Langton Capital – 2017-10-25 – Whitbread, Heineken, McDonald’s, discounting & other:
Whitbread, Heineken, McDonald’s, discounting & other:
A DAY IN THE LIFE:
The question as to how long you can resist before checking texts & emails on your phone led to a reasonable post-bag yesterday.
Of course, the answer depended on whether you used your phone as an alarm clock or not. Those that did, struggled to make it past 30 seconds without checking at least texts (which are often highlighted by a red circle on the phone’s home page) if not texts and emails both.
Meanwhile others claimed that they could make it for several hours without even glancing at their phones adding, nonchalantly, that surely if an email or a text were important enough, the sender would despatch his or her butler to deliver the message in person.
So we’ll take them at their word on that one, won’t we? On to the news:
WHITBREAD H1 ANALYSTS’ MEETING:
Following the announcement of its H1 numbers this morning, Whitbread hosted a meeting for analysts and our comments are set out below:
Overview of the last 18mths:
• CEO Alison Brittain has been in the job for c2yrs. She updated analysts on her view of the company c18mths ago and updated on this update this morning
• Markets have evolved. Political & economic uncertainty has been a feature. Sterling dropped and costs rose, but inbound tourist numbers have been strong
• Whitbread is targeting Premier Inn in Germany, Costa in China & Costa Express as areas for medium term growth
• This is good news
• But it fails to encompass Premier Inn in the UK (good but better opportunities elsewhere?) and Costa in the UK
• The latter stood still (up 0.1%) in terms of LfL sales in Q2 and is moving backwards in terms of inflation-adjusted LfL revenues
• There may be some cannibalisation, competitors may be ‘better’, pricing does not seem to be an issue but, somewhere & somehow, growth is proving more difficult to source
• Profitability across Costa, despite more stores, more machines & more products, was flat in H1. Units and staff have been working harder and longer. For nothing.
• We don’t want to overdo the Costa issue but, it has to be said, the days when it was hard to find a coffee shop have long since gone
• Costs are up 260bps in hotels and up 180bps in Costa. Cost cutting has mitigated much of this. Cost rises may continue incrementally but cost cuts may not.
Other points raised by analysts & the company:
• Premier Inn in Germany is a big opportunity. But units ‘will be slower to mature’. The group ‘will need to get to 20+ units before margins equal those in the UK’
o WTB is not yet using OTAs in Germany.
o The German market, though larger than that in the UK, is ‘immature in terms of branded budget units’. There ‘is not a clear market leader’
o In the UK, it wants ‘frictionless booking’
o 8 Hubs are trading well
o PI has underperformed slightly in terms of REVPAR. This is partly due to new openings & extensions. It’s also the case that international brands (not Premier Inn) will benefit more from international visitors
• Restaurants. Bar & Block ‘is trialling well’.
• Costa. The High St is under pressure. The best will survive. Only 1/3 or so of own-managed Costa stores are High St. Leases ‘are typically 10yrs with a 5yr break clause’. The group therefore has flexibility
o Breakfasts have been ‘brilliant’ but food is lower margin. It will take longer to ‘educate customers that lunch is an option at Costa’
o SBUX has put its prices up (again). Costa reiterates that ‘price is not the first lever that it wants to pull’
• Mindful of IFRS 16, lease adjusted debt is 3.0x EBITDAR.
• This year, the group should open 4,200 rooms, 230-250 Costa stores & site 1,200 Costa Express machines
• No comment on current trading
• 20% of the workforce are EU nationals. If it comes to a ‘Talent War’, then Whitbread believes it will win
• Langton Comment: The overall feel was that of a process-driven, large and diversified company that is trading satisfactorily in a more challenging environment.
• The rating reflects both Whitbread’s freehold base & its good brands (positive) and the tougher outlook (negative).
• The group is not nimble but it is secure & well-financed.
• Replicating ‘a Whitbread’ with holdings in 20 or 30 small, dynamic new entrants, is not an option for most shareholders.
• The group will weather whatever storms Brexit & a worsening economy throw at it better than most. But coffee does not appear to be quite the engine that it was, and Whitbread is looking overseas for growth.
