Langton Capital – 2016-11-02 – JD Wetherspoon, Just Eat, MLC, inflation & other:
JD Wetherspoon, Just Eat, MLC, inflation & other:
A DAY IN THE LIFE:
Thick frost on the grass this morning. Reduced Day in the Life as we have to get the heating on and check the JDW (and other) numbers. On to the news:
JD WETHERSPOON – Q1 TRADING UPDATE:
• JD Wetherspoon has this morning updated on trading for the period comprising the 13wks to 23 Oct 2016 and our comments thereon are set out below:
• Headline Numbers:
• JD Wetherspoon updates on trading saying that LfL sales in the 13wks to 23 Oct rose by 3.5%
• Total sales rose by 2.3%, the lower number impacted by the number of pub disposals during the period
• JDW says ‘the level of like-for-like sales reduced to 2.3% in the last 5 weeks of the period.’ This is against tough comps last year as Oct 2015 featured the Rugby World Cup
• JDW reports its operating margin, excluding property gains, was 8.6%, compared with 5.8% in the same 13 weeks last year.
• JDW says ‘the margin was unusually high during the period and was unusually low for the same three months last year.’ It says ‘the Company currently anticipates an operating margin of around 7% for the current financial year.’
• Balance Sheet, Debt & Outlook:
• JDW reports it has opened one new pub since the start of the financial year and has sold nine. JDW states ‘we intend to open about 15 pubs in the current financial year.’
• JDW says ‘the Company remains in a sound financial position.’ It gives information on debt saying ‘the Company understands that debt always involves risk: the greater the debt, the greater the risk.’
• It says keeping this in balance can be tricky.
• JDW says ‘as well as expanding rapidly by opening new pubs, Wetherspoon has bought back approximately half of its shares in this millennium, at a cost of £400m and has spent approximately £140m on freehold reversions’
• The company reports ‘weighing the level of debt and risk is a difficult job.’ It says ‘insofar as it is possible to generalise, the board believes that debt levels of between 0 and 2 times EBITDA are a sensible long-term benchmark.’
• This hasn’t been achieved by the group in recent years & seems a little inconsistent with sharply higher capex levels and with share buybacks
• Langton View: JD Wetherspoon has reported somewhat slower LfL sales growth but higher margins – and this should come as a relief to some.
• However, LfL sales slowed in the last 5wks of the quarter and the group expects margins of only around 7% for the year as a whole.
• Chairman Tim Martin reports ‘the Company’s sales growth has been strong in the last few months, but has slowed in recent weeks.’
• He says ‘the Company anticipates higher costs in the remainder of the current year, for instance in the areas of wages, business rates and repairs. The Company also intends to increase the level of capital investment in existing pubs from £34m in 2015/6 to around £60m in the current year.’
• Mr Martin concludes ‘the Company has made a reasonable start in the current year, but any forecasts for the full year are inevitably tentative, with nine months still to go – and the outlook for the current financial year is unchanged. We will provide updates as we progress through the year.’
• Overall it would appear that trading is in line with expectations. Mr Martin suggests that a hard Brexit could lead to less Swedish cider being sold. Margins will decline for the remainder of the year, though only to expected levels.
• The group’s shares are trading at around 18x earnings which, even after the recent pull-back, seems relatively fully-priced
PUB, RESTAURANT & DRINKS PRODUCERS:
• Just Eat has reported a ‘strong’ Q3, with like-for-like group order growth up 34% in the three months and 38% in the year to date. UK orders were up 28% ‘notwithstanding a significantly warmer and dryer summer that 2015’, while 80% of orders in the country now made on phone. Just Eat has increased its forecasts for full year results on the back of the performance, bumping its FY revenue forecast up to £371m from £368m and underlying EBITDA up from to £109-111m from £106-108m.
