Langton Capital – 2017-04-26 – Nichols, McDonald’s, Coke, Chipotle, Panera & other:
Nichols, McDonald’s, Coke, Chipotle, Panera & other:
A DAY IN THE LIFE:
I’m still getting a lot of Out of Office replies, I hope from people who forgot to switch them off after Easter.
Either that or, with a couple of Bank Holidays coming up, some would-be workers have decided to make a month of it and take late April and all of May off work.
Which sounds like quite an interesting idea but don’t you think the ‘I will not be able to pick up email’ reply is a bit boring?
How about ‘missing in action, believed eating sandwich ‘ or simply ‘missing’?
And don’t you think those replies saying ‘I’m on an executive stess / bonding / team-building course in Arizona for the next 2wks’ represents either vanity or the desire to call a holiday anything but a holiday?
And guys, it puts more pressure on the rest of us. We’re simply taking a day off. On to the news:
WHITBREAD FULL YEAR RESULTS MEETING:
Following the release of its Full Year numbers this morning, Whitbread hosted a meeting for analysts and our comments are set out below:
Overview & tone:
• Chairman Richard Baker stressed that WTB had 275yrs of history behind it.
• Longevity, caution and prudence were mentioned back-to-back
• The results were labelled ‘good’. Costa had a wobble but was back in LfL growth in Q1 this year. The High St isn’t wonderful but the group has well-regarded brands etc.
• Both major businesses are growing but the tone re current & near term future trading is cautious
Premier Inn & Restaurants: :
• London ‘was tougher in the first 3 quarters of the FY but it improved in the final quarter
• Some 94% of rooms are sold direct, the vast majority online
• Occupancy has slipped for 2yrs running (slide 36)
• London ‘is still a big opportunity’
• The group will have 85k rooms by 2020 and ‘line of sight’ on 100k
• Frankfurt is performing strongly, the outlook for Germany is encouraging
• Restaurants were down on the year but the group believes that they outperformed the market
• Some crossover benefits from restaurants allow Premier Inn to retain customers & perhaps increase prices – this will be registered as a hotel rather than a restaurant contribution
• Costa’s margin slipped a little on costs associated with the new roaster (amongst other things)
• Costa’s High St units were down 1.2% LfL in Q4. The group is currently c40% High St (with more exposure to shoppers if Retail Parks are included). This number will trend down to nearer 30% over the next 5yrs
• The chain is >2x the size of Starbucks & is cheaper than both the American operator & Caffe Nero
• Cost inflation will cost c£8m to £9m this year. Margin could be 120bps lower.
• China is ‘solid’. There is some ‘strategic re-orientating’ going on. Perhaps closures followed by head-scratching. Or vice versa.
• Costa is facing a ‘tougher environment’ . Margins are likely to be lower in the current year, perhaps by as much as 120bps
Debt, balance sheet & cash-flow:
• Margins were steady. Given the sale & leasebacks, perhaps they should have gone up a shade?
• Expansionary capex amounted to £404m in FY17. It will be £380m or so this year.
• Debt to EBITDA adjusted for leases is 3.2X. Headline debt is 1.1x EBITDA
Conclusion & current trading:
• Whitbread reports that there are no changes being made to its overall expectations. The tone of the meeting suggested that, perhaps, some downgrades may follow
• Langton Comment: Whitbread remains a solid company with good growth prospects.
• However, the tone of today’s statement & meeting was perhaps a little more cautionary than the market expected and the group’s shares have fallen accordingly.
• Whilst WTB suggests that it is not changing its expectations, that does not sit well with comments that the environment is more challenging.
• That must be ‘more’ challenging that had previously been the case and that implies that numbers should perhaps be adjusted in the light of changed (a.k.a. less good) trading.
• Our numbers above comprise modest downgrades and leave the group trading on around 15.6x this year’s earnings and 14.7x next with a yield of 2.6% and 2.8% respectively.
• The group’s shares are still not cheap but they rarely are. WTB has brands with overseas potential. It has a robust balance sheet & remains largely freehold (at least in the UK). The group has historically been straight with the market and has spotted trends either before others or, more likely, before others wished to talk about them.
• It has periodically therefore found itself cast as the whipping boy and such may be the case today. The shares offer fair value.