• This (the great ‘Outland’ the other side of The Wall) is a potentially vast market. It encompasses >99% of the world’s population. But it does mean increased risks. A rating of around 15x this year’s earnings is reasonable but, given higher execution risks overseas and tougher markets at home, it is not a steal.
PUB, RESTAURANT & DRINK PRODUCERS:
• Whitbread shares down yesterday as ‘the froth comes off Costa sales’ (per The Times). Shares down not far from 5%. ‘Wake up and sell the coffee’ (per FT). It’s all good stuff. Cold coffee etc.
• Quote of the Week: ‘As a big company, you are constantly trying to fool-proof yourself against being big, because you see the advantage of being small, nimble & entrepreneurial’. So says Sundar Pichai, CEO of Google.
• Heineken has updated on Q3 trading saying that consolidated beer volumes rose 2.5% organically ‘with growth in Asia Pacific, Americas and Africa, Middle East & Eastern Europe offsetting lower volume in Europe against tough comparatives.’
• Heineken reports total beer volumes +11.1% with growth of 33.5% in the Americas (acquisitions) but a 2.8% drop in Europe. CEO Jean-François van Boxmeer commented ‘performance in the third quarter was solid, with an acceleration of organic volume growth in Asia Pacific and Africa, Middle East & Eastern Europe. Growth in Asia Pacific continued to be driven by Vietnam and Cambodia whilst in Africa, Middle East & Eastern Europe, the main contributors were Russia, Ethiopia and South Africa. In the Americas, Mexico continued to deliver, and weaker volumes in the US were offset by growth coming from Brazil. Europe had to face tough comparatives, partly due to less favourable weather in some key markets. During the period we completed the acquisition of Punch Securitisation A.’
• Heineken concludes Q3 comment by saying ‘our full year expectations remain unchanged.’
• Heineken points to the cooler summer weather as main reason for sluggish sales in Europe. It says ‘in key markets such as France and the Netherlands, performance was negatively impacted by tough comparatives and a cool summer, resulting in volumes declining on average mid single digit.’
• Heineken says ‘volumes in the UK were down double digit, continuing to be impacted by a partial de-listing at a large customer.’
• Discounting back on the up despite half term. Prezzo is back at 40% off mains, Pizza Express ‘up to 25% off’ and ASK 30% off mains.
• Thai restaurant chain Rosa’s London has reported numbers to end-March to Companies’ House for the year to end-March 2017 showing revenues up to £8.2m from £5.5m in the prior year. During the period, the group acquired Rosa’s Westfield. The enlarged group made PBT of £722k up from £313k last year.
• McDonald’s has reported numbers for its Q3 to end-Sept saying global LfL sales rose by 6% ‘reflecting positive guest counts in all segments’.
• McDonald’s reports in Q3 ‘we are serving more customers, more often by offering great tasting food at a good value with the quick service and friendly hospitality they expect from McDonald’s.’ CEO Steve Easterbrook says ‘our positive comparable sales and guest counts across all of our operating segments during the third quarter demonstrate broad-based momentum throughout our business that builds upon our strong first half of 2017.’
• McDonald’s reports total systemwide sales +7% in Q3 in constant currencies. Consolidated net income +44%, partly due to a gain of $850m on the sale of the company’s business in China & Hong Kong.
• McDonald’s has reported Q3 EPS of $2.32 (up 55%). Normalised EPS was $1.76. Revenues were down 10% at $5.8bn, impacted by the abovementioned refranchising & sale in China.
• McDonald’s US Q3 LfL sales +4.1%, international +5.7% ‘led by continued momentum in the UK & Canada’. High growth markets were +6.2%. CEO Steve Easterbrook concludes ‘we are on track to succeed with our commitment and focus on execution.’
• McDonald’s says that its newly-introduced delivery service is performing well.
• Interest rates on credit cards are at their highest level in 10yrs reports Moneyfacts. The average rate charged across a basket of cards was 23%.