• Individual Restaurant Co, which owns the Piccolino brand, has reported turnover of £62.7m for the year to end-March. The co has reported LfL growth of 5% with PBT +176% to £1.5m. Founder Steven Walker reports ‘it’s been another record year and we’re heading in the right direction. This year is heading for a good result and revenues will be up again.’ Mr Walker continues by saying ‘where we can get big strategic sites like Opera in Chester and Piccolino in Alderley Edge, we’ll do that.’ He adds ‘we’ll be opening in partnership with Gino D’Acampo on Park Row in Leeds before Christmas. And the plan is for four additional Gino D’Acampo sites in the 2017 calendar year, with a focus on major UK cities.’
• Molson Coors has reported sales down 6.9% in the last quarter on the back of reduced demand in Canada & Europe. Net income, however, rose to 94c per share versus 9c last year on the back of reduced impairment charges.
• Texas Roadhouse has reported FY numbers for the year to 27 Sept saying revenues rose by 11% to $1.51bn.
• Texas Roadhouse reports FY EPS +28% at 134c. Says margins +155bps with LfLs +4.2% for the year. CEO Kent Taylor reports ‘we are pleased to report another quarter of restaurant margin expansion and double-digit diluted earnings per share growth. Our results were driven by the opening of new restaurants, positive comparable restaurant sales and continued commodity deflation. As we move into the fourth quarter, our sales momentum continues with October comparable restaurant sales up 3.8%, including positive traffic growth.’
• Horizons’ latest Ones To Watch report suggests ‘a slowdown in entrepreneurial activity’ in the foodservice sector over the past six months. Analyst Nicola Knight said: ‘This slowing of entrepreneurial activity may be the beginning of a more general slowdown in the foodservice sector, even a short recession across the economy with Brexit being the key reason behind the uncertainty. It shows that fledgling operators are currently being more cautious in their expansion plans.’
• The Ones To Watch report does highlight dessert cafés Kaspa’s and Treatz Dessert Parlour as rapidly expanding franchises, while Creams featured prominently in last year’s reports and is now up to 39 sites. Some of the fastest-growing brands by new openings include Burger Shack, Cau, and The Stable, while others displaying high percentage growth include Chicken Shop, Dunkin’ Donuts, Red’s True Barbeque, and Grind & Co.
• Gourmet Burger Kitchen’s revenue rose 21% to £67.4m in the year to 28 February 2016 as profit before tax jumped 78% to £5.7m. Restaurant opening costs grew by a third to £1.2m as a higher number of new openings drove a 14% increase in admin expenses to £23.1m for the period. The better burger chain anticipates labour cost inflation as a key risk moving forward, but remains optimistic of its ability to out-perform in what it calls a fragmented market.
• The head of Waitrose BWS warns that the off-trade is ‘dumbing down’ wines by focusing on low margin products and failing to charge a sustainable price.
• Coca Cola, Ambev SA and Britvic have shown interest in buying a stake in Brazilian juice maker Natural One SA as global beverage companies look to grow their stable of healthy drinks.
• The NIESR has said that families will be poorer next year as household incomes shrink and inflation surges to c4%
• NIESR estimates economy will grow 2% this year & 1.4% next. It had previously expected growth this year of 1.7%.
• NIESR expects rates to stay at 0.25% until 2019. Sterling should stay around 122c to US$ and 111c to the Euro. The NIESR says ‘there are signs of substantial impending inflationary pressure, especially when one looks at the price indices that tend to lead consumer prices. Much of this is driven by the dramatic fall in sterling, which has been one of the most striking features of the post-referendum data. In the past three months, sterling has hit a 31-year low against the dollar and a 5-year low against the euro. As this depreciation is passed through to consumer prices, we expect CPI inflation to accelerate rapidly, reaching around 4 per cent in late 2017 and only returning to the Bank of England’s 2 per cent target in 2020.’