PUB, RESTAURANT & DRINK PRODUCERS:
• Chairman John Nichols is to tell the Nichols AGM that ‘the Group’s trading performance for the first quarter of 2017 is in line with management expectations.’ Mr Nichols will comment ‘in the UK, the Vimto brand continues to outperform the market with reported sales up by 3.4% compared to the first quarter of 2016. This compares favourably to the total soft drinks market growth of 1.2% in the same period [and] in our international markets, sales to Africa have maintained the growth momentum from 2016 and as anticipated, the first quarter has been a busy period for sales of Vimto concentrate to the Middle East ahead of Ramadan which begins at the end of May.’
• Nichols comments ‘we anticipate the UK soft drinks market will remain challenging throughout 2017 with the addition of currency related input cost inflation to an already price competitive environment.’ The co concludes ‘against that backdrop, we are pleased with the Group’s trading performance for the first quarter and currently expect full year earnings to be in line with market expectations.’
• McDonald’s reports Q1 numbers & says its efforts ‘are yielding meaningful results with continued positive momentum and a strong start to 2017 that includes positive comparable sales across all segments, higher global guest counts and enhanced profitability.;
• McDonald’s CEO Steve Easterbrook reports ‘there’s a sense of urgency across the business as we take actions to retain existing customers, regain lapsed customers and convert casual customers to committed customers. We’re continuing to build a more personalized and enjoyable visit, which delights customers with the taste and quality of our food and offers the highest level of convenience, in order to gain traffic in an increasingly competitive industry and deliver profitable growth for our System and shareholders.’
• McDonald’s reports global comp. sales +4.0% ‘reflecting positive comparable sales in all segments while up against an extra day in 2016 due to leap year’.
• McDonald’s reports consolidated revenues down 4% (3% in constant currencies) ‘due to the impact of refranchising’. Consolidated operating income was +14% (16% in constant currencies) with diluted EPS of $1.47 (up 18%).
• McDonald’s Q1 US sales +1.7% with international +2.8%. Group sees ‘continued momentum in the UK’. Group CEO concludes ‘I’m confident that we’re on the right path and well-positioned to unlock incremental growth and deliver against our Velocity Growth Plan for 2017 and beyond.’
• Coca Cola Q1. Says is ‘on track to deliver Full Year targets.’ Net sales down 11% ‘reflecting unfavourable Impacts from structural changes of 10% and foreign currency of 1%’.
• Coca Cola reports Q1 EPS of 27c. CEO Muhtar Kent reports ‘the first quarter performance was in line with our plan, and we remain on track to deliver our underlying revenue and profit targets for the full year. As anticipated, revenues in the quarter were adversely impacted by two fewer days and the shift of the Easter holiday. Most importantly, we continue to execute against the long-term strategic transformation plan for the Company – a plan that I am confident will deliver even greater shareowner and stakeholder value in the years to come.’ New CEO James Quincey takes over next week.
• Coca-Cola announced plans for business restructuring that could see many marketing jobs being lost as 1,200 jobs are to be axed. The job losses will come in the second half of 2017 and into 2018, as the company develops into a ‘faster and more agile business.’
• Chipotle shares bounced yesterday on the back of good Q1 numbers. The group reported Q1 revenues of $1.08bn, a 28.1% increase on Q1 last year, when it was still suffering from the impacts of food-safety issues.
• Chipotle reports comps +17.8% with net income in Q1 of $46.1m, compared to a net loss of $26.4m in Q1 last year. CEO Steve Ells reports ‘2017 is off to a strong start, as our restaurant managers and teams are energized by our renewed focus on the customer’. He concludes ‘by simplifying the focus in our restaurants to only those elements that lead to a great guest experience, our operations have improved every single month, which gives us confidence that we are on our way to achieve our mission to ensure that great food made with whole unprocessed ingredients is accessible to everyone.’
• Panera, the US bakery-cafe chain due to be bought by JAB for $7.5bn, yesterday reported Q1 numbers ahead of forecasts. The group reported $42.5m in net income for Q1 with diluted EPS of $1.88, up 30% on last year. CEO Ron Shaich reported ‘over the last five years, we have developed and executed a powerful strategic plan to be a better competitive alternative with expanded runways for growth. The themes we have bet on – digital, clean food, loyalty, delivery, and new formats for growth – are shaping the restaurant industry today.’