• World famous chef, Marco Pierre White is opening a Steakhouse Bar and Grill in Hull, the first of its kind in the region. The 140-cover restaurant will be located in the new four-star DoubleTree by Hilton in Hull city centre. Marco commented on the announcement: ‘As a proud Yorkshireman I’m delighted to be bringing my Steakhouse to Hull, right in the heart of the fantastic UK City of Culture’.
• BrewDog is hosting its Annual General Mayhem on the 7th April 2018. The group has invited its ‘army of Equity Punks’ to Aberdeen to enjoy ‘music, food and most importantly – some of the best beer in the world’.
• More than 825,000 litres of used cooking oil was gathered from Stonegate Pub Company’s kitchens and recycled last year, with help from Northamptonshire-based specialist Olleco.
• Hotcha, the company that had intended to become the largest Chinese food delivery company in the UK, has been placed in administration. The company says ‘the administrators now manage the affairs, business & property of the company’.
• In the US, Chipotle reports same-store LfLs increase of 1% in Q3 to September 30, yet earnings disappointed Wall Street. Revenue was up 8.8% to $1.13bn with net income doubling to $19.6m. Both numbers were below market expectations, with the company blaming a costly data breach and hurricanes Harvey and Irma.
• Per Propel, Meatcure will close its Hinckley site, after being open for just six monthss. The news comes two weeks after the company revealed the closures of its Leicester and Bedford restaurants. Meatcure only has its Market Harborough site remaining.
• A MyVoucherCodes.co.uk survey has found that nearly a quarter of Britons find Christmas ‘boring’. Instead, 16% of respondents said they would prefer a warm winter holiday. Tenerife, Lanzarote and Florida were the three most popular destinations during Christmas, commanding 30%, 21% and 17% respectively.
• This year’s harvest in Champagne has been the shortest in Bollinger’s history and the toughest yet faced by the brand’s cellar master, Gilles Descôtes.
• Global wine production is forecast to fall to its lowest level in over 50 years due to severe frosts and a heatwave affecting France, Spain, and Italy this spring and summer. According to an initial estimate by the Organisation of Vine and Wine (OIV), global wine production will fall to 246.7 million hectoliters in 2017, down 8% on last year, while the European Commission expects production in Europe to be at a 36 year low.
• High Street chain Le Pain Quotidien is ‘pleased’ with the outcome of a refrigeration trial that could end up saving it thousands of pounds in running costs a year if it chooses to roll it out across multiple sites.
• Amazon is closing its dedicated wine arm, Amazon Wine, in the US as it pushes its wine retailing through other outlets. The online retail giant commented: ‘As Amazon continues to offer customers additional retail options for buying wine, we will no longer offer a marketplace for wine at this time, and Amazon Wine will close on December 31st, 2017.’
• BrightHouse, the rent-to-own retailer, has been charged to pay £14.8m to 249,000 customers by the FCA. The firm will have to compensate customers who had their agreements cancelled after one downpayment with no refund as well as agreements that have been deemed to not be affordable.
HOLIDAYS & LEISURE TRAVEL:
• The UK has become one of the world’s best-value travel destinations due to sterling weakness, according to Lonely Planet. The travel publisher, owned by US firm NC2 Media, is encouraging tourists to ‘reap the benefits’ of a weak pound.
• Uber business travel spending in the US took a slight hit whilst rival Lyft made gains, according to the Certify Spendsmart Report. Uber business travel was down to 54% in Q3 compared to 55% in Q2, whereas Lyft business travel grew from 8% in Q2 to 11% in Q3.
• The £3bn in Premier League television deals will be spread amongst the top 20 clubs more fairly, after rivals of the richest clubs are demanding more money.
• Lord David Currie, chairman of the Advertising Standards Authority (ASA), has raised concerns over the ‘unforeseen consequences’ of making gambling adverts legal on TV and radio 10 year ago. Lord Currie said that it’s the ‘sheer volume’ of gambling ads that ‘upsets people’ but said any changes would have to be ‘a decision for government and parliament’.
• Fitness First have agreed to sell CustomFit, a digital training app, to Wexer, according to Sky News.
FINANCE & MARKETS:
• EU flash PMIs show manufacturing stronger in October with the larger services down a little. Composite PMIs were slightly lower.
