Langton Capital – 2017-09-18 – DP Poland, more on JDW, UK pubs, Escape Hunt etc.:
DP Poland, more on JDW, UK pubs, Escape Hunt etc.:
A DAY IN THE LIFE:
Bit busy with results this morning so on to the news:
DP POLAND – FIRST HALF RESULTS:
DPP has this morning reported H1 numbers and our comments are set out below:
• DPP has reported system sales +50% in H1 with LfL sales +17%. These numbers had been previously announced.
• LfL system sales are up by 24% in July and up by 28% in August
• The group has generated 19 consecutive quarters of >10% LfL system sales growth
• The group now operates 48 stores, having opened 13 in the year to date
More on Trading:
• DPP reports that combined corporate store EBITDA and commissary variable profit is up by 39% in H1 2017 against 2016. Group EBITDA losses decreased 5% H1 2017 on H1 2016 at constant exchange rates. They increased by 3% in Sterling terms
• Group reports a second commissary is operational and says the total commissary capacity is now c.150 stores. Some 73% of delivery System Sales are now ordered online
• CEO Peter Shaw reports ‘we are on track to cross the 50 stores mark in October, as we drive towards the critical mass that will support national television advertising and further economies of scale in procurement.’
• Mr Shaw says ‘new store openings in combination with robust like-for-like sales growth increased System Sales by 50% in the first half of 2017. In July and August we saw like-for-like System Sales grow by 24% and 28% respectively.’
• DPP reports ‘the twin sales streams of corporate stores and commissary delivered an increase in combined corporate store EBITDA and commissary variable profit of 39%. As our newest stores’ sales build and they move into profitability we will see a further uplift’
• The group says ‘our new commissary opened at the end of August, ahead of schedule, and is now supplying stores to the north, south and west of the country, while our original facility in Warsaw continues to supply the capital city and the east.’
• DPP reports ‘our expansion is further underpinned by the robust growth of the Polish economy.’
• The group comments ‘the return to 24% and 28% like-for-like growth in System Sales in July and August respectively, shows that the pizza delivery market in Poland and Domino’s Pizza’s position in that market are both healthy.’
• Marketing has played a part in this step up. The group says ‘the next step in marketing for Domino’s Pizza in Poland will be the first test of television advertising.’
• DPP says ‘we will sustain our roll-out of store openings in 2017 and 2018, as we drive to become the leader in the pizza delivery market in Poland. Our real estate team has a pipeline of store openings for the rest of this year and into 2018 and our operations team is ready to manage these openings alongside our growing base of sub-franchisees.’
• DPP comments ‘we are on track to finish the year with 50+ stores and we have our commissaries and supply chain in place to service c.150 stores, comfortably more than our intermediate target of 100 stores by YE 2020.’
• The group says ‘in the longer term we believe that the Polish market could support at least 300 Domino’s pizza stores, with the continued expansion of the Polish economy.’
• Re numbers, DPP says ‘we anticipate that Group EBITDA for 2017 will be a modest improvement on 2016 as we see the impact of new store openings and the additional fixed costs of the second commissary, dampening the impact of significantly higher sales.’
• Looking further forward, DPP says ‘we expect to see a step change improvement in Group EBITDA in 2018 as more corporate stores mature, new stores become a smaller proportion of the whole and the contribution from our commissaries continues to grow.’
• Langton View: DPP is continuing to deliver. It has 48 stores & will have 50 next month. It is on track to have 55 by its December year end.
• The group is loss-making, as one would expect at this stage in its development, but growth continues and, post the group’s fundings in December 2016 and June 2017, the group has the resources to grow its estate of company-managed stores (currently around 40% of total units) more rapidly.
• Poland is a fast-developing economy and, with the New York Times saying that it may be the first major economy since South Korea 20yrs ago, to make it into the world’s group of ‘rich countries’ (per capita income of >$15k), this looks set to continue.