• NIESR expects job growth to stall. Says ‘uncertainty could lead to a delay in firms’ hiring plans’. Unemployment could rise to 5.6% next year. The NIESR reports ‘the positive outturns for GDP growth in the near term are very welcome, but these give little to no guidance as to what will be the long run impact from leaving the EU will be. The depreciation of sterling has been the most striking feature of the post-referendum economic landscape. This will pass through into consumer prices over the coming months and quarters. By the end of 2017 we expect consumer price inflation to have reached almost 4 per cent. While we expect this to be only a temporary phenomenon, it will nonetheless weigh on the purchasing power of consumers over the next couple of years’.
LEISURE TRAVEL & HOTELS:
• Millennium & Copthorne reports Q3 numbers. REVPAR +3.5% at the 9mth stage & revenue +8.1%
• MLC says London hotels have benefited from ‘the steep fall in the value of sterling after the 23 June 2016 referendum’.
• MLC reports ‘profit before tax in constant currency for the third quarter of 2016 increased by 9.5% and by 27.8% in reported currency. For the first nine months of 2016, profit before tax increased by 4.1% in reported currency and decreased by 2.9% in constant currency.’
• MLC chairman Kwek Leng Beng says ‘our London hotels have seen some positive benefits from leisure travellers following the EU referendum in June 2016 although the outlook for the UK economy is uncertain.’ He says ‘we are monitoring the performance in all our markets closely and the Group’s financial position remains strong. The Group has a long term perspective and considers asset ownership as key to its strategy.’
• ‘Super budget’ hotel owner, developer, operator and franchisor, easyHotel, has announced the signing of a new franchise agreement in Reading. The site is centrally located on Caversham Road in Reading and will add 54 rooms to the easyHotel network, bringing the group’s total committed development projects to 1,658 rooms under development, 576 of which are owned and 1,082 are being developed by franchise partners.
• Guy Parsons, Chief Executive Officer, said the development will ‘enable us to further increase our presence in the south-east and raise brand awareness without direct capital investment,’ while franchisee and vice chairman of Splendid Hospitality Group, Nadeem Boghani, commented: ‘We are delighted to be working as a franchise partner with easyHotel to create the new easyHotel Reading. Reading is an area we know well from an operational point of view and it is ideally suited to the easyHotel portfolio. We think that business and leisure travellers in and around the M4 corridor will welcome this affordable super budget option.’
• The latest UKinbound business barometer shows that bookings and arrivals for July and August were up year-on-year and confidence levels are at a 12-month high.
• The Civil Aviation Authority accepts that the incoming Package Travel Directive, which will become UK law in 2018, could change the risk profile of the Atol scheme. Under new PTD ‘place of establishment’ rules, this could see UK firms promoting the virtues of Atol protection across Europe as they compete for customers cross-border, although the new rule has also attracted controversy as it could encourage operators to relocate to areas with less comprehensive regulatory regimes to avoid costs.
• Online outdoor accommodation vendor Pitchup.com has expanded into five new countries, bringing the total number of countries the company operates in to 32.
• Airbnb and New York are in talks regarding a lawsuit that would curb short-term rentals on the sharing economy site.
• Wyndham Vacation Rentals UK, owner of Hoseasons, has acquired cottage and luxury lodge agency Blue Chip Holidays. Blue Chip has more than 1,100 rental properties and has a strong presence across the south west of England. Wyndam Vacation Rentals UK managing director Geoff Cowley said: ‘Blue Chip Holidays has a great range of high-quality properties in key honeypot locations that complement our existing portfolio, so it’s a great brand to have on board. Our focus now will be on continuing to provide breaks for Blue Chip customers and great service for our owner partners.’
• Sportech’s discussions with Burlywood Capital over a proposed £92.75m sale of The Football Pools have been terminated after the latter was ‘unable to conclude the transaction’.
• Electronic Arts’ adjusted revenue forecast of $2.08bn for the key holiday-shopping quarter, which features the launches of Battlefield 1 and Titanfall 2, is slightly below expectations. Strong release line-ups from rivals Ubisoft and Activision Blizzard are thought to have led to the conservative forecast.
