Langton Capital – 2017-03-10 – JD Wetherspoon H1, C&C, costs, evolution & other:
JD Wetherspoon H1, C&C, costs, evolution & other:
A DAY IN THE LIFE:
Bit busy today, JD Wetherspoon meeting is an early one.
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JD WETHERSPOON – H1 NUMBERS:
• JD Wetherspoon has this morning reported H1 numbers for the period comprising the 26wks to 22 Jan 2017 and our comments thereon are set out below:
• Headline Numbers:
• JD Wetherspoon reports sales up by 1.4% in the period to £801.4m
• Sales were +3.3% LfL but the group sold a number of pubs during the period
• Profit before tax was up 42.8% at £51.4m
• EPS is some 51.6% higher at 33.8p and the H1 dividend has been held at 4.0p
• More on Trading:
• JDW chairman Tim Martin reports ‘the biggest danger to the pub industry is the continuing tax disparity between supermarkets and pubs, in respect of VAT and business rates.’
• He outlines a number of other tax & regulation-based financial headwinds that the group is facing
• Re current trading, he reports ‘in the six weeks to 5 March 2017, like-for-like sales increased by 2.7% and total sales decreased by 0.2%.’
• Mr Martin adds ‘as previously announced, the company intends to increase the level of capital investment in existing pubs from £34m in 2015/6 to around £60m in the current year.’
• He says ‘the company also anticipates significantly higher costs in the second half of the financial year. In view of these additional costs and our expectation that like-for-like sales will be lower in the next six months, the company remains cautious about the second half of the year.’
• The group concludes ‘as a result of modestly better-than-expected year-to-date sales, we currently anticipate a slightly improved trading outcome for the current financial year, compared with our expectations at the last update.’
• Group says LfL wet sales +2.4% with food +5.1%
• Says machine income down 2.1% but accommodation +14.8%
• Food sales made up 34.8% of group sales
• JDW reports ‘the improved performance in the period was due mainly to lower utility and interest costs, relatively benign costs in other areas and the sale of some lower-margin pubs. In addition, the company saw little impact, in the period under review, from the ‘living wage’ legislation, having increased pay rates before the government announced its plans in this area.’
• Operating margin was 8.1% (2016: 6.3%).
• Group adds ‘during the period, the company received £0.4m in compensation in respect of a transfer of interest-rate swaps between two financial institutions; this has been treated as an exceptional item.’
• Balance Sheet, Debt & Outlook:
• JDW reports ‘as at 22 January 2017, the company’s net debt, including bank borrowings and finance leases, but excluding derivatives, was £696.0m, an increase of £45.2m, compared with that of the previous year end’
• It says its net-debt-to-EBITDA ratio was 3.46 times at the period end (24 July 2016: 3.47).
• JDW has around £144.3m of bank debt headroom
• The group bought back
• Langton View: Although these numbers benefit from some one-offs, JD Wetherspoon has reported very sharply higher H1 numbers and reports that the outlook is somewhat improved.
• If the group reassures that its multi-year march towards lower and lower margins is over, then forecasts will move higher.
• The impact of share buybacks is showing through clearly in the EPS progression.
• The disposal of some marginal pubs is also helping profitability, though it is responsible for headline declines in revenue.
• Overall, trading would appear to be ahead of expectations.
• The group’s shares have tested new highs recently and, at around 17x earnings, they are not cheap in an absolute sense.
• However, if margins are to rise, forecasts will come under upward pressure and the shares may have further to go.
PUB, RESTAURANT & DRINK PRODUCERS:
• Loungers, which will open its landmark 100th site in May, has posted a like-for-like sales increase of 5.8% in the 12 week period to 5 March. The group has recently opened its 17th Cosy Club in Cheltenham and its 79th Lounge in Poole, while An 18th Cosy Club will open in York in April along with further Lounge openings in Weston-super-Mare later and Kidderminster, before the opening of Capo Lounge in Mansfield on 10th May.
• The British Beer & Pub Association has expressed its disappointment at the decision by the London Borough of Hackney to consult on implementing a Late Night Levy in the Borough.
• Pret A Manger’s director of human resources says the chain will struggle to staff its outlets after Brexit as UK job seekers do not see it as a desirable place to work. Just one in 50 job applicants to Pret is British and 65% come from the European Union.
• Domino’s Pizza UK shares fell sharply yesterday as the group announced that LfL sales in the UK had slowed
• Chinese officials have said that the overseas share of the Chinese wine market should level off at around 40%
• The John Lewis Partnership has cut staff bonus by 40% as it prepares for a tough year in 2017
• Staples globally has reported its 16th consecutive quarter of falling sales. It has completed its sale of its retail business in the UK & is to sell a controlling interest in its European operations.
• Drinks company C&C Group expects operating profit to be in the region of €94-€96m for the year to 28 February 2017 as a result of the devaluation of sterling. Volume performance in the three principal brands of Bulmers, Magners and Tennent’s was ‘resilient’ and a significant improvement on FY16. The group’s cost savings were broadly offset by investment in its brands, while market pressures on pricing and pack and channel mix continue to hamper performance. ‘In FY18 we will continue to invest in our core brands to deliver long term growth, remain disciplined on costs and look to strengthen our route-to-market where possible.’ C&C said of the coming year, but it remains cautious and is ‘not anticipating improved trading conditions in the short term.’
