Langton Capital – 2017-10-13 – Domino’s, Millennials, Goals, Revolution, Laine & other:
Domino’s, Millennials, Goals, Revolution, Laine & other:
A DAY IN THE LIFE:
So anyway, with WH Smith saying that it now sells more at travel hubs than it does on the High Street, hands up who likes shopping at airports?
Because Langton doesn’t. In fact it feels physically unwell when called upon to part with £1.99 for 500ml of water or £30 for a USB charger or whatever and the vendors who put their logos above their shops may be generating negative goodwill by asking them for £4.99 for a curled up cheese sandwich or £1.50 for a small bar of chocolate.
Not that I’m mean or anything.
Though I would say that, wouldn’t I and I know that the landlords, the charming BAA amongst others, are charging revenue rents up to 35%, 36% or more of turnover and the operators have to charge £4.00 for two slices of toast but I’m not so sure you want your High Street brands in the airports gouging to the extent that they do, why not leave it to SSP or another operator that’s never going to feel any sort of backlash on Main Street?
Anyway, at some point we’re going to have to tell readers a little story about something called MIFID II. It’s almost as interesting as it sounds but, and here’s the rub, it is going to have a major impact on how (or whether) we disseminate information in the future. For the time being, though, let’s move on to the news:
• Cardinal Research tells the Pub Goers’ Conference that Millennials can be split between Homies, Thrifties. Cosmos and Adventurers. The respectively stay in, stay in most of the time, fancy themselves something wicked or burn the candle at both ends and wake up on the pavement. Some may drift between categories as they get further away from payday.
• Millennials, putting the cart before the horse? Thriftiness can be a lifestyle choice but it is also a side effect of a lack of money. It’s hard to determine causality. Cosmos arguably dominate the London scene. Shoreditch, Brixton etc. Competing for bragging rights on Instagram, fashionable poverty etc. but they only make up 14% of Millennials per Cardinal at the Pub Goers’ Conference.
• Millennials. Best educated or longest educated? Chilled or lazy? Opinionated or entitled whiners? Or all of the above? Probably the latter but, either way, they are the future.
• Millennials. Is Instagram a response to poverty? Great (photo of a) pair of shoes. Great (photo of a) meal. Shame the snapper can’t afford them. Young said to be around 20% poorer than their parents at the same age. Shame on them or shame on us?
PUB, RESTAURANT & DRINK PRODUCERS:
• Brexit debacle & political uncertainty, prospect of Hard Left government, consumer retrenchment & over-expansion weighing on the sector.
• Footfall in US down 4.1% in Q3 on the back of over-building. See below.
• Luke Johnson and/or Risk Capital reported to be to be looking to exit both Gail’s and Lane Pub Co. Sold Small Batch Coffee post Brexit referendum & merged 50% owned Grand into Drafthouse earlier this summer. Others warning on reduced footfall and consumer headwinds, shortage of labour, rising costs etc.
• Stonegate reports ‘the licensed retail industry has faced a number of challenges over the past 12 months, many of which are likely to persist for some time. These include rising input costs, National Living Wage, the Apprenticeship Levy and the new rates regime. Late night business has also suffered from the uncertain consumer environment and increased licensing regulation.’
• BBPA chairman David Forde told the BBPA annual dinner that actions was urgently needed on tax. He said ‘the UK beer and pub industry is taking up the challenge of responding to uncertain times – but action was needed to avoid an unsustainable tax burden on the sector’.
• BBPA chairman David Forde earlier in the week sounded a note of caution, particularly on government taxation policy. He said recent trends worried him greatly, he said, and taxation was “a massive concern”. Reflecting the BBPA’s current campaign for a cut in Beer Duty in the November Budget, he made a plea for Government not to damage the industry with additional taxation, and to ensure the sector had access to the skills that its businesses need.