• DPP comments ‘the Polish economy is in good health, as evidenced by the recent upgrade in GDP forecast growth from 3.2% to 4.3% by the Moody’s rating agency. By the year end this will represent the 26th year of positive annual growth since the country transitioned from communism to a democratic market economy. As the 24th largest economy in the world, founded on a broad based and modernized manufacturing sector, Poland has been identified as a future economic powerhouse.’
• The group’s current growth (it will have been a little slower in Q2 than in Q1 due to the shift of Easter) should propel it to cash flow break even by FY19 & profit shortly thereafter. There is no obvious reason why Poland should not be host to 300+ DPP stores in due course.
DISCOUNTING & CASUAL DINING:
• There would appear to have been a pickup in discounting across the casual dining sector. Pizza Express, for example, was offering 30% off all food (until yesterday) and Prezzo is offering 40% off main courses. Pizza Express is now offering 50% off wine.
• It will be interesting to see whether Pizza Express will remain at full price having discounted heavily until yesterday.
• Food Service analyst Peter Backman reports that he has noted a pickup in discounting on his Voucher Tracker. This picks up aggregated online discount offers.
• Backman adds that focussed offers that are sent to app / website users by individual operators are also increasing. He adds that Pizza Express were at the forefront of discounting during the last major setback in 2007-2008.
JD WETHERSPOON – FULL YEAR ANALYSTS’ MEETING:
• JD Wetherspoon Friday hosted a meeting for analysts to discuss its FY numbers and our comments thereon are set out below:
• Headline Numbers:
• JD Wetherspoon has confirmed a record year for sales (+4.1% to £1,660.8m), PBT (+27.6% to £102.8m), and EPS (+43.3% to 69.2p).
• LfL sales for the year are +4.0%, helped by strong trading and the sale of underperforming sites.
• The dividend for the full year is maintained at 12p so that JDW can continue to invest in initiatives such as site staff rooms, bathroom upgrades, and beer gardens.
• The group will continue ‘opportunistically’ with share buybacks and freehold reversions.
• More on Trading, Balance Sheet etc.:
• Management reiterates its view that 3-4% like-for-like sales growth is required to break-even on profit but will hope to surpass this.
• JDW has seen good growth in Bar (+3.1%), food (+5.7%), and hotels (+9.9%), albeit the latter remains a small part of overall sales.
• Like-for-like pub profit has increased by some 8.4% (2016: -0.3%).
• JDW reiterates its aim to get net debt/EBITDA down to between 2 and 2.5 times (year-end net debt/EBITDA: 3.39 times).
• The pub group continues to actively invest in its estate, with £99m of capex attributed to the period and £27.2m of acquisition costs (with a further £13.1m falling next year).
• The group expects repairs and maintenance to continue running at an average of 7-8% of sales.
• JD Wetherspoon now has an estate of 895 pubs following the sale, or termination of lease, of 127 pubs in the last two years. Group acknowledged that ‘some mistakes are inevitable in site selection’.
• Feedback from its app is still in its early stages but JDW anticipates that, in time, it might be a valuable driver of like-for-like sales. It is particularly popular among students.
• JDW chairman Tim Martin reports that current (last 6wks) trading is exceptionally strong (at +6.1%) but says like-for-likes will moderate as the group encounters tougher comps.
• JDW expects to open between 10-15 sites and close around 12.
• Langton View: JD Wetherspoon’s strong trading runs contrary to comments made by some of its peers and shares in the group are up accordingly. There has been no mention of raising prices so far, but this is a valuable option at the group’s disposal and is arguably one not shared by many of its competitors.
• The group’s strategy of ditching underperforming sites, making selective openings, and reducing its overall estate appears prudent given current market conditions. This has allowed for a more focused capex programme and vibrant like-for-like sales gains. Continued share repurchases should lend further support.
PUB, RESTAURANT & DRINK PRODUCERS:
• NPD’s latest Foodservice UK – Out of Home Eating Trends survey reports that, despite the UK recording its weakest 6mth period of growth since 2012, the foodservice sector continues to be strong.
