Langton Capital – 2017-09-08 – Greene King, beer prices, storms, costs, Brexit etc.:
Greene King, beer prices, storms, costs, Brexit etc.:
A DAY IN THE LIFE:
I have to admit that I’m not the most observant of people.
I’ve been known to compliment people on their haircuts when they haven’t had a haircut (bad, but not as bad as failing to compliment them when they have) and I couldn’t describe what someone else was wearing ten minutes after I’ve had a meeting with them but, and this was a tough ask, I’ve apparently bested myself.
This when I had to get a kitchen repaired. The ceiling had partially fallen in (washer leak in the flat above) & it needed replacing & the ceiling and the walls needed painting. Despite living there, I didn’t know what colour the walls were so I had to ask somebody who knew.
‘Cream,’ they said.
‘Green,’ I heard and ‘green’ I told the painter. ‘What shade?’ he asked. ‘I don’t know,’ I said. I mean cream is cream, isn’t it? ‘Surprise me.’
Well, he didn’t surprise me as I didn’t notice that the kitchen was a two-tone, green and off-white combo. And neither did the lads. Either that or they couldn’t be bothered to comment on the fact that there was a jagged demarcation line in the middle of the wall separating the colours.
I’ve been put right since, of course. The good lady wife & daughter came down for a while & told me but I’ve since forgotten about it and have ceased to notice. On to the news:
GREENE KING CAUTIONS ON TRADING: LAST 8WKS NOT GOOD AT ALL:
• First 18wks trading update – period to 3 Sept 2017:
• Greene King has this morning updated on trading for the 18wks to 3 September and our comments are set out below:
• Headline numbers:
• Greene King reports ‘in the first 18wks of the year, Pub Company LfL sales were down 1.2% against a market which declined 0.7%’
• Excluding Fayre & Square, Greene King was down by 0.9%
• GNK says ‘in the first ten weeks, LFL sales were in line with our expectations and broadly in line with last year, despite the tough comparisons from Euro 2016’
• GNK says ‘since the second half of July, when the weather worsened, trading weakened.’
• GNK says ‘over the course of the year so far, most of the LfL sales decline can be attributed to value food’
• GNK adds ‘more recently, we saw some softening across other segments’
• The company comments ‘we are continuing to address the challenges of the value food sector through measured capital investment to upgrade and reposition pubs and through selective disposals.’
• Pub Partners’ LfL income is +1.4% with Brewing & Brands down by 0.5% against an ale market down 2.9%
• Further trading comment:
• GNK says it expects to deliver £45m of cost savings post Spirit this year. It says ‘the scale of our cost saving programme helps to reduce the impact of weaker than anticipated sales’
• This will limit margin declines (the mention of which suggests that margins will fall)
• The group mentions ‘unprecedented industry cost pressures.’
• Greene King says ‘we remain cautious about the trading environment and expect the challenges of weaker consumer confidence, increased costs and increasing competition to persist over the near term.’
• The company says ‘in the longer term, utilising the benefits of the Spirit acquisition, our brand conversion and cost saving programmes, our robust balance sheet and our strong cash generation will be important levers to help deliver competitive advantage, growth and attractive and sustainable dividends for our shareholders.’
• Langton Comment: Greene King has updated on trading for the summer period and the picture is not pretty.
• The first 10wks of the period under review were in line with last year but the summer was bad.
• Industry wide, July was unhelpful, August was not good and September, not covered in today’s release, is up against the hottest temperatures of the year last year.
• Trading has slowed and the group remains ‘cautious but well-positioned’ etc.
• The integration of Spirit is mitigating some of the negative impact of slowing sales.
• Tenanted houses are performing well, ale is ahead of the market.
• Overall, GNK remains concerned about the wider economy.
• Uncertainty is unavoidable and this will extend to forecasts. These are likely to be reduced. We believe that small ticket purchases may hold up better than the economy as a whole but, with Fulham Shore and now Greene King updating over the last couple of days, it is clear that the pub is not immune.
