Langton Capital – 2017-09-15 – JD Wetherspoon, Tracker, Gym Group, Comptoir & other:
JD Wetherspoon, Tracker, Richoux, Comptoir & other:
A DAY IN THE LIFE:
Bit busy today so we’ll have to move straight on to the news:
JD WETHERSPOON – FULL YEAR RESULTS:
• FY Results – 53wks to 30 July 2017:
• JD Wetherspoon has this morning reported full year numbers for the 53wks to 30 July and our comments thereon are set out below:
• Headline Numbers:
• JD Wetherspoon reports sales for the year up 4.1% at £1,66m
• LfL sales for the year as a whole are +4.0%
• PBT is £102.8m against £80.6m last year
• Earnings per share are +43.3% at 69.2p against 48.3p last year
• The dividend for the full year is maintained at 12p
• Chairman Tim Martin reports ‘since the year end, Wetherspoon’s like-for-like sales have continued to be encouraging and have increased by 6.1%.’
• The chairman says ‘this is a positive start, but is for a few weeks only – and is very unlikely to continue for the rest of the year.’
• Tim Martin says ‘comparisons will become more stretching – and sales, which were very strong in the summer holidays, are likely to return to more modest levels.’
• Overall ‘it is anticipated that like-for-like sales of around 3-4% will be required in order to match last year’s profit before tax.’
• Tim Martin concludes ‘we currently anticipate a trading outcome for the current financial year in line with our expectations.’
• More on Trading, Balance Sheet etc.:
• JDW reports the company’s total net debt, including bank borrowings and finance leases, but excluding derivatives, was £696.3m (2016: £650.8m), an increase of £45.5m.
• JDW says ‘factors which have led to the increase in debt are expenditure on new pubs and extensions of £40.3m, expenditure on existing pubs of £58.6m, the acquisition of freeholds of £88.6m, share buybacks of £28.4m (excluding £15.5m in respect of shares purchased at the end of the financial year and settled post year-end) and dividend payments of £13.4m.’
• Year-end net-debt-to-EBITDA was 3.39 times (2016: 3.47 times).
• JDW adds ‘as at 30 July 2017, the company had £163.9m (2016: £189.6m) of unutilised banking facilities and cash balances, with total facilities of £860m (2016: £840.0m). The company’s existing interest-rate swap arrangements remain in place.’
• JDW chairman Tim Martin reports that current (last 6wks) trading is exceptionally strong (at +6.1%) but says that this will moderate over the year
• A like for like outturn of around +3% to 4% is expected
• This is certainly up with or ahead of best expectations
• Langton View: JD Wetherspoon at its year end that sales had been good in the last 11wks of the year. It said that the weather, which was hot in June, had helped.
• Today’s strong results, therefore, were largely anticipated but current trading – at +6.1% – is certainly stronger than had been expected.
• The group’s shares are off their recent highs but today’s announcement should send them better and continued share repurchases should lend further support.
• Upgrades to follow and, with JDW’s shares trading at around 16.5x earnings this year and next before increases in forecasts, there is room for medium term outperformance.
AUGUST COFFER PEACH TRACKER:
• After a series of profit warnings from operators, the August Tracker highlights ‘flat August trading for Britain’s pub, bar and restaurant groups’
• August Tracker has LfL sales +0.2% across the country with London down 1.6% and the regions up 0.8%. Restaurants outperformed pubs at +1.1% versus minus 0.3%.
• Total sales are +3.5%, highlighting the impact of continued new openings.
• Tracker says ‘London had a particularly poor month’ in August.
• Tracker’s Peter Martin comments ‘the wet weather can take some of the blame, with restaurant chains, which tend to do better when it’s raining, seeing a collective 1.1% increase for the month against a 0.3% decline among pub and bar groups.’
• Tracker now recognises that LfL sales are falling in real terms. Peter Martin comments ‘what will worry operators is that this performance is lagging inflation, now edging up towards 3%, by some distance.’
• Peter Martin comments ‘the sector has had to absorb significant cost pressures already this year, particularly around property costs and food inflation – and most operators have passed at least some of that on to consumers through price rises. While those menu increases don’t appear to have not hit sales, neither have they provided any noticeable revenue boost.’
• Tracker says ‘sales are sluggish and hard fought.’
• Coffer Corporate Leisure reports ‘these numbers reflect the tough summer that many pubs and restaurant businesses have suffered. There is no hiding. These like-for-like figures are well below inflation. For restaurants particularly they reflect the new openings over an extended period that have taken some trade from established operators. Pubs suffered from poorer weather in August compared to last year.’
