovered overnight to >$40 per barrel. Now moving a little higher still, trading at around $40.60 per barrel. Was last >$40 in Dec last year.
• The US oil rig count has apparently fallen for the 11th straight week
• Pretty material rebound given the <$28 at which it was trading back in mid-February. Price has risen by 45% in three weeks. As this is the single-most important commodity in the world, you may need to read that twice.
Commodities & input prices:
• For gold & gold vs oil, see below.
• The iron price had its best day apparently ever (or for at least as long as traders could remember) yesterday at plus 20%. Yes, 20%.
• Iron is clearly a pretty important input.
• Recent US$ weakness has led to a bump up (slight) in the prices of some soft-commodities.
• One would hardly conclude on the evidence of the above that inflation was in danger or returning – but nor are rising commodity prices consistent with deflation (re the CPI) over time
Gold vs Oil:
• Gold price up again. Showing around $1,275 per ounce.
• Though both commodities are currently rising in price, oil is stronger than gold meaning that the gold/oil ratio is slipping a little – albeit from all-time highs.
• Ratio is now such that it takes 31.4 barrels of oil to buy an ounce of gold. Peak was around 34.5 with the longer term average around half that level.
• Tempting to conclude that, if you were a gold-bug, you’d be dumping the yellow metal to buy oil.
• Aide memoire:
o Gold Oil ratio up = risk off investing
o Gold Oil ratio down = risk on investing
o Ratio stable, both prices rising = political uncertainty
o Ratio stable, both prices falling = ask us again if it ever happens