• Imbiba-backed bar-restaurant chain Wright & Bell has announced that its initial CEO, Jayne Baker, is to leave the company. W&B comments ‘after a very productive 18 months and a successful opening of the Kitty Hawk concept from Wright & Bell, Jayne Baker, Managing Director has decided to leave the business and explore new avenues, utilising her operations and human resource management expertise. She leaves on very positive terms.’ The company continues by saying ‘the board of Wright & Bell has decided to put in place a strong management and operations team to develop the business further, continue to open new sites and build on what has proved to be a very dynamic multi-format offer. Sarah Clark starts as Managing Director, with a background as Operations Director at Corney & Barrow, former Head of Operations at Pret A Manger, and as former Retail Director with
• Frontier Pubs, the partnership between EI Managed Investments and pub operator Food & Fuel, will open The Norbiton, Norbiton on the 26 April, closely followed by its sixth site, The Kings Arms, Hanwell.
• Espresso bar and café concept The Attendant has secured its third site in London at 75 Leather Lane as part of its strategy to open ‘innovative quality and service focused brunch cafés’, per MCA. The group launched in 2015 with its popular Fitzrovia unit before expanding into Shoreditch and co-founder Ryan De Oliveira commented: ‘Since opening in 2013, the Attendant has now developed into a coffee roastery, cafe and kitchen, with the intention of bringing permaculture back to UK cafe culture.’
• Patisserie Holdings has launched an updated version of its Philpotts sandwich shop concept in Manchester, writes MCA.
• The ALMR has welcomed confirmation that the upcoming General Election will not delay payments from the discretionary business rates relief scheme. Kate Nicholls, ALMR’s CEO said: ‘It is reassuring that the Government has listened and acted, providing a measure of stability and certainty for our members. Discretionary relief payments cannot come soon enough for operators facing huge rates rises that threaten their businesses. We urge any of our members struggling with their rates bills to contact their local authorities to explore how to apply for relief payments.’
• Waitrose will be adding 25 new beers in stores after seeing sales of specialty beer rise by 33%. The retailer will now offer 95 different beers, some of which have never received a national listing before.
• China has been hailed as a potentially major player in the wine industry by Tesco, as the retailer added a Chinese Cabernet Sauvignon to its selection. The Changu Moser XV will be available for £7 and is described as a ‘cross between a classic Bordeaux and a rich fruity Australian wine’.
HOLIDAYS, LEISURE TRAVEL & HOTEL
• STR’s 2017 HOST Almanac indicates that US hotel industry revenue and house profit hit all-time highs in 2016 of $199bn and $76bn respectively. ‘Inflation-adjusted revenues topped the previous peak, and real house profit levels were the second-highest we’ve seen,’ said Joseph Rael, STR’s director of financial performance. ‘However, in the past year, we’ve also seen revenue growth slow considerably throughout the country. With RevPAR (revenue per available room) growth forecasted below 3% for the next couple of years, we only expect modest profit increases in the short term.’
• The Times reports that the US laptop ban may be imposed on flights from some parts of Europe. A Whitehall source told The Times that British security chiefs are waiting to see whether Britain is included. A US official confirmed that Britain was on the list of countries being examined for extended restrictions.
• India’s largest budget hotel chain, Oyo Rooms, is close to raising its US$250m target for international expansion. The chain is currently valued at US$850m by its existing investor SoftBank.
• Netflix plans to raise €1bn through a debt offering to finance investments in new content as well as supporting capital expenditures and potential acquisitions.
• LinkedIn now has more than 500 million users across 200 countries. The company’s last milestone was 400 million users in October 2015, last year Microsoft acquired the company for US$26bn.
• Marissa Mayer, CEO of Yahoo, will receive $184m from the sale of the company to Verizon later this year.
• Investment banks have told Vivendi that its Paris-based Universal Music Group is worth about €20bn and believe selling 10 to 15% would free up funds for other acquisitions. UMG, whose artists include Drake, U2, the Weeknd (sic) and Lady Gaga, has been benefiting from a rebound in business, thanks to streaming and paid subscriptions such as a multi-year deal it signed with Spotify, with sales rising by 4.4% last year.
