Langton Capital – 2017-07-12 – JDW trading update, Fulham Shore FY, costs & other:
JDW trading update, Fulham Shore FY, costs & other:
A DAY IN THE LIFE:
A bit busy today with early meetings & conference calls. On to the news:
JD WETHERSPOON – FULL YEAR TRADING UPDATE:
JD Wetherspoon has this morning updated on trading for its full year to end-July and our comments thereon are set out below:
• JD Wetherspoon has updated on trading ahead of its end-July year end saying that ‘sales have been good in the last 11 weeks, probably helped by unusually good weather.’
• The group says that for the 11 weeks to 9 July 2017, LfL sales were +5.3% with total sales, impacted by disposals, up 3.6%
• JDW says cumulative LfL sales (first 50wks) are +3.9% with total sales up by 1.9%
• The group adds that ‘the full-year operating margin before exceptional items and before a £1.6m gain on property is expected to be between 7.6% and 7.8% for the 53-week period, compared to 6.9% last year.’
More on Trading, Balance Sheet etc.:
• JDW reports that it has opened 9 new pubs since the start of the financial year and has sold or closed 38.
• The group says ‘we expect to open one more pub before the financial year end. There are expected to be around £24m of exceptional, non-cash losses in this financial year, which are mainly associated with pub disposals and closures.’
• Some £65m of capital spending is expected in the current year as the group says it ‘has increased capital expenditure in older pubs’ in areas such as staff rooms, kitchen and garden upgrades, and IT improvements.
• JDW has spent some £89.5m on buying in freeholds on 44 units this year.
• Re financing, JDW says ‘the Company remains in a sound financial position. Net debt at the end of this financial year is currently expected to be around £715m.’
• Over the year, the company has bought back 3.4m shares, at a total cost of £31m
• JDW chairman Tim Martin reports ‘sales have been good in the last 11 weeks, probably helped by unusually good weather.’
• He says ‘as previously stated, the Company anticipates that like-for-like sales of about 3 to 4% will be required to maintain profits at this year’s levels in our next financial year.’
• Tim Martin says calls for ‘clarity’ and ‘a post-Brexit transitional arrangement this year’ are unrealistic & says ‘the City and businesses are supposed to be able to deal with uncertainty.’
Langton View: JD Wetherspoon reported last month that trading was ahead of expectations and it has been able to confirm that this has been maintained throughout the remainder of its Q4.
The disposal of some marginal pubs is also helping profitability, though it is responsible for headline declines in revenue.
The company has historically not been materially impacted by the weather, warm or cold, but it does say that the last 11 weeks’ extremely good numbers may have been weather-affected.
Overall, many of the improvements that the company has reported have been largely due to its own efforts.
The group’s shares are off their recent highs but continued share repurchases should lend some support.
Modest upgrades are possible on the back of today’s update suggesting that JDW trades at around 16.5x earnings this year and next. It should be noted that EPS is positively impacted by share buybacks but, that said, debt levels remain acceptable.
THE FULHAM SHORE – FULL YEAR NUMBERS:
The Fulham Shore has this morning reported FY numbers for the year to 26 March 2017 and our comments are set out below:
• The Fulham Shore has today reported revenues for the year to 26 March of £41.3m (2016: £29.3m) with headline EBITDA of £7.1m (2016: £5.2m)
• The group has reported headline operating profits of £4.7m (2016: £3.3m) with PBT of £969k (2016: £76k)
• Headline diluted EPS is 0.7p (2016: 0.4p) and, as expected, there is no dividend
• Fulham Shore has moved from 29 restaurants at its March 2016 year end, to 45 at end-March 2017 to some 54 units (including one franchised) today
• Fulham Shore reports ‘we continue to see growth in the sales of take out, delivery and ordering on-line.’
• It adds ‘both The Real Greek and Franco Manca offer these services to our customers. ‘Click and collect’, where customers order on-line and then collect their order themselves from the restaurant, is proving particularly popular at the moment.’
More on Trading:
• FUL reports ‘we see the financial success of this year as a sound base upon which to build the expansion of Franco Manca, The Real Greek and the Group over the coming years.’
• It says both brands have the potential to expand considerably
• Chairman David Page reports on the market, saying ‘recent years have seen unprecedented amounts of capital invested in the UK restaurant sector and, in recent months, more restaurant space has appeared on the market than for many a year.’