• Stonegate Pub Company has said that its 203p bid for Revolution will be its final offer. Stonegate says it ‘has built its business by being a disciplined buyer of pubs and pub estates. Since creation, Stonegate has grown to over 700 sites and is the UK’s leading drinks led licensed retailer. Stonegate is not willing to depart from the acquisition discipline that has made it successful. As a result, Stonegate declares its Cash Offer of 203p final and will not be increased, except that Stonegate reserves the right to set this statement aside in the event of a firm offer announcement to acquire Revolution [by a rival bidder].’ Stonegate chairman Ian Payne says ‘we have always been disciplined in the prices we pay for acquisitions. We believe that 203p fully reflects the value of Revolution and the Board of Revolution agrees with us. We urge shareholders to vote in favour of our Final Cash
• NRN reports that ‘restaurant sales performance in the third quarter is disappointing at first glance.’ It says LfL sales were down 2.2% in the quarter despite rising GDP and population numbers. Footfall was down 4.1%. NRN’s blog comments ‘the slump reignites fears that the industry’s woes may be more severe than initially thought.’
• Low income tenants are now said to spend 28% of their wages on rent, up from 21% in the mid-90s.
• Statistics from CGA Peach indicate that consumers could spend an additional £562m on drinks out-of-home this Christmas despite wobbling confidence. A similar pattern to last year might be seen, when fewer people visited the on-trade over the festive period (-4%), but those that did went out more and spent more money (with value of sales rising 4.4%). ‘Last year consumer confidence was muted pre-Brexit. This year consumer confidence is still shaky so it’s unclear if consumers will rein-in spending or want to treat themselves,’ commented Philip Montgomery, CGA client director (drinks), adding: ‘For operators Christmas is an opportunity to leverage sales through their premium offer and suppliers should help with ranging decisions. It’s also essential to have engaging bar staff and good POS material promoting your offers – our research showed that 57% of consumers noticed outlet
• Peter Borg-Neal, CEO of the fast-growing Oakman Inns & Restaurants, has warned that there will be a ‘significant slowing’ of investment from the industry if the cost of items such as catering equipment keep increasing. The pub boss added that an increase in capital expenditure costs over the past 12 months has had the ‘biggest impact’ on 20 sites, after catering equipment suppliers adjusted prices in the wake of Brexit-related currency volatility.
• ‘The key challenge we are experiencing is the increase in input prices driven by sterling weakness.’ said Borg-Neal. ‘We have seen a large increase in food prices whilst being very wary of passing them on to the consumer. However, the biggest impact on us is being seen in our capital expenditure costs. Items such as kitchen equipment and building materials have increased dramatically. When this is set against some of the other challenges to our trading it seems to us very likely that, without government intervention, there will be a significant slowing of investment in our industry.’
• Brighton and London-based pub operator Laine Pub Company, which is backed by Luke Johnson’s Risk Capital, has appointed advisors as it looks at future funding options. Speaking to MCA, CEO Gavin George confirmed that the 55-strong group is working with BDO to assess the best way of funding ‘the next chapter in our exciting journey’. The group has had a busy year after expanding to 19 sites in London and launching the first sites in its joint venture with Ei Group.
• Demand for Scotch whisky has fallen by one million bottles in the UK since Chancellor Philip Hammond increased spirits tax in his March Budget, according to the Scotch Whisky Association (SWA). The SWA launched its Drop the Dram Duty Campaign in July to urge Ministers to support the scrapping of what it calls an 80% ‘supertax’ on Scotch and a cut on spirits duty. It followed the disappointing 2017 Spring Budget, which instead of a cut saw spirits duty rise with inflation, piling on more tax.
• Japan’s Asahi Group Holdings is considering a sale of its 20% stake in Tsingtao Brewery which was acquired for $666.5m and is now considered to be worth $1.1bn.
• Domino’s Pizza US posted same-store sales of +8.4% in Q3 ending September 10th, whereas international same-store sales grew by 5.1% in the same period. However, with shares down 6% in pre-market trading, investors were left unsatisfied.
• Ranjit Singh, boss of 2 Sisters, has been summoned by the Commons Committee to give evidence over its chicken scandal.
DOMINO’S Q3 NUMBERS:
• Q3 results – 13wks to 24 Sep 2017:
• Domino’s Pizza Group has this morning released Q3 numbers to 24 Sep 2017 and our comments are set out below:
• Group system sales rose by 11.9% on a constant currency basis to £286.4m.
• UK & ROI system sales were up by 11.7% on a constant currency basis to £261.6m.
• UK like-for-like growth excluding splits +8.1% (up from 6.2%); ROI like-for-like growth excluding splits +13.1% (up from 7.6%).
· London franchisee JV creates a platform for faster growth and innovation.