FINANCE & MARKETS:
• UK manufacturing was on a ‘firm footing’ last month, per the Markit/CIPS purchasing managers index, which was down from 55.5 to 54.3. Many respondents referenced a ‘marked’ increase in costs because of the exchange rate. Price inflation for goods being bought by manufacturers hit its highest rate for more than five years, and was at its fourth-highest since the survey began in 1992.
• World markets: UK, Europe & US all down yesterday. Asia lower in Wednesday trading.
• Oil price down again at around $47.80 per barrel for Brent Crude.
• Sterling little changed at $1.224 per US$.
• HMRC is going after some £1.9bn in owed taxes by the UK’s richest people and recovered £416m from 6,500 high net worth individuals in 2015. The £1.9bn figure is ‘at risk’ of not being received, is an estimate and not all of it will be owed once each case has been examined in detail, according to the National Audit Office.
YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:
• Capacity issues. There’s some good stuff on High Street & on nation’s retail parks but, outside London, how full is it on a Monday evening?
• Capacity. Could low interest rates be sparking too much building? The marginal unit on the marginal retail park may not be a good idea
• CBRE reports that, following the June Brexit vote ‘we have seen continued confidence in UK operational real estate investment.’
• Conviviality updates on H1 trading, says has reorganised its business into 3 units, distribution, off-licenses & trading.
• Horizons’ latest Quarterly Briefing Report warns that operators will start to see their margins being squeezed as import costs rise
• Spending on eating out in restaurants, pubs, and cafes rose in the past three months, according to research from Deloitte
• CBRE’s October 2016 Leisure Report has focused on the ‘explosion of the dessert restaurant’ in the eating out sector
• The UK voluntary living wage will soon rise from £8.25 to £8.45 (and from £9.40 to £9.75 for those living in London).
• Google search data suggests that interest in travel has bounced back quickly in the wake of terrorist incidents.
• Writing in The Telegraph, economist Roger Bootle has said that arguments are now stacked against further rate cuts in the UK
• Governor Mark Carney has said that he will stay at the Bank of England until mid-2019. His 8yr contract would have run to early 2021.
• Later tweets: Commodity prices volatile but most a lot higher in ££ terms. Oil price > doubled since lows, sugar +81%, coffee +66% on last 12mths
• Lots of Russian & Polish to be found in Euro holiday resort restaurant menus. Shame if Brits didn’t travel but plenty of others will
• Halloween. Arguably ‘biggest day of the year’ for some operators. Weather was chilly but dry. As good as it gets
RETAIL NEWS WITH NICK BUBB:
• Next: Ahead of today’s much-awaited Q3 update from mighty Next, the City has grown nervous about what the company would say, despite the evidence of much improved October trading, on the back of colder weather. The issue is how bad August and September were and so it is some sort of relief that overall full-price sales were only 3.5% down in the period: “In August full price sales were subdued following the much larger end-of-season Sale in July, and in September we traded against our best month last year. October sales improved significantly, as comparative weeks last year became less challenging”. The accompanying bar graph doesn’t show the weeks, unfortunately, but August in total was 7.0% down (ouch), September was 5.1% down and October was 1.3% up. The split of business shows that Next Directory sales were flat in Q3 and Next Retail was a hefty 5.9% down. This outcome means that
• JD Sports: The heavyweight £15 share price of JD Sports is not as high as some in the sector (eg Next), but, out of the blue, the company announced yesterday lunchtime that an EGM will be held on Nov 24th to approve a 5 for 1 sub-division (effective Nov 28th). JD Sports said of the share split that “The Board believes that this proposed sub-division would, among other things, reduce the company’s share price to a level where smaller sized dealings in the shares would be more efficient and may improve liquidity and marketability of the company’s shares”.
• News Flow This Week: The Waitrose Food & Drink Report 2016 is launched this evening by MD Rob Collins and his team at the Waitrose Cookery School on Finchley Road. Tomorrow morning brings the Howden IMS and the Morrisons Q3 update, plus the MPC interest rate announcement at lunchtime. Friday morning then brings the SMMT new car sales figures for October