Langton Capital – 2017-03-09 – RTN, Cineworld, Dominos, Morrison’s, Budget & other:
RTN, Cineworld, Dominos, Morrison’s, Budget & other:
A DAY IN THE LIFE:
Deciding to put the Budget on the TV yesterday, I noticed the website that I was using had the channels displayed in a predictable order (BBC1, BBC2, ITV1, C4 etc.) and that the choice on the leading BBC channels was between Bargain Hunt and the Budget.
Well, as you can imagine, as I was looking for comment from commercially aware businessmen as to the state of the nation’s economy, I was initially drawn towards Bargain Hunt but, as I realised that might not fill in some of the blanks as to how we got in this mess in the first place, I plonked for the Budget.
And there, though this was by and large, a pretty boring affair, it was difficult as always to keep one’s blood pressure under control as one listened to a gilded politician telling us how he was going to spend our money on someone or something else.
Thankfully HMG has still deigned to let us keep some of it but, with taxes rising on the self-employed, business rates rocketing in the South of England, mandatory pensions for staff and the NMW & NLW nutcracker in operation, it’s getting to be something of a challenge to make ends meet for many.
Perhaps the less said about the frothing, beetroot-faced response of Mr Corbyn the better. Oh, for an effective opposition. On to the news:
RESTAURANT GROUP – FULL YEAR NUMBERS:
• Full year results – Analysts’ Results Meeting:
• Following the release of its results earlier this morning, the Restaurant Group hosted a meeting for analysts and our comments are set out below:
• The evolving problem:
• Group says Frankie & Bennies has been losing share since 2013. It had put prices up but lost customers. Cover volumes were well down. Menu development was untested & the operation was losing customers
• Chiquitos was losing customers & its strategic positioning was unclear
• Coast to Coast was clearly a disaster. Despite its recent launch, it was seeing ‘extreme declines in LfL sales.’
• Pubs & concessions were (and are) performing well.
• The current situation & future development:
• The group accepts that it needs to cut prices & market more. This will cost money. Costs will be immediate but benefits could be H2 or FY18.
• The mechanics are that lower prices, even if they result in higher footfall, will put a drag on LfL sales.
• RTN has shut 41 units but has only disposed of 4. This has resulted in additional provisions. Profits are sheltered but closed units cost money. Both rent and, ultimately, rates & insurance will be payable.
• RTN is facing industry-wide cost headwinds in 2017. It believes these will add between £16m and £19m to costs.
• When you’re in a hole, stop digging. So far, so good. Broadly speaking. The dividend, which we believe should have been cut, has been maintained.
• This will ‘remain under review’. That’s practical and understandable but may not be what shareholders wish to hear.
• The likelihood of success:
• Whether RTN’s initiatives succeed or fail is unclear at this point. This is inevitable.
• Hence, whilst understanding & accepting problems is (usually) necessary for recovery, it is not sufficient. Execution will be key.
• The group accepts that its competitors will not stand still. The marketing budget & new openings will change in response to events ‘on the ground’ and the dividend may yet be cut.
• On a brighter note, RTN’s market cap is only around £700m and it has (or had in FY16) some £710.7m. There are plenty of bangs for your buck.
• That said, margins will fall, LfLs will fall in the short & medium term and, whilst RTN will be pulling hard on one end of the rope, its competitors will be pulling on the other.
• We look below at internal & external factors. Some problems can be addressed & others are without the gift of this (or any) company.
• Self-help (soluble problems):
• Don’t gouge customers, become lazy, entitled and fat. RTN gets a tick here. At least the verbiage is encouraging. Execution comes later. Group self-admittedly must ‘restore its value credentials’.
• Ask customers what they want. As above.
• Serve them better. Be relevant, give them a reason to return. As above.
• Don’t run your company from a PC terminal. Get into the trenches. Tick.
• Don’t sit back with tired brands. Ask ‘if it didn’t exist, is the UK crying out for it?’ Judgement here pending.
• Rebrand Coast to Coast as a better-burger operator. Crowded space with nimble (and some well-funded) operators but less crowded on leisure parks. This will be ‘aspirational but affordable’. That’s the Holy Grail.
• Push where there is give. The pub estate will. More concessions will be sought. This takes time, however, and will be slow to move the dial.
• External issues (without RTN’s gift):
• Social & demographic trends are positive. Or they have been.
• Consumer wage squeeze is negative. The danger may be in chasing the customer down the value chain.
• Cost pressures are intense. This is an industry-wide problem. But RTN will find itself under natural pressure to put prices up when it is actually committed to putting them down.
• Staffing issues will come to the fore if EU chefs are expelled. Ditto.
• Langton Comment: Best advice may be ‘don’t start here’.
• But that’s not an option. RTN needs to press the marketing button, cut capex, cut prices & generally sharpen up. It needs to compete with nimble competitors and some of these are true throat-cutters. It must own the social media space & make itself relevant.