· 19 stores opened in the period – including DOM’s 1,000th UK store – taking total to 1,149 stores.
· International system sales +25.1% to £24.8m, driven in part by Dolly Dimple store conversions.
· £15m buyback announced (on top of £20m of share repurchases completed in H1).
· The table below shows DOM’s UK like-for-like system sales growth trends (ex-splits):
· David Wild, Chief Executive Officer, reports ‘We are pleased with our performance in Q3, especially the improved trend in our core market of the UK.’
· Despite acknowledging consumers in the UK are ‘uncertain and they continue to focus on value,’ the group expects to launch a record 90 stores in the UK this year.
· About DOM’s growing stable of overseas businesses, Wild comments: ‘we are making progress in all our overseas operations. In Ireland and Switzerland, our online initiatives are fuelling accelerated growth, and in Norway the first Dolly Dimple’s conversions are trading very well.’
· The group also notes a ‘real surge in digital engagement, with our new advertising campaign, “The Official Food of Everything”, driving a record 200,000 online orders – or 140 a minute – on the last Saturday in September.’
Further on trading:
· DOM opened 18 new UK stores in the period, bringing the 2017 total so far to 58 and is confident of reaching its 90-unit opening target for the year.
· The group acquired a 75% interest in a London franchisee business comprising 25 stores, providing a ‘platform for accelerated growth in the most important market in the UK’.
• The group expects to increase the store portfolio from 25 to around 40 over the medium term.
· First new store opened in the Republic of Ireland for six years, taking the total store count to 48.
· Switzerland achieved constant currency sales growth of 25.1% and like-for-like growth of 20.4%.
· This sales growth was driven by menu price reductions during H1. Online sales grew by 69.6% to represent 61% of total sales.
· In Iceland, where average weekly unit sales are higher than anywhere else in the Domino’s worldwide system, constant currency system sales were up 7.4% and like-for-like sales were up 4%.
· Like-for-like growth of 14.6% in Norway as the group continues to convert Dolly Dimple stores into Domino’s Pizza stores. Five stores have been franchised out and the franchisee has opened a sixth.
· Three stores are now trading in Sweden since DOM launched in November 2016 and another three are under construction.
Current trading & outlook:
· Progress in Q3 has been ‘encouraging’ and full year underlying profit before tax should be ‘at least in line with current market expectations’.
• Domino’s Pizza Group has pulled something of a rabbit out of the hat in its Q3 update. Many had pencilled in a period of lower growth as the group transitions to a strategy of splitting UK stores and focusing more on overseas rollouts for growth. Shares fell by nearly 32% from May to September 2017 as a degree of execution risk was factored into the group’s stock price.
• That stock has since been marked up by 14% to 344p – a handy re-rating – as the group declares encouraging like-for-like sales growth and strong digital progress. Domino’s does not elaborate on the drivers of this like-for-like growth, however. We know many in the industry are turning to discounting and other margin-eroding practices. It remains to be seen whether Domino’s has had to ‘invest in margin’ to retain customers and induce top-line growth.
• Its overseas businesses are growing but small. Together, they represent about 8.7% of the group’s revenues. It will be some time before they make a telling contribution to group performance. Meanwhile, splitting stores in the UK is a valid strategy but entails a degree of cannibalisation (although this can be eclipsed by the uplift in total sales).
• With shares on a forecast PE ratio of 19.5 times, we suggest that investors might be paying a high price considering the rate of future growth. That said, Domino’s Pizza is a cash-generative company with a strong brand and a high-margin business model.
• Some things are worth paying over the odds for but, here at least, we are happy to watch from the side-lines and wait for a better entry price.
HOLIDAYS, LEISURE TRAVEL & HOTEL:
• Philip Hammond, has said that a ‘no deal’ Brexit could in theory lead to a suspension of air travel between the EU and UK. The chancellor said: ‘It is theoretically conceivable that in a no deal scenario there will be no air traffic moving between the UK and the European Union on March 29 2019. But I don’t think anybody seriously believes that that is where we will get to’.
• Repatriation efforts of stranded Monarch customers was disrupted by French air traffic controller strikes, the CAA has reported. The CAA said that it is ‘working around the clock’ to get the remaining 20,000 passengers back home. So far more than 79,000 have been repatriated.