• GNK is one of the UK’s better-positioned pub companies and, with its shares now trading at a single-digit multiple, it is not expensive. However, forecasts will come down. Also, with a big acquisition under its belt, the group has to execute on its strategy and cautionary comments may put off would-be buyers in the short term.
RESTAURANTS: THE GOING GETS TOUGH…
The current situation:
• Fulham Shore is the latest in a long list of casual dining casualties, and these are just the ones we hear about.
• Richoux, Tasty, Comptoir, and Restaurant Group have all issued profit warnings. There are likely more to come.
• Add to that share price weakness from Marstons, Greene King, Domino’s Pizza, Mitchells & Butlers, Whitbread, and, before being bid for, Revolution Bar Group.
• It’s fair to say the dining and drinking out market is not in fashion at the moment. Why might that be the case?
How did we get here #1: Oversupply
• Structural oversupply is no secret. Most operators are hardwired to expand and there has been too much new supply in the UK for many years now.
• When this is the case there is no timely braking mechanism. There is just the crash, and then the shakeout as the market adjusts to a sustainable trajectory.
• The US is well advanced on this path. Middling operators have been contracting and sales declining for multiple quarters as observed by NRN.
How did we get here #2: Cash-strapped customers
• The dining out sector has enjoyed like-for-like growth in excess of wage growth in recent times — this has likely been funded by consumer credit.
• The Bank of England has warned about dangerous levels of household debt. While growth here is moderating, it is still c+10% year-on-year.
• Consumers might feel even less wealthy should house prices soften, as they have in parts of London.
• Consumers still respond to operators who provide a memorable experience for an affordable price.
• There is too much restaurant space. After years of having it their own way, landlords will now struggle to tempt in quality operators.
• As such, operators canny enough to haggle on leases will likely prosper. Conversely, those who have rushed into rip-off leases might be approaching their emperor-has-no-clothes moment.
PUB, RESTAURANT & DRINK PRODUCERS:
• Overbuilding an issue both sides of the pond.
• US same store restaurant sales fell by 2% in August with traffic down by 3.9%. Clearly something unpleasant is going on Stateside.
• US restaurant sales slip reflects ‘the difficult environment many restaurant chains face in today’s rapidly changing market’ says journal NRN. You wouldn’t know times were tough from US GDP figures, which suggests that overbuilding is an issue.
• US restaurant sales in August ‘a tale of two different periods’ says Victor Fernandez, executive director of insights and knowledge for TDn2K. He continues ‘in the first three weeks of the month, same-store sales were down 1.4 percent, a significant 1.4-percentage-point improvement over July. Same-store traffic was down 3 percent. Although still negative, this was an improvement over recent results.’
• US restaurant sales impacted by Hurricane Harvey. Same-store sales in Texas down 15% in the week of the storm.
• JDW announced that it yesterday bought back 102,500 of its own shares for cancellation at a price of 1050p
• Surrey has overtaken London as the most expensive place to buy a pint for the first time in The Good Pub Guide’s 36-year history. The average price in Surrey is now £4.40, compared to £4.20 in the capital, while the average price across the country has risen by 13p to £3.60 in the last year. Guide editor Fiona Stapley told The Morning Advertiser said that she was really ‘amazed’ by the results, but admitted that pubs were being ‘hammered’ by a range of costs.
‘The chancellor’s decision to increase duty on beer for the first time in five years has been a huge blow to brewers and to pubs and their customers. There are also increases right across the food and drink industry that include higher wage bills as a result of the national living wage increase last year, rocketing business rates (some pubs are seeing rises of more than 200%), higher costs of raw materials, and inflation due to the depreciation of sterling as a result of Brexit,’ she said.
• Family visits to pubs rose in the year to June but still lagged growth in adult-only visits, according to data collated in the quarterly NPD Pub Tracker. Visits with children of all ages rose by 0.4%, accounting for a total of 19.8% of all pub visits over the year, compared to a 1% rise in adult-only trips. Cyril Lavenant, director of foodservice at NPD, said: ‘Consumers seem to be less promotion-driven when visiting pubs. However, promotions/deals are more important to pubs (accounting for 29.1% of their traffic) than for the foodservice industry in general (27.7% of traffic).’