• He adds ‘this is largely a function of larger businesses trying to sell poor performing locations, newly created developments and administrators selling sites for broken companies.’
• He cautions that supply growth may be an issue ‘either nationally or locally’. Me-too offers may struggle
• Mr Page concludes ‘I am confident that Fulham Shore is well placed as a dynamic operator with strong brands and a good portfolio of sites. We believe that our businesses have significant growth potential across the UK underpinned, first and foremost, by the quality and value of their customer offerings.’
• Chairman David Page concludes ‘as a result, and despite the challenging backdrop, we are confident that the Group will continue to perform well in the fast-growing casual dining market.’
• Fulham Shore reports ‘both Franco Manca and The Real Greek have performed well over the last year.’
• It says ‘we believe we will see this continuing, underpinned by great ambience, food quality and value of their customer offerings.
• The group says ‘we will be reviewing the progress of our third business, which is a single franchise of the Bukowski Grill brand in Soho, over the next few months.’
• Re the future, FUL reports ‘we believe that both of our key brands have significant further growth potential. We have a pipeline of locations where we would like to open either or both The Real Greek and/or a Franco Manca.’
• The group says ‘we anticipate opening approximately 15 new locations in the current financial year.’
• Current trading has ‘remained in line with our expectations’ but the group cautions that ‘there are many uncertainties out there: another General Election would be unhelpful, terrorist incidents have always reduced London public confidence (and therefore restaurant visits) and the long-term Brexit impact is unknown; it is, however, already affecting the availability of skilled European restaurant staff. In addition, food costs are currently on the increase and there is some evidence of reducing consumer expenditure.’
• Overall, however, the group remains upbeat concluding that ‘the UK dining out market continues to grow and as a nimble and agile operator with great restaurant brands we are confident of another year of good progress.’
Langton View: Fulham Shore has more than doubled in size in the last two years and there are no indications that its expansion period is coming to an end.
Indeed recently, whilst London may see something of a pause for breath with regard to Franco Manca, The Real Greek has seen renewed new-openings activity.
Whilst the company is still in a period of rapid expansion, it’s valuation measures are likely to look somewhat stretched. Although, even here, arguably year two projections on market cap to sales, sales to book and EV/EBITDA measures look fair to good value when compared to the peer group.
The group is basically selling the right things to the right people at the right price. It markets ‘affordable treats’ from relevant venues. It adds some theatre & it is genuine. Growth is set to continue.
THE ALCHEMY OF OVERSUPPLY — TURNING A1 INTO A3
The casual dining landgrab:
• The internet’s disruptive effect on retail has been well-documented – just look at the contrasting fortunes of BHS and Debenhams with Boohoo and ASOS.
• Brick & mortar retail sites are less in-demand. Gamers don’t shop at Game Digital anymore.
• Casual dining is getting pulled into these former retail units, which shift their licenses from A1 (retail) to A3 (bars, cafes and restaurants).
• While a solution of sorts, it also provides a shot in the arm to the long-standing (though recently moderating) trend of casual dining oversupply.
What does this mean?
• Just another ingredient in a cocktail including high rents and business rates, rising labour costs, rising input costs, Brexit uncertainty, and the ever-present spectre of rising interest rates.
• A wave of bars and casual dining operators are currently in expansion mode. A few have, recently, come unstuck as a result of problem sites picked up along the way. Others may, perhaps, be a little too used to historically low interest rates.
• Meanwhile, prime casual dining units such as those in destination retail parks are more crowded, competitive and expensive than ever.
• Bars and restaurants have benefitted in recent times from the fact that the UK’s economic recovery is largely consumer spending-led.
• On-trade like-for-likes have been rising in tandem with increasing consumer disposable spending on leisure activities. Meanwhile, wage growth has been weak and consumer credit lending has boomed.
• The above suggests it is prudent for operators to strengthen their finances and to become more discerning with their site openings and other postponable costs.
PUB, RESTAURANT & DRINK PRODUCERS:
• The ALMR has reported that operating costs in the pub sector have risen to >50% of turnover for the first time. Costs rose by 2.2ppts to 51.5% of revenue. Payroll is the largest cost (at 27.9% of turnover). ALMR CEO Kate Nicholls says ‘operating costs could threaten investment, job creation and investment into our communities.’