• Gatwick airport has had its busiest-ever September, with 4.5m passengers traveling through the hub, a 2.6% rise on the same period last year. Destinations in Asia have proven the most popular with Gatwick passengers, with traveller numbers to Hong Kong growing 64%.
• Growing popularity of holidays outside the peak summer months has been driving record-breaking numbers of passengers flying from Stansted. More than 2.45m people flew from Stansted in September, a y-o-y increase of 12.6%.
• Air Berlin is the latest airline to announce it will have to cease operations. The group will stop flying by October 28th.
• Airbnb is directly competing with traditional hotel operators in Florida, by launching branded, purpose-built apartments. The 300-unit rental complex will be built and owned by the Newgard Development Group, and will operate under the new brand ‘Niido powered by Airbnb’.
• STR data has shown London hotel occupancy fell 1.6% y-o-y during September to 86.9%, with ADR climbing 1% to £165.39 and RevPAR declining 0.6% to £143.69.
• STR also released data on the US market indicating that for the week 1-7 October 2017, occupancy increased 0.9% to 71.4%, with ADR rising 2% to $130.92 and RevPAR climbing 3% to $93.51.
• Richard Branson has invested in Hyperloop One, a group that is specialising in high-speed transport. The group is developing pods that will be able to transport passengers and cargo at speeds of 250 mph.
• Alphabet Inc’s Waymo had tried to claim $1bn in damages and an public apology from Uber in a trade secret lawsuit. Waymo also wanted an independent monitor to be appointed to ensure Uber did not use Waymo technology in the future.
• Goals Soccer has announced that it yesterday granted options over 350k shares to CFO Bill Gow. The scheme was approved over 17mths ago. Goals yesterday announced that CEO Mark Jones had resigned.
• Gaming group, GVC, records another strong quarter of growth, with a 10% rise in gaming revenue to €243.5m.
FINANCE & MARKETS:
• BCC says that despite progress in the manufacturing sector, the UK economy grew at a muted rate in Q3. The BCC’s Dr Adam Marshall commented ‘the uninspiring results we see in our third-quarter findings reflect the fact that political uncertainty, currency fluctuations and the vagaries of the Brexit process are continuing to weigh on business growth prospects.’ Mr Gove maintains that we are sick of experts.
• BCC says ‘while much of Westminster and Whitehall is distracted by Brexit, business needs action now on the home front. The solutions to some of the biggest issues currently facing our firms – including high up-front costs, a lack of incentive to invest, and a need for better infrastructure – are entirely within the power of the UK government to deliver.’
• ECB’s Draghi says interest rates likely to stay low for an extended period of time, well past the end of QE
• Oil unchanged at $56.56
• Sterling up fractionally vs dollar at $1.3273
• Pound up vs Euro at €1205
• UK 10yr gilt yield down 1bp at 1.38%
• World markets: UK up yesterday with Europe up and US down. Asia mostly up in Friday trade
• Banks have accepted that they must tighten lending rules for non-secured loans.
o Barnier says not enough progress to move on to trade. Says there is deadlock & lack of movement is ‘disturbing’.
o BBC’s Laura Kuenssberg says ‘not even Brexit’s biggest cheerleader could claim the discussions in Brussels have been going well. And there are visible frustrations on both sides.’
PRIOR DAY’S LATER TWEETS:
• Later tweets: Goals Soccer CEO Mark Jones to leave the company. Mr Jones will ‘take up another role in the private sector’
• Alix Partners says smaller restaurant chains are ‘defying current market headwinds’ by continuing to expand. Good news or bad…?
• Millennials said to be around 10% to 20% worse off than their parents were at their age. Around half of them are less well off
• Jet2holidays now bigger than Thomas Cook in UK, becomes second largest operator in UK
• BDO says online sales +19.8% y-o-y on back of +26% in the year before. Total store sales down 3.4%. Where to now the High Street??
• WH Smith travel store sales > high street. What future the latter? Says maintained High St profits via higher margins. Lovely. But finite…
START THE DAY WITH A SONG:
Yesterday was the rockers from down under, AC/DC with ‘Back in Black’. Today’s song is:
Wherever he laid his hat was his home,
And when he died, all he left us was alone
RETAIL NEWS WITH NICK BUBB:
• Nick is back next week.