• NPD reports that spend rose 3%, average spend per head was up 2% and the number of visits to foodservice outlets was +1%. CPI is currently 2.9%.
• NPD reports quick service restaurant sales +4% whilst their full service peers saw sales fall by 1%. Delivery foodservice sales are said to be up by 22%.
• The BRC has suggested that the price of beef, veg & cheese could rise by as much as 30% unless a zero tariff deal can be agreed when the UK exits the EU.
• Moody’s has reported that the UK’s pubs are beginning to struggle. After profit warnings from virtually all of the UK’s quoted restaurant operators, the failure of players such as Handmade Burger & Ed’s Easy Diner (and comments such as those from Byron today) as well as cautionary comments and profit estimate reductions from Greene King, Marston’s and others, this may be stating the somewhat obvious.
• Moody’s points out UK pubs are facing higher costs, rising inflation and slack demand. Overbuilding (in casual dining) will not be helping the situation. M&B updates on trading on Thursday and Marston’s will update on 10 October.
• Moody’s reports that Punch and M&B could be in danger of breaching covenants by the end of next year if wages rise by 5% or more and demand does not pick up. This is deemed to be a ‘stress case’ rather than the credit agency’s ‘base case’. Moody’s reports ‘we expect this [negative] trend to carry on as the pub industry continues to experience structural declines.’
• Dishoom has reported numbers to end-Dec 2016 saying that turnover rose from £18.2m to £27.8m. This was ‘driven by solid performance across the restaurants and a new restaurant opening in St Andrew Square, Edinburgh in December 2016.’
• Dishoom adds that EBITDA before loss on disposals rose to £2.98m from £1.62m ‘which the directors consider to be satisfactory performance.’
• Chris Guyver, the lobbyist running the VAT Campaign, believes the government might cut VAT for hospitality businesses as it leaves the EU. Speaking to MCA, Guyver said: ‘I see the change in the political weather happening over the next 12 to 18 months. I suspect we will have some significant mood music from senior figures in Government towards the end of next year. We leave the EU in March 2019 and Government will be keen to surround that moment with lots of highly positive messages from Brexit. I would expect our message to be one of those included as a benefit that will be accrued on behalf of Brexit.’
• Contract catering company Sodexo has acquired The Good Eating Company.
• New World Trading Company is launching a new concept based on its staple range of cocktails, world ales, and a ‘vibrant food menu complete with deli, rotisserie and grill-inspired dishes’ called The Florist in Bristol. The site will open in early 2018 at 67-69 Park Street.
• ‘Big beer’ companies are ‘fooling consumers into thinking they are still drinking “independent” or “craft” beer, according to beer writer Roger Protz. The editor of CAMRA’s Good Beer Guide said: ‘First Big Beer buys up a swathe of independent breweries. Now it’s attempting to control the natural ingredients used to make beer… Not only are consumers being misled, but these global brewers are changing the very character of the beers they buy and driving genuine independents out of business. It is most certainly the biggest single threat to consumer choice.’
• Total retail sales at Network Rail’s stations increased by 5.29% between April and June 2017, reaching £129.5m.
• Chief executive of the BBPA, Brigid Simmonds, has commented on DEFRA results showing that the UK exported one billion pints of British beer, ‘This is certainly great news. Beer is Britain’s second biggest food and drink export, and a big success story for a great British industry’.
• Soho House will proceed with its expansion plans, despite the group’s failure to refinance a £145m bond. The group plans to open three sites a year.
• The Vietnamese grab and go chain, HOP, has closed a round of $750,000 private fundraising, the MCA has reported. The fundraising will enable the group to open a further two sites.
• Byron burgers has hired KPMG to help advise on site closures, due to falling customer demand. The 70 strong chain will still look for ‘growth opportunities’, however, it first must move out of unprofitable locations.