LESSONS FROM THE USA?
• Lessons in overcapacity coming across loud and clear from the US industry.
• US journal NRN has reported that LfL sales across the US restaurant industry fell by 3.7% in February. Footfall was 5.0% down.
• NRN says ‘unfortunately, January’s improved results were not a turning point in declining industry performance.’ It says ‘a macro view leaves little room for optimism. Same-store sales averaged a 2.7 percent decline for the last three months.’
• NRN reports that sales per customer rose by 1.2% in February but footfall was some 5% lower. The journal reports ‘February’s results were among the weakest in the last four years.’ NRN reports in the US ‘consumers are spending, but they are being battered by rising inflation.’
HOLIDAYS & LEISURE TRAVEL:
• Budget 2017 has caused the travel sector to lash out at Philip Hammond regarding a lack of change in air passenger duty. Alan Wardle, a director of travel organisation ABTA, said: ‘The post Brexit world in which we now live, is a very different one from where we were 12 months ago. Levying sky high taxes on aviation sends out the worst possible message as we look to build our business relationships and connections outside of Europe.’
• Data from STR reports that the US hotel industry showed positive performance in all three KPIs for the last week of Feb/the first week of March 2017. Y-o-y performance showed occupancy +1.9%, ADR +1.6% and RevPAR +3.6%.
• Manchester Airport Group-owned Stansted saw February passenger numbers fall by 2.2% to 1.65 million year-on-year. The Essex airport has recently signed a new growth deal with Ryanair which will see a “step change” in capacity for this summer while Jet2.com’s arrival this month is expected to further boost passenger numbers this year.
• Carlson Wagonlit Travel has reported strong financial results for 2016 with $2bn in new business sales.
• Airbnb has raised a further $1bn in order to provide fresh funds for its expansion. The funds raised value the company at $30bn.
• Groupon has offloaded its Singaporean business to online-to-offline e-commerce company Fave The group. The group is looking to reduce its global operations and last year sold its Indian sector to Sequoia India.
• Lego saw sales rise by a ‘phenomenal’ 6% to 37.9bn Danish kroner (£4.42bn) in 2016, although this was not enough to see it overtake Barbie maker Mattel as the world’s biggest toy company. The performance was down from the 25% growth of the year before and suggest a more ‘sustainable level of growth’.
FINANCE & MARKETS:
• The ECB has held rates across the Eurozone at effectively 0%. This despite calls from Germany that monetary policy was too soft and evidence that inflation is beginning to pick up. The ECB commented ‘the governing council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.’
• Brent down further at $52.38
• Sterling up a little vs US$ at 121.67c.
• But down a little vs Euro at 115.03c
• UK 10yr gilt yield up a basis point at 1.23%
• World markets: UK down yesterday with Europe up. US markets up & Asia up in Friday trade
• US markets on forward PER of 18x with interest rates just commenced on a 5yr upward move? Okaaaay….
• MRW recovery. Change chairman, CEO etc. Restaurant Group tick, tick. MRW shut sites, cut prices. RTN tick x2. MRW cut dividend, RTN….oooops
• Silicon Valley’s Conjoined Triangles of Success vs South Park’s ‘collect underpants’ for best marketing bum-speak
• Marketing bum-speak II. Be wary of consultants. Borrow your watch, tell you the time & charge you for it. See House of Lies…
• Best advice if you have a bunch of bum outlets? Don’t start here. Buy into 10 smaller, nimbler operators with growth potential
• Domino’s UK LfL sales fall to 1.5% in first 7wks of 2017. If it looks like cannibalisation & smells like cannibalisation then perhaps…
• Market = elephant. Restaurant = rider. Q: Where do you go when riding an elephant? A: Wherever the elephant wants. AKA stay nimble, relevant
• Alex Baldock of Shop Direct says ‘all online sales growth is coming from mobile’. Stay relevant, cater to trends…
RETAIL NEWS WITH NICK BUBB:
• Retail Week Awards Watch: The prestigious “Retail Week” Awards (aka the “Retail Oscars”), sponsored by the cloud computing company Salesforce and hosted by TV celeb Gabby Logan, were held last night at the Grosvenor House hotel in the West End. Events kicked off with a “Lifetime Achievement” Award for John Timpson of the eponymous shoe repair firm (who had a star role on the first day of the big “Retail Week Live” industry conference on Wednesday). The surprise winner of the “Retail Leader of the Year” Award was not Mike Coupe of Sainsbury or Dave Potts of Morrisons…(in fact our spies tell us that Dave Potts didn’t even attend the event), but Alex Baldock of Shop Direct (who, funnily enough, had also starred on the first day of the “Retail Week Live” conference). As for the key “Retailer of the Year” Award, we said yesterday that it would be nice if that went to JD Sports, rather
• News Flow Next Week: The highlight of next week is the 4-day Cheltenham Festival and “Honest Nick” is looking forward to bringing you his Tips from Tuesday onwards, but before that the Bunnings/Homebase DIY group has helpfully arranged an analyst’s trip to its Milton Keynes HQ and St Albans prototype store on Monday. On Tuesday we also get the Ocado Q1 update, closely followed on Thursday by the Sainsbury Q4 (the 9 weeks ending March 11th). In the world of Fashion retailing, we get the much-awaited French Connection finals on Tuesday and the Inditex Q4 on Wednesday.