• Jimmy Wales, the founder of Wikipedia, has announced plans for a crowd-funded news website that he hopes will counter the spread of fake news. The platform is called Wikitribune and it will go live in 29 days, be funded by donations and will aim to hire 10 professional journalists.
FINANCE & MARKETS:
• Government borrowing fell by £20bn to £52bn in the year to the end of March, according to the ONS.
• Oil price up a touch $52.08
• Sterling up vs US$ at 1.2833
• Pound down a shade vs Euro at 1.1723
• UK 10yr gilts up 4bps at 1.09%
• World markets: UK mixed yesterday with Europe up. Wall St higher and Asia mostly up in Wednesday trade
YESTERDAY’S LATER TWEETS:
• Later tweets: Cautious Whitbread comment sees shares tank. Seems a bit harsh. Just telling it like it is. Good co but wasn’t cheap
• Whitbread meeting. Co reassures it has plenty left in the tank. PI & Costa still to grow. Perhaps in the short term, the latter not so much
• CBI manufacturing sector review. Q1 (backward-looking) pretty good but outlook for Q2 (the future) less rosy.
• Slowdown? Business confidence hits hiring, hits consumer confidence, hits bit ticket spending first. Evidence mixed but Carpetright down
• Carpetright warns that big ticket spending under a bit of pressure. Profits for FY will be at ‘lower end of current range’
• Carpetright saying ‘experienced tougher trading conditions over the last 3mths’. Shares down around 4%. WTB similar, down 6.5%
RETAIL NEWS WITH NICK BUBB:
• Boohoo: Another day, another upgrade on Boohoo…After a year of upgrades, Boohoo has delivered another sales and earnings beat. Full year sales of £295m to y/e Feb were up 51%, with growth accelerating across all regions in H2. This impressive top line performance converted to a near doubling in PBT to c£31m, driven by overhead leverage, although that includes a £1.4m one-off accounting gain on the recent acquisition of PrettyLittleThing. The complementary acquisitions of PrettyLittleThing and Nasty Gal transform the Boohoo business into a multi-brand proposition and underpin expectations for continued strong sales growth of c50% in 2017/18, so they are bound to get a lot of focus in the analysts meeting in the City at 9.30am. The company says that “Trading in the first few weeks of the 2018 financial year has made a promising start”, so it will be interesting to see whether the
• John Lewis Partnership Sales Watch: We flagged a week ago that trading looked better for JLP as the Easter calendar shift unwound. But last week saw a bit of a sting in the tail, as the fall of Easter Sunday meant that there was one less trading day compared to last year…At John Lewis, total sales were up by 1.6% gross (marginally down “LFL”) in w/e Apr22nd, thanks to a near 12% jump in Electricals sales. John Lewis is now running up 1.3% up gross (c0.5% down LFL) on a cumulative basis over the last 12 weeks. Over at Waitrose w/e April 22nd saw sales dip by 4.6% gross (down c6.5% “LFL”). Over the last 12 weeks combined, Waitrose is now running 2.0% up gross (flat LFL).
• Carpetright: The Carpetright Q4 trading update yesterday did not mention the increasing UK competition from the expansion of its rival Tapi (backed by the family of former boss Phil Harris), although that has very much been a live topic in the City…However, analysts were told that the impact from Tapi has continued to moderate, with Carpetright’s response to adjacent competitor openings now generally faster and more effective. Indeed, the 27 Carpetright stores that have now annualised by more than a year and a quarter against Tapi site openings are said to have delivered an average of 6% LFL sales growth over Q4.
• Store Watch: The upbeat feature on Marks & Spencer in the Daily Mail yesterday noted that CEO Steve Rowe (who is coming up for his 1st anniversary in the job) spends a lot of time in the M&S Bromley store, which has an impressive Food hall. And the Telegraph article yesterday about the anniversary of the collapse of BHS highlighted that the BHS Jersey store was bought by Sports Direct for a hefty £18m-19m, for its Premium Fashion division.
• News Flow This Week: Tomorrow brings the N Brown finals, the Travis Perkins update and the Howden trading update, as well as the McColl’s and Pendragon AGM’s. And with the end of the month coming up quickly now, we also get the CBI Distributive Trades survey for “April” on Thursday morning and the monthly GFK Consumer Confidence survey first thing on Friday.