• The UK obesity crisis is being blamed on businesses pushing unhealthy food and larger portions on shoppers, according the Royal Society for Public Health.
• Castle Rock Brewery has opened its 23rd pub, the Fox and Grapes in Sneinton Market, Nottingham.
• The value of American spirits exports increased by 10.6% in the first half of 2017 – up more than US$67 million to a total of $698.5m, per Distilled Spirits Council. Growth was driven primarily by the American whiskey category (including Bourbon, Tennessee Whiskey and American Rye), which witnessed a 6.1% rise in value to $464.6m. Smaller categories of other American spirits also showed strong growth, including brandy – up 39.4% to $43.45m total); vodka – up 51.2% $33.6m total); and rum – up 49.5% $18.55m total).
• The Fulham Shore’s Franco Manca Operations Director Jawaid Akhtar is the latest of the company’s management to buy shares in the company following its profit warning. Akhtar purchased 67,658 shares at a price of 14.78p.
• Asda has cut more than 300 staff from its HQ in the group’s third major round of job cuts in as many years.
HOLIDAYS, LEISURE TRAVEL & HOTEL:
• Hurricane Irma has destroyed an airport in the Caribbean and cruises have been canceled, while a state of emergency has been declared across Florida and a number of Caribbean islands. Princess Juliana Airport in St Maarten, which was shut down on Tuesday as a safety precaution, has been ripped apart by the 185 mph winds, the Telegraph reports.
• US vacations are shifting towards domestic road trips, according to travel marketing firm MMGY Global’s ‘2017 Portrait of American Travelers’ annual survey. Some 85% of total American vacations were spent in the 50 states and road-trip vacations grew from 22% to 39%.
• Global airline passenger demand tailed off in July over the previous month. Total revenue passenger kilometres rose 6.8% over the same month last year but were down from the 7.7% growth recorded in June, according to the latest Iata statistics. A record high load factor in July showed that the appetite for air travel remains very strong, said Iata director general and chief executive, Alexandre de Juniac. ‘However, the stimulus effect of lower fares is softening in the face of rising cost inputs. This suggests a moderating in the supportive demand backdrop,’ he added. ‘As the first full month in the summer peak travel season, July is a bellwether month, and demand continues to be very strong.’
FINANCE & MARKETS:
• The ECB yesterday left interest rates on hold but said that the Eurozone will grow this year by 2.2%, its fastest rate in 10yrs.
• Euro up on the back of Draghi comments. Scaling back of QE now expected in the coming months.
• Halifax reports ‘some buoyancy’ in UK property market. It says prices rose by 1.1% in August and are now 2.6% ahead of the same month last year. The Halifax comments ‘house prices should continue to be supported by low mortgage rates and a continuing shortage of properties for sale over the coming months.’
• Oil up again at $54.74
• Sterling up vs dollar at $1.3131
• Pound down vs strong Euro at €1.0883
• UK 10yr gilt yield down 3bps to sit now below 1% at 0.98%.
• World markets: UK & Europe up yesterday with US down. Far East mostly down in Friday trade
o Brexit returns to parliament with David Davis introducing the EU (Withdrawal) Bill
o Jaguar Land Rover boss Ralph Speth has said that free trade is ‘crucially important’ to the UK economy
o Wolfgang Fink, co-CEO of Goldman Sachs in Germany has said the company may triple or quadruple its presence in Frankfurt post Brexit
YESTERDAY’S LATER TWEETS:
• Later tweets: Fulham Shore directors buy shares in wake of profit warning. A trait absent elsewhere in the sector?
• Patty & Bun loses 40% of its balance sheet (£175k) in year to end-November.
• Brexit debacle rolls on. PM asking for business support. Business asks ‘what’s your plan?’ Conversation ends?