• Easy to say but less easy to do.
• However, some actions are in train. Frankie & Benny’s will introduce a new menu this month with Chiquitos later this month. Coast to Coast is on a yellow card. Perhaps it should have got a straight red but, with 40-ish closed sites already sitting on the books, that may not have been an option. The consultants are in, though whether this is a positive or negative development is open to debate.
• RTN’s shares have responded positively to today’s results.
• Such share price strength will, for some time, be a mark of faith as proof of recovery will be some time in coming.
• However, we acknowledge that share prices move ahead of events, and note positively that RTN has substantial sales, a real leisure park, airport & retail park presence & has recognisable brands. It can and will grow its pubs business & its balance sheet is un-stretched. Forecasts are under review. Please drop us a line if you would like to discuss further.
PUB, RESTAURANT & DRINK MANUFACTURERS:
• Budget comment below.
• Domino’s Pizza Group plc has announced its results for the 52 weeks ended 25 December 2016, during which system sales rose 14.5% to £1bn but the rate of UK like-for-like system sales fell from 11.7% to 7.5%. UK like-for-likes have been a rather more muted 1.5% for the first nine weeks of 2017. Average sales per address (ASPA) in new stores grew 15% in the year. Underlying PBT stood at £85.7m (+17.1%) and statutory revenue rose by 13.8% to £360.6m.
• Domino’s now has net debt of £34.6m after opening some 81 UK stores (with another 80 targeted for 2017). The group called its progress in the Nordics as ‘solid’, while the conversion of stores in Germany following Joey’s acquisition has been delivered six months ahead of plan. Meanwhile, the Republic of Ireland reported 10% year-on-year growth and Switzerland logged 21%, including one new store.
• Domino’s Pizza Group has bought Dolly Dimple’s in Norway. It says Dolly Dimple’s is the third largest pizza company in Norway, with 42 stores across the country and a well-established and strong heritage of customer service. It is being acquired from Norges Gruppen for an enterprise value of £4m.’ CEO David Wild says ‘this is a really exciting move for DPG and we are delighted to welcome the business into the Domino’s group.’
• The ALMR has said that the ‘Government must not restrict managers’ access to accommodation’. It says that ‘any decision to restrict access to tax-free accommodation for pub and bar managers could have negative consequences for the sector.’ That’s probably true. But the government needs the money. The ALMR’s Kate Nichols, who had a busy day yesterday, says ‘for many pub, bar and restaurant operators the ability to live above the shop is an absolutely essential part of the job. Without this convenient accommodation, many innovative and hardworking licensees would be unable to work long hours and keep their businesses open to grateful customers.’
• Morrison’s reports FY numbers, says it has been ‘a year of strengthening performance’. LfL sales (ex-fuel) +1.7% with a positive performance in all 4 quarters including +2.5% in Q4.
• MRW FY: Group says turnover was +1.2% in the year to £16.3bn. Underlying PBT is +11.6% at £337m. EPS is +39.8% at 10.86p.
• MRW FY: Dividend 5.43p for the year as a whole, up from 5p last year. Group reminds investors this is the first year of positive LfL sales & profit growth since 2011/12.
• MRW FY: Group has achieved £1bn of cost savings with ‘further productivity & cost savings to come’. Chairman Andrew Higginson reports ‘food retail is a simple business, but it is not easy. Only consistent and outstanding execution differentiates.’ He concludes ‘I am confident that strong execution will drive sustained dividend growth and improving returns for Morrisons shareholders.’
• MRW FY: CEO Dave Potts reports ‘our full year of like-for-like sales and profit growth was powered by listening to customers, and shows what our hard-working team of food makers and shopkeepers can do.’ He concedes there is much to do. Potts continues ‘we are confident we can continue to turnaround and grow Morrisons.’ The CEO says ‘we have identified further cost saving opportunities beyond the £1bn already achieved…our medium-term targets of £1bn improvement in working capital and at least £1.1bn of disposal proceeds remain unchanged.’
• Accolade Wine’s private equity owner, Champ PE, says the Australian wine business will confirm its upcoming IPO. Accolade’s market-leading brands include the biggest selling UK off-trade wine brand Hardy’s and the number three brand Echo Falls.
• Year-on-year consumer spending increased by 4% in February, according to the latest data from Barclaycard. The report claims that spending on entertainment was up 10.8%, pubs increased by 13.3% and restaurants grew by 11.4% y-o-y. Restaurants compensated for an 8.8% decrease in avg spend by recording an impressive 22% increase in avg no. of transactions.
• The Fulham shore owned pizzeria, Franco Manca, has lined up seven new sites as it sets out to push through the 40-site mark per MCA. The restaurant chain recently won best concept award at the Retailer’s Retailer Awards 2017.