• Heineken has offered up 30 pubs for sale in order to gain CMA approval for its proposed purchase of Punch Taverns. The Heineken proposal is intended to head off a potential phase 2 investigation. Such an investigation could take up to 6 months. The pubs that are to be sold are split between Heineken’s existing pub company, Star Pubs & Bars, and the Punch A portfolio
• Fleurets comments on Q2 saying that Easter staycations were up 10% year on year. It also points out that this month marks the 10th anniversary of the Smoking Ban. There are said to be 1.9m fewer smokers in the UK now than there were 10yrs ago.
• Matthew Taylor, an aid to Theresa May, has likened Labour’s plan to ban zero-hours contracts to using a ‘sledgehammer to crack a nut’. He went on to say that British entrepreneurs and businesses had ‘nothing to fear’ from his upcoming report.
• The imbiba Partnership has announced it is seeking a £1m investment into its new experiential concept based on bingo for millennials, the MCA has reported. The venture will be called American Bingo, and plans to follow the likes of Bounce and Flight Club in the growth of ‘competitive socialising’. A spokesperson for Imbiba said ‘Bingo is simple, social and fun. It just hasn’t been repackaged – yet!’.
• Brewdog has lost its court battle with the Elvis Presley Estate over the names of its ‘Elvis Juice’ and ‘BrewDog Elvis Juice’. The brewer sought to trademark the names and appeared to mock the Elvis Presley Estate for objecting, despite the brewer’s history of robustly defending its own trademarks, which include such commonplace words as ‘punk’. The UK Intellectual Property Office found that Elvis Presley is indeed ‘the most famous of all Elvises’ and that the drinks’ names might make the average consumer ‘assume that the goods come from the same or a related undertaking’. BrewDog was ordered to pay £1,500 in costs and will now have to change the name of the beer or apply to EPE for official permission to use the name.
• The US tech and cannabis company, American Green, has developed smart vending machines that sell cannabis. The vending machines will require customers to pre-register by scanning their fingers via the machine’s biometric scanner.
• The Association of Licensed Multiple Retailers (ALMR) has revealed that venues are now being driven out of business as a result of spiralling rates. ALMR chief executive Kate Nicholls commented: ‘A number of recently-closed venues within London I spoke to confirmed that increases in business rates bills played a part in their closure. The ALMR has been warning the Government for years that spiralling rates bills were having a severe effect on businesses and that if this issue was not addressed, we would unfortunately see closures. If the Government does not do something to fix a broken rates system, more businesses will close their doors.’
• Liverpool-based Indian concept Mowgli Street Food has secured £3.45m of new funding from private equity group Foresight to roll out further restaurants across the UK.
• Ben & Jerry’s will offer delivery of its ice creams in the US. Customers will be able to order through the brand’s website.
• Aldi aims to recruit 4,000 people across its stores and regional distribution centre, with most of the roles being store assistants, assistant store managers and deputy store managers. Employees earn at least £8.53 an hour or £9.75 if in London, meaning Aldi is the UK’s highest paying supermarket.
• PepsiCo Inc has beaten expectations with its second quarter of profit. Revenue for the group increased 3% in the quarter ending June 2017, with the group selling more healthier foods and raising prices on its drinks in North America.
• A cashless society is one step closer after figures from the British Retail Consortium (BRC) showed that more than half of retail purchases (54%) in the UK were made with card, for the first time.
HOLIDAYS, LEISURE TRAVEL & HOTEL:
• A poll conducted by OTA eDreams.co.uk found that 25% of 18-29 year olds went on their first international holiday by the time they were 2 years old, whereas 43% of baby boomers hadn’t travelled internationally by the age of 18. By the age of 5, 70% of millennials have travelled abroad compared to 12% of baby boomers at the same age.
• Handheld in-flight entertainment will now be provided to Thomas Cook passengers, allowing them to use their personal devices to watch TV series and movies.
• In the 12 months leading up to June, Heathrow experienced a record 77m passengers, with this June responsible for 6.76m passengers (up 2.3% yoy). Routes to the Middle East grew by 12.1%, with Asia/Pacific having the next highest growth rate, up 4.4%.
• More than 1m passengers passed through Glasgow airport in June, a new record for the airport. Numbers were up 5.7% yoy driven by increased capacity for European city break destinations.