• Just for Pets, the 25 strong pet shop chain will enter into administration. Owners of the chain, Wynnstay, say that changing customer buying behaviour, increased competition and greater cost pressures were to blame.
HOLIDAYS, LEISURE TRAVEL & HOTEL:
• Taleb Rifai, UN World Tourism Organisation (UNWTO) secretary general, has warned that over-tourism protests are a ‘wake-up call’ to the industry. Rifai continued ‘We have started to see resentment to tourism – to see a tourism phobia – in Barcelona, in Venice, in Rome, in Dubrovnik … we have to make it more sustainable, to make life better.’
• French unions have called for more strikes across the country against Macron’s labour reforms, causing more travel disruptions. At least 200 flights will be cancelled between Monday and Wednesday with air traffic controllers striking. Ryanair and Airlines for Europe have called for the French government to intervene.
• The UK terror threat level has been reduced to severe following two arrests relating to Friday’s attack on a London Tube train. An 18 year old and a 21 year old are in custody on suspicion of a terror offence. The “severe” terror threat level means an attack is no longer imminent but is still highly likely.
• Ryanair plans to cancel 40 to 50 flights every day for the coming six weeks, as the group aims to improve flight punctuality. The group had described the fall its punctuality to 80% was ‘unacceptable’. The move could affect 285,000 passengers, who would all be offered alternative flights or refunds.
• Escape Hunt reports H1 numbers. The group purchased Experiential Ventures Ltd for £12m during the period. The group has reported a ‘pre-tax loss of £1.1m, in line with our expectations and including transaction costs of £0.9m’
• Escape Hunt reports loss of 7.9p per share. Group has £12.4m of cash (at end-June). Has 45 franchisees at H1 end. The group reports its ‘share of franchisees’ revenue for the two months since acquisition [id] in line with expectations and an increase of 40% on the same period in 2016’.
• Escape Hunt CEO Richard Harpham comments ‘in a short space of time, we have identified 8 attractive sites in the UK where leases are in the process of completion, and with a strong pipeline of sites for next year.’ He adds ‘at the same time, we have been reviewing and improving the process of game design and implementation to ensure that both franchisee and owner operated sites can be opened as smoothly as possible. In order to mitigate risk, the completion and fit-out of sites will be carefully staged.’
• Escape Hunt reports ‘our franchisee activity continues to develop with 45 franchise sites now open and 4 more due to open in the near future. Our share of franchisees’ revenue for the two months since acquisition is in line with our expectations and is an increase of 40% on the same period in 2016. Since we acquired the business four months ago, our expectations of the market are being confirmed and we remain confident about the opportunities for the business. Given our ambitious owner operated plans in the UK, the Board has developed a sequentially planned roll-out programme to manage risk and ensure returns are maximised.’
• Pinterest has reached the milestone of 200m monthly users, growing nearly 40% yoy.
• Odeon, the UK cinema chain, saw losses increased to £93.2m in 2016, from a loss of £40.1m in 2015. The chinese investment firm Dalian Wanda bought the chain last July, valuing the group at £921m.
FINANCE & MARKETS:
• Unions representing nurses & other NHS staff have written to the chancellor demanding a 3.9% pay rise and a on-off £800
• Bank of England’s Gertjan Vlieghe suggests ultra low borrowing rates in the UK are coming to an end
• Sterling at post-Brexit vote highs vs US dollar
• ECB’s Peter Praet says ‘substantial stimulus is still necessary’ to maintain growth across the Eurozone
• Rightmove has reported that asking prices for houses fell by 1.2% in September, the biggest September drop in 4yrs. London was worst hit with a drop of 2.9%. Prices are up 1.1% over the year.