• Bob Evans Foods Inc. revealed on Wednesday that its restaurant division same-store sales decreased by 2.6% in its third quarter. Golden Gate Capital is set to buy the 523-unit chain at the end of April for $565m.
• Nestlé intends to remove 10% of sugar from its confectionary brands, which include Kit Kat, Aero and Yorkie.
THE BUDGET & THE HOSPITALITY INDUSTRY:
• Chancellor Phillip Hammond announced a 2p-a-pint increase in beer duty yesterday, the first rise in 5yrs.
• Some 90% of pubs are to receive a £1,000 rebate on their business rates bill.
• Colin Valentine, CAMRA National Chairman, says ‘UK beer drinkers, pubs and brewers have been let down by the Chancellor’s decision to increase beer duty’. He continues ‘the announced 2p-a-pint increase marks a return to the days when the much-hated Beer Duty Escalator contributed to 75,000 job losses, 3,700 pub closures and a 24% fall in beer sales in pubs.’
• SIBA has welcomed the £1000 reduction in business rates for pubs with a rateable value below £100,000, but calls the 2p increase on beer tax a ‘setback’ and says the sector needs more support.
• The BBPA similarly says the 2p tax increase is ‘not good news for the British beer industry and in turn pubs’ and notes that Britain’s beer taxes are already three times the EU average and thirteen times higher than the bloc’s largest producer, Germany. Brigid Simmonds comments: ‘Business Rates, auto-enrolment of pensions, the national living and minimum wage, and the Apprenticeship Levy were already adding the equivalent of 5.3p in beer duty. Beer tax has now risen by 43% the past ten years. This latest rise will mean 4,000 fewer jobs this year, mostly in pubs. Tax rises on all alcohol will add £125m to the cost base of pubs.’
• Duty is to increase by 8p on a bottle of wine, by 28p on a (70cl) bottle of vodka and by30p on a 70cl bottle of gin.
• The controversial ‘reasonable professional judgement’ proposal for rates appeals has been scrapped in the Budget.
• The ALMR has also welcomed the Budget Statement for its pub sector-specific relief, which addresses rates inequality and ‘promotes investment’. ‘The Chancellor has stated that he wants to make the UK the most attractive place in the world to do business. Cuts to Corporation Tax will help hardworking and successful businesses continue to grow and invest in their teams,’ ALMR Chief Executive Kate Nicholls said, but warned that these actions ‘must form part of a wider strategy on business tax. If the Chancellor is serious about encouraging investment then we need to see a detailed blueprint of how it is to be achieved and how this links with the Government’s wider industrial strategy.’
• Peter Borg Neal, CEO of the 18-strong Oakman Inns, argues that the Budget actions will not protect the pubs ‘that are generating employment growth’ while rates relief ‘does nothing to lessen the impact of this ridiculous and unfair system’. The pub boss called the decision to again delay a root and branch review of the ‘regressive’ business rates system ‘is deeply disappointing.’
• This ridiculous, regressive tax encourages the wrong type of business and we are disappointed and outraged by this lack of basic financial common-sense.”
• The BBPA has released the following statement clarifying the beer duty rise in the 2017 Budget: ‘The Chancellor announced that there are to be no changes to previously planned upratings of duties on alcohol. However, an inflationary increase WAS previously planned, …[of] 3.9 per cent. An increase in beer tax of about £130 million.’
• Bills will rise by a maximum of £50pm for businesses that are ineligible for rate relief from April, such as corner shops. A £300m discretionary fund will be available to councils for hard-hit cases.
HOLIDAYS & LEISURE TRAVEL:
• Prime Minister of the Bahamas, Perry Christie, and the CEO of Royal Caribbean International, Michael Bayley, confirm plans for a significant investment into enhancements to CocoCay, the private island destination of the Bahamas. The developments will include a new pier, additional guest features and amenities.
• Elegant Hotels reports new marketing and sales agreement signed with The Landings Resort and Spa in St. Lucia. CEO Sunil Chatrani comments ‘we are delighted to have signed this agreement with a luxury property that so clearly reflects our ethos of understated elegance and outstanding customer service.’
• Hays Travel has bought Holiday Travel in Bridlington for an undisclosed sum.
• Alan Wardle, the director of public affairs at Abta, has made the following comments in relation to Philip Hammond’s Budget 2017: ‘The chancellor’s decision to go ahead with additional increases in air passenger duty is very disappointing. …APD also represents an unjustifiably high economic burden on hard pressed family budgets and Abta urges the government to follow the lead of the Scottish government and make a firm commitment to halving this retrogressive tax.’
• Cineworld preliminary results for FY 2016 see revenue rise by 13% on a statutory basis and 8.7% on a constant currency basis, EBITDA grew 13.2% (8.4% on a constant currency basis). The Company’s CEO, Moshe Greidinger, stated Cineworld had made ‘great progress’ in 2016 going on to say ‘We served over 100 million customers who came through our doors, and provided them with the choice of which movie to watch, the choice of format and the choice of an expanded range of retail offerings – all with great customer service.’