• The Chinese conglomerate Fosun remains in talks to buy a position in the French ski resort and amusement park operator, Compagnie des Alpes. Fosun is also reportedly interested in a number of other French consumer goods companies, with vice-president of the firm, Jim Jiannong Qian saying ‘’.
• The US hotel industry saw occupancy swing from -1% to 1% in June, while its average daily rate rose from 1% to 3% and revenue per available room increased from 2% to 4%.
• Thomas Cook has successfully defended a holiday sickness claim in what a spokesman for the operator called a ‘significant case which sends a clear message to claimants’.
• Uber will offer an improved offer to drivers and would welcome greater legal clarity about different types of employment in Britain. A government review was released yesterday into the gig economy, which calls for a new category of worker called a ‘dependent contractor’, meaning that those Britons working for companies such as Uber and Deliveroo would receive more benefits.
• Premier League football clubs revenues rose by 9% to £3.6bn for the 2015/16 season.
• Snap Inc shares fell yesterday after the stock was downgraded by Morgan Stanley, the lead underwriter on the firm’s IPO. The investment bank raised concerns over Snap’s ability to compete with Facebook’s Instagram, just 4 months after the company’s flotation. The shares on Tuesday were last at $16.12.
FINANCE & MARKETS:
• Bank of England says it is on the lookout for ‘creative accounting’. It doesn’t want UK banks taking undue risks
• Bank Deputy Governor Ben Broadbent yesterday did not give an opinion as to the outlook for UK rates. His silence was taken to be dovish & Sterling gave up some ground.
• Oil up a buck & a quarter to $48.22
• Sterling a little lower versus US$ at $1.2848
• Pound considerably weaker against Euro at €1.1187
• UK 10yr gilt yield unchanged at 1.28%
• World markets: UK down yesterday with Europe also lower. US higher but Far East mostly down in Wednesday trade
YESTERDAY’S LATER TWEETS:
• Later tweets: M&S numbers not brilliant. Sales in clothing & home (Easter-adjusted) down 1.8% vs inflation of 2.9%. Going backwards in real terms
• M&S food shows Q1 Easter-adjusted food sales down by 0.8% (despite the BBQ weather). Cannibalisation? Halo slipping?
• Langton writes on over-building, slack money & the unforeseen consequences post QE etc. http://www.langtoncapital.co.uk/2017/07/60-seconds-slack-money-the-hunt-for-yield-over-building/
• Young’s has cracking start to the year. Plus 8.6% LfL. Shows how well warm weather & (well-invested) riverside pubs go together
• YNGA cautions on more challenging trading. Shares a tad lower on a good update. Co says affordable treats’ spending should hold up
• Staycations. Hoseasons posts 13% rise in peak summer bookings made in June y-o-y with a shift towards high-end accommodation
RETAIL NEWS WITH NICK BUBB:
• B&M: Discounters are doing well in most Retail markets and mighty B&M is no exception, reporting impressive LFL sales growth in the UK for its Q1 today (from 26 March to 24 June). The 7.3% growth was boosted by 1.0% from the late Easter timing, but B&M say the performance was helped by “excellent sales in seasonal categories, particularly garden and outdoor living, and by strong grocery sales” and that “Although it’s early yet in the FY18 financial year, we are nevertheless confident of meeting full year market consensus profit expectations”. CEO Simon Arora says “In these uncertain times, and with inflation returning to the UK market, more and more shoppers are actively seeking out value in our stores and that means our business is strongly positioned to do well and continue its rapid growth”. Conf call for analysts at 8am.
• Burberry: Today’s Q1 update from Burberry (for the 3 months to 30 June) is the first with Marco Gobbetti, the new Chief Executive Officer, in charge, so it is perhaps significant that one of the key messages is that “In FY 2018, Burberry will focus on productivity from its current store footprint therefore no material contribution from net new space is expected”. Still, Retail LFL sales were up by 4%, which seems decent enough, although performance was mixed: strength in Mainland China drove improved, “mid single-digit” percentage growth in Asia Pacific and there was “high single-digit” percentage growth in EMEIA, led by strength in the UK, but the Americas delivered a “low single-digit” percentage decline. Overall guidance for FY 2018 adjusted PBT at constant exchange rates is maintained and there is a conf call for analysts at 9am
• News Flow This Week: Tomorrow brings the ASOS Q3 update and the Burberry AGM.