• Re discounting, RSM says ‘promotional activity has increased significantly in 2017 and yet sales continue to stagnate, putting further pressure on margins. Despite this, the appetite of new entrants joining the market remains remarkedly resilient with London set for a record 44 restaurant launches this month as reported by Hot Dinners. As consumer spending tightens and cost pressures increase, competition from new independents will simply add to the challenges being faced by existing operators.’
60 SECONDS – IS A BULL TRAP EMERGING IN HOSPITALITY?
The tone of the Tracker, above, is much, much more cautionary than it has been in recent months. Now caught up by events, we put this out earlier in the week.
A deteriorating situation on the ground?
• Pressures are building within the UK hospitality industry.
• GNK, RTN, FUL, COM, RIC & TAST have recently warned on profits & analysts have downgraded estimates for MARS, MAB & others.
• Which is odd as the July Coffer Peach Tracker suggests ‘It’s steady as you go for Britain’s managed pub & restaurant chains’.
• The Tracker says both June & July saw LfL growth of 0.6% y-o-y and adds ‘the British are continuing to go out to eat and drink much as they did last year’.
• Is this representative of the industry? Were expectations too high or are there other forces at work?
It’s not plain sailing out there:
• Greene King said that pub co market LfLs declined by 0.7% for the 18 weeks to 03 September and was facing ‘unprecedented industry cost pressures’.
• Fulham Shore adds ‘during the holiday season in July and August the Group has seen a slowdown in trade, primarily from our restaurants in London suburbs.
• The company continued ‘we believe this is a sector-wide trading pattern and not unique to our brands.’
• Tasty said in its H1 report ‘the sector as a whole has been suffering due to a slowdown in consumer spending since the beginning of 2017 and this is set to continue into 2018.’
• Interestingly, none of the above contribute to the Coffer Peach Tracker
Ultimately, the sum of the companies within an industry must equal the whole:
• Industry stats should be built from the bottom up.
• The ‘industry’ doesn’t pay dividends or generate cash; the companies within it do.
• The definition of ‘LfL’ (i.e. the treatment of units listed for sale or that are the recipients of capital spending etc.) is important.
• We would suggest the forward indicators look troubling & agree that tough trading will continue into the New Year and perhaps beyond
PUB, RESTAURANT & DRINK PRODUCERS:
• Link to our cautionary comments back at the beginning of the year – sector overview
• Comptoir has reported H1 numbers saying revenues rose by 36.1% to £13.1m with EBITDA down 81% to £0.2m
• Comptoir had ‘net cash and cash equivalents at the period end of £0.1m (30 June 2016: £8.0m).’ The group chairman Richard Kleiner reports ‘notwithstanding the challenging environment that has subsisted since early 2017, I am pleased to see that, over the last few months, the business revenue has stabilised.’
• Comptoir chairman says that despite 81% drop in EBITDA, he believes ‘the Company is therefore in a good position to take advantage of the opportunities that the board believe will arise over the foreseeable future.’
• Discounting. Comptoir reports ‘we have observed a significant increase in level of promotional activity within the restaurant sector. The Board has decided not to discount but improve our offering to bring more value for money for the Group’s customers.’
• Comptoir current trading: Group says ‘during the 6-month period to 30 June 2017, and as previously announced, the Group did experience a number of additional cost pressures including higher supplier costs due to currency exchange rate variations, consumer spending impacting on average spend per transaction, increase in business rates and the National living Wage.’
• Hopeful signs. Comptoir reports ‘the Group has seen a noticeable improvement in trading during the last few months as the 9 new restaurant opened in the second half of 2016 have bedded in.’ It says ‘the pipeline for 2018 is currently under consideration and is dependent on site availability and funds available.’
• UK pubs are facing a ‘ticking time bomb’ due to rising business rates, warns the Campaign for Real Ale (CAMRA). CAMRA reports that many out-of-town supermarkets and stores have seen their rates reduced, whereas, town centre pubs have received the short end of the stick. The organisation fears that this ‘can only fuel the rate and leel of pub closures’.
• Citigroup researchers believe the UK may have reached coffee shop saturation, suggesting that investors holding onto shares in Coasta’s owner Whitbread may wish to reconsider. UK coffee shop numbers have increased to 22,000 from 10,000 ten years ago, with branded outlets doubling in number.
• Wagamama has increased LfL sales by 6.6% in the 16 weeks to 13 August, with adjusted EBITDA climbing 2.5% to £12.4m. The group opened four new UK restaurants and one US in the first quarter.