FINANCE & MARKETS:
• OBR ups estimate for GDP growth this year & cuts thereafter. Says UK should expand by 2% this year (was 1.4%)
• OBR says growth will slow to 1.6% in 2018. Government deficit should fall.
• Profits at Foxtons have collapsed on the back of a slower housing market.
• China has reported a rare trade deficit for Feb 17.
• Brent down sharply at $53.50 vs $55.56 yesterday.
• Sterling down vs US$ at $1.2155 (was $1.2203 yesterday)
• Sterling also down vs Euro at 115.39c (was 115.51)
• UK interest rates edging up. Ten year gilt yield up to 1.22% from 1.19% yesterday.
• World markets: UK mixed yesterday with Europe higher. US markets mostly down and Asian markets mostly lower in Thursday trade
• Later tweets: Restaurant Group analysts’ meeting. Spotting the problem is necessary but not sufficient. Solving it (them) would also help
• John Lewis numbers a bit sluggish. Ok, just five weeks but going backwards LfL at 1.5% leaves a 3% plus gap when CPI is 1.6%
• Pie me up Scottie. National Pie Week. Vote for @theHullPie. Made, like the best of us, in the City of Culture. All’s good…
• Chancellor ‘gives’ £1,000 of our money in rates rebate to 90% of UK pubs. No obvious anti-pub news…
RETAIL NEWS WITH NICK BUBB:
• Morrisons: Today’s finals from Morrisons for y/e Jan are headlined “A year of strengthening performance” and LFL sales ex-fuel/ex-VAT in Q4 were up 2.5% (a tad lower than the 2.9% growth seen in the 9 weeks of Christmas). Underlying PBT was up 11.6% to £337m, at the upper end of the £330m-£340m guided range. And the company says that, with further productivity and cost savings to come, “We are confident we can continue to turnaround and grow Morrisons. There are some uncertainties ahead, especially around the impact on imported food prices if sterling stays at lower levels. We also expect depreciation and pension costs to increase, and we will continue to invest in colleague pay rates. However, all of this is incorporated into our plan”. We’ll leave the final word to Andy Higginson, the Chairman: “Food retail is a simple business, but it is not easy. Only consistent and outstanding
• Sports Retailing Watch: Two contrasting statements from our 2 leading sports retailers today: Sports Direct blathers on about appointing the first Worker’s Representative to the Board (as if that will stop Mike Ashley doing what he wants to anyway), whilst JD Sports gets on with its highly successful expansion in Europe, by announcing a merger of its interests in Spain and Portugal with the Sport Zone business of the local retail group Sonae.
• John Lewis Partnership Watch: The John Lewis Partnership will be hosting an analyst’s presentation at 11.30am this morning, at its HQ in Victoria, following the announcement of its full year results at 9.15am. We expect stated PBT to be slightly up from £306m to £310m, given the pension funding benefit, but Divisional Trading Profits are likely to be just over 10% down at £431m in y/e January, with both Waitrose and John Lewis seeing profits fall back. And the current trading/outlook statement is likely to be cautious. The John Lewis Partnership Bonus is expected to be “significantly” lower at 7%, versus 10% last year.
• Retail Week Live Watch: The big “Retail Week Live” industry conference kicked off successfully in London yesterday morning. The best presentation was by Trevor Hardy of The Future Laboratory on the “Age of Uncertainty” and the importance of thinking “long term and local”. The best title was the Mckinsey presentation about UK Grocery retailing called “Eating the Elephant in the Room”, although the content was a bit thin. The best quote was from Alex Baldock of Shop Direct: “All Retail sales growth is coming from Online. All Online sales growth is coming from Mobile. Therefore all Retail sales growth is Mobile”. We don’t know who won “Best Start-Up Pitch”, but we enjoyed the presentation by Stuart Rose’s former PA, Susan Aubrey-Cound, on a new business called Syte.
• News Flow This Week: The John Lewis Partnership finals are announced at 9.15am and the Signet Q4 results are out at mid-day, whilst the big “Retail Week Live” conference continues into its second day (see above), culminating in the prestigious “Retail Week” Awards this evening (see below).
• Awards Watch: As noted, the prestigious “Retail Week” Awards (aka the “Retail Oscars”) are held this evening at the Grosvenor House hotel in the West End. The “Retail Leader of the Year” Award was won by Richard Pennycook of the Co-op last year and this year’s main contenders look to be Mike Coupe of Sainsbury and Dave Potts of Morrisons. As for the key “Retailer of the Year” Award (which was won by Dixons Carphone last year), it would be nice if that went to someone like JD Sports, but no doubt the likes of Morrisons will be favoured…