• Oil up at $55.72
• Sterling up vs dollar at $1.3593
• Pound stronger vs Euro at €1.1381
• UK 10yr gilt yield up another 8bps at 1.31%. It has now risen 32bps in a week…
• World markets: UK down on Friday with Europe also lower. US higher and Far East mostly up in Monday trade
o FT calls on UK government to publish position papers on impact of leaving the EU on specific sectors. The papers exist, the FY maintains, but ministers may not want to spell out the impact as it could hinder negotiating position with Brussels
o Tory civil war bubbling under. Boris attacks May with vision of ‘glorious’ Brexit
o UK delays next round of Brussels talks until after PM’s upcoming Florence speech.
YESTERDAY’S LATER TWEETS:
• Later tweets: JD Wetherspoon smashes forecasts & hits 6.1% LfL growth in first 6wks of current year. Must be price increases?
• JDW EPS +43% to 69.2p but dividend unchanged at 12p? There is cash coming out of the vehicle but buybacks seem to take priority
• August Tracker says LfL sales +0.2% across the country with London down 1.6% and the regions up 0.8%.
• Tracker. Restaurants > pubs but ‘London had a particularly poor month’ at down 1.6%. And this despite more tourists?!
• Our 60 sec. earlier in week called bull trap in leisure. Trade on ground worse than aggregators suggested. But Aug Tracker more realistic
• Link to our cautionary comments back at the beginning of the year – sector overview
• Comptoir sees more discounting out there but also a ‘noticeable improvement’. Really?
• MPC says economic picture ‘slightly stronger’ with unemployment down and price rises picking up. Rate increase possible this year
• JDW boss tells EU negotiators to take a wise-up pill & realise risk of messy Brexit is to their economies rather than that of the UK. Hum…
• JDW says due to ‘potential for advantageous investments’ it will ‘maintain the dividend at its current level for the time being’
RETAIL NEWS WITH NICK BUBB:
• Saturday Press: Apart from the London Tube bombing at Parsons Green on Friday morning, the big Business story on the front pages was the further surge in sterling (to $1.36) on the back of a speech by MPC member Gertjan Vlieghe about the need to raise interest rates (the FT headline was “Sterling at highest since Brexit vote as “uber dove” joins rates call”). We expected more coverage of JD Sports’ move into South Korea, but the only paper to really pick up the news was the Telegraph, which noted our view that hopefully JD boss Peter Cowgill has been able to negotiate a good entry point. The Telegraph also highlighted the BBC interview given by Christopher Bailey of Burberry, in which he gushed about the creative potential of the UK, which prompted the Business editorial in the Times to mock the fact that he never talked to the press when he was CEO. The lead Business story in the
• Sunday Press: There was surprisingly little follow-up in the Sunday papers on last Thursday’s bumper bundle of Retail updates, although the Comment column in the Sunday Telegraph highlighted that “Morrisons’ comeback is refreshingly old-fashioned” and the Observer’s overview of the week repeated the allegation that John Lewis Partnership blamed Brexit/weaker sterling for their problems. The Observer also noted that it had been “a good week” for Next and the Sunday Times’ “Quote of the Week” was Simon Wolfson’s priceless comment that “I would hate for you to think that everyone at Next is skipping with joy”. The Observer also flagged that the French Connection interims on Tuesday will be a good test of the wisdom of the big share stake taken by Sports Direct. The Comment column in the Sunday Telegraph also highlighted the “Testing times at House of Fraser” and that the Chinese
• Today’s Press and News: The front page headline of the FT is “Number crunchers take Johnson to task over revived £350m NHS pledge” and other papers also highlight that the head of the UK Statistics Authority has written to the hapless Foreign Secretary to upbraid him for his renewed claim about EU funding. There is also plenty of coverage of the gloomy Rightmove survey about the London housing market. The Times picks up the slower growth reported by TK Maxx in the UK for y/e Jan. The Telegraph has a feature interview with the boss of the recently floated Eve Sleep Online mattress company. And the Telegraph and CityAM have previews of this week’s news from Ocado and Kingfisher.
• News Flow This Week: Things are less busy this week, but there’s still plenty going on, kicking off tomorrow 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.