• UK cider has reached £1bn in sales for the first time since 2014, data from Nielsen has found. Warm weather has been suggested as a main contributor to the 5.5% rise in sales. Helen Stares of Nielsen’s said ‘This is extremely welcome news for cider manufacturers after what’s been a sustained period of struggle. However, it also highlights how highly dependent the cider industry is on good weather’.
• Budweiser announced that it will launch a new alcohol-free Prohibition range in the UK next month.
• The 20 strong, Handmade Burger Co, has been acquired out of administration for £1.45m by The Burger Chain.
• The Bank of England launched the new £10 note yesterday featuring novelist Jane Austen. The new £10 will be printed on polymer, making it safer, stronger and cleaner. The note will also include a new tactile feature on the £10 to help the visually impaired, ensuring the nation’s money is as inclusive as possible.’
• Per MCA, Stonegate Pub Company’s acquisition of Bar Holdings represents its first foray into the transport hub sector. The London-based sports bar & grill chain has sites in Waterloo, Marylebone, Victoria, Farringdon and Canary Wharf.
• Soho house has been boosted by wealthy members spending more of food and drink. The company said revenues were up 3.4% to £294.6m with underlying turnover increasing by 21% to £273.6m. Global membership was almost 70,000, a 23.9%increase over the previous year. Food sales were up 20% with drink sales up 15%.
• Nestlé has acquired a majority stake in Blue Bottle Coffee, based in Oakland, valuing it at $700m according to the FT. Blue Bottle, currently at 29 sites, is expected to grow to 55 sites in the US and Japan by the end of the year. Nestlé CEO Mark Schneider said ‘this move underlines Nestlé’s focus on investing in high-growth categories and acting on consumer trends’.
HOLIDAYS, LEISURE TRAVEL & HOTEL:
• Hurricane Irma is being compared to the Icelandic ash cloud in terms of challenges faced by the holiday industry. A limited flight programme in and out of Miami and Orlando resumed on Tuesday after about 10,000 flights were cancelled, while Orlando Sanford airport and Varadero in Cuba remained closed to commercial flights.
• Japan’s Softbank, USA’s Dragoneer and China’s Didi Chuxing are close to finalising a joint venture investment worth up to $10bn in Uber, according to Techcrunch.
• Chrome River, an expense management solutions provider, reports that more than three-quarters of companies use apps such as Uber and Airbnb in their travel policies.
• London-based hotel brand De Vere has been relaunched as part of Principal Hotel Group following more than £100m of investment from Starwood Capital Group. The De Vere portfolio includes five properties in central London, as well as the 17th-century De Vere Wotton House in Dorking, Surrey, which has been restored to the tune of £6m ($8m).
• Banks remain wary of Ireland’s hotel market despite average daily rate surpassing its pre-recession peak. Irish banks are lending into the sector, but at different loan-to-value and cash ratios.
• The US hotel industry saw positive results in three key performance metrics for the week of 3-9 September, compared with the same week in 2016, per STR. Revenue per available room was up 3.7% year over year to $77.31, buoyed by a 1.6% increase in average daily rate to $120.78 and 2.1% occupancy growth to 64%.
• The government has reported that traffic levels across the UK hit new records in the year to end-June. Total UK car mileage over the year was +1.3%. The move towards staycations after the fall of Sterling may have helped to boost the numbers.
• Gym Group has announced the purchase of 18 gyms from Lifestyle Fitness for £20.5m. The group says ‘the Acquisition is expected to be significantly earnings enhancing by 2019 as a result of the expected growth in membership of the acquired sites.’
FINANCE & MARKETS:
• Banks MPC yesterday held rates at 0.25% (vote 7-2) and voted unanimously to keep QE at £435bn.
• MPC says economic picture ‘slightly stronger’ with unemployment down and price rises picking up.
• MPC says ‘monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years.’
• MPC says ‘monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations.’
• Some suggestions of a 25bp rise in UK rates by November. Sterling up versus global currencies on higher rate fears / hopes.
• Oil up at $55.28
• Sterling at 1yr highs vs dollar on UK interest rate rise fears / hopes at $1/3394
• Pound up vs Euro at €1.1244
• UK 10yr gilt yield up 9bps at 1.23%
• World markets: UK down yesterday but Europe mostly higher. US down and Asia mostly down in Friday trade
o Leave campaigner Sir James Dyson has told the BBC he expects the UK to leave the EU without a trade deal
o Chancellor Philip Hammond says we need a multiyear transitional deal that ‘looks a lot like the status quo’
o T May to speak on Brexit for first time in 6mths in Florence next week
o Burberry has said that there is enormous potential post Brexit. But creative officer Christopher Bailey says he hopes an anti-immigration climate will not endanger the UK’s ‘thriving creative culture’.
o A UK tax boss has said that the country may need another 5,000 customs officials post Brexit
o Smuggling will be a growth industry
o A letter is being signed by business leaders in the EU (including the UK) calling on politicians to speed up the negotiation process
YESTERDAY’S LATER TWEETS:
• Later tweets: Thomas Cook & Expedia in deal. Latter will ‘become the preferred provider of hotels for city breaks
• Overused phrase of the month is ‘Perfect Storm’. But that doesn’t mean it’s not an accurate description of casual dining headwinds
• UK wage squeeze as more UK workers work longer for less (in real terms). Stronger oil price suggests Sept CPI could edge higher
• STR reports the European hotel pipeline for August rose 17.5% y-o-y. Demand good in London but supply may outstrip
• Next surprises market by saying market ‘less challenging’ – but John Lewis says headwinds will continue into next year.
• Langton commented at the beginning of the year that the going was getting tough. See https://t.co/QOGDse5kv6
RETAIL NEWS WITH NICK BUBB:
• JD Sports: It’s a brave man who would go to South Korea at the moment, given the threat of conflict with North Korea, but it’s still a big market of over 50m people and hopefully Peter Cowgill of JD Sports has been able to negotiate a good entry point, as he has announced a joint venture this morning with a subsidiary of the South Korean sports footwear chain Sportsmarker. The initial consideration is only £5.5m for 15% of the business, but the intention is for JD to exercise an o to buy another 35% next year and we must wish them the best of British luck with their endeavours.
• John Lewis Partnership: Some more detail on yesterday’s JLP interim results: in the first half Waitrose eked out some modest 0.7% LFL sales growth and controlled its branch and central costs well, but all the benefit here was eaten up by pressure on gross margins. The Waitrose MD Rob Collins said on the analyst’s conference call that product cost price inflation was 4.5%, because of the weakness of sterling, but selling price inflation was only 1.5%. The result was that first half underlying operating profits at Waitrose fell by 17%, to £101m. Over at John Lewis LFL sales growth was a mere 0.1% in the first half, but underlying operating profits of £40m recovered a little, in the absence of last year’s transitional costs. Nevertheless, the structural pressures on John Lewis continue and although their Online sales continued to grow nicely in the first half, by c11%, LFL Store sales
• BDO High Street Sales Tracker: We flagged on Wednesday that John Lewis had a pretty good time in Fashion last week and the BDO High Street Sales Tracker for small/medium-sized Non-Food chains flags that w/e Sept 10th saw Fashion Store LFL sales rise by 3.9%, despite a reasonably good comp. Including Homewares and Lifestyle chains, total Store LFL sales were up by 4.1% last week (versus +0.7% a year ago), whilst overall Online sales also picked up, to +22% (against strong 26.3% growth a year ago).
• Trade Press (1): In today’s Retail Week magazine the front cover flags up a feature on “Becoming a Consumer Champion” (how Tesco has shown that it can be a disruptive retail force). RW also has features on Sports Direct (“What can Sports Direct do to win over investors and customers?” and Belfast (“Northern Irish retailers are benefiting from a tourism surge”). In terms of News stories, RW focuses on the news that the new Hobbycraft boss John Colley has left the business just two months after taking the helm and the Fashion retail sector’s week of big-name executive exits (including the departure of IT guru Andy Harding from Mothercare after only 2 months in the business). And, in his column, the acting Editor looks at Business Rates and thunders that “Rates have retailers staring down the barrel”.
• Trade Press (2): In Drapers magazine the Editor devotes her column to the news that Lipsy, the young women’s fashion brand owned by Next, will cease trading from its own website in January 2018 (“The curious closure of the Lipsy website”). In terms of features, the focus is on the opening of the new Lexicon shopping centre in Bracknell and Fenwick’s first store opening for 14 years. In terms of News stories, the focus is on the way in which “fun” accessories like flamingo pool inflatables helped Primark avoid heavy discounting over the summer, the news that the Online fashion etailer Missguided has hired former Shop Direct deputy chief executive Gareth Jones as CEO of Online and the reports that Debenhams’ brand partners have largely welcomed the news that the chain is restructuring to supports its new strategy (Debenhams is creating three new business units: Fashion and Home; Beauty
• News Flow Next Week: Things are less busy next week, but there’s still plenty going on, kicking off on Tuesday with the French Connection interims, the Ocado Q3 update and the latest Kantar and Nielsen monthly grocery sales data. Wednesday brings the Kingfisher interims and the delayed ONS Retail Sales figures for August. And then there is a Pets at Home Capital Markets Day on Thursday.