• Oil up nearly a dollar at $58.40
• Sterling down vs dollar at $1.3131
• Pound lower vs Euro at €1.1168
• UK 10yr gilt yield up 4bps at 1.35%.
• World markets: UK virtually unchanged yesterday with Europe & US higher. Asia up in Wednesday trade
o Reuters’ poll suggests chance of a disorderly Brexit ‘has crept higher’. It says interest rates will still rise next week.
o Reuters puts chances of a no-deal exit at 30% (was 25%)
• Liam Fox previously said ‘a trade deal with the EU should be one of the easiest in human history.’
• Michel Barnier says deal with the UK will be on no more favourable terms than Canada. The latter took 7yrs.
• No10 denies that the PM is anxious, despondent and discouraged.
• No10 says PM is not clueless, friendless and directionless. Nor is she unprincipled. Nor does she have the awful soundbites. Red, White & Blue Brexit, no money tree (except for Ulster fundamentalists), getting on with the job etc. are ironic rather than asinine.
PRIOR DAY’S LATER TWEETS:
• Whitbread H1. Shares down on Costa’s stalled growth. Up 0.1% LfL in Q2. Amounts to material drop accounting for inflation
• WTB to look for growth in Chinese coffee, machines & Premier Inn in Germany. Bit less in UK coffee, UK hotels etc. then?
• WTB: Strong but not nimble. Not an option for most shareholders to replace WTB holding with 20+ smaller stocks, though
• BrewDog co-founder James Watt justifies the brewer’s super-high prices in supermarkets. Nielsen says 2x price of some others
• Barnier warns Britain’s trade deal will be no better than Canada’s & it will take years to negotiate. De facto hard Brexit nailed on?
• Merkel said to be furious over leaks of private talks. Conspiracy theorists looking at Juncker (denies it) and Boris.
START THE DAY WITH A SONG:
Yesterday’s song was Arctic Monkeys with Why do you only call me when you’re high. Today who sang:
The chance to change has nearly gone,
The alternative is only one,
The final source of energy
RETAIL NEWS WITH NICK BUBB:
• Pendragon Watch: Following the Pendragon warning on Monday, there was a bit of muttering about why the group had suddenly changed its non-exec Chairman and not its CEO, but the veteran Trevor Finn (who has been in charge, incredibly, since 1989 and has presided over many ups and downs) showed defiance by picking up 2m shares at 22.25p yesterday, to take his personal shareholding to 16.7m shares.
• John Lewis Partnership Sales Watch: We noted on Monday that MD Paula Nickolds was gloomy with the press on Friday, on the Oxford store preview trip, about how warm weather and tough comps had conspired against John Lewis in October so far…and yesterday’s sales figures for last week from JLP showed why. John Lewis sales slumped by 4.7% in gross terms (c5% down LFL) in w/e Oct 21st. Thanks to the warmer weather, Fashion sales were down by 6.9% gross (even though Beauty etc was up 0.5%), Home was down by 6.6% gross and Electricals were down by 0.5% gross. Over the last 12 weeks, however, John Lewis sales have been cumulatively up by 2.1% gross, a bit under 1% up LFL. Over at Waitrose sales were up by 2.5% gross last week (c0.5% up LFL), with Online sales up 23% and wines, beers and spirits selling well. Over the last 12 weeks Waitrose sales have cumulatively been broadly flat LFL (up 1.9%
• Peach Tracker Watch: Following the subdued noises from Whitbread yesterday about trading at Costa Coffee etc, we have been asked about what the Coffer Peach Tracker, the oddly named monthly survey of pub and restaurant sales, reported about trading last month. Well, we are grateful to our friends at the Leisure sector experts, Langton Capital, for pointing out that the Peach Tracker showed last week that overall LFL sales fell by 0.9% in September versus last year. Restaurants in London were worst hit, suffering a 3.2% fall in LFL sales compared to September last year. Across the sector, trading was generally better outside the M25, down just 0.7%, compared to a fall of 1.6% in London. Total sales growth in September among the 38 companies in the Tracker cohort was 2.6%, compared to the same month last year, reflecting the continuing if much more subdued effect of new restaurant
• News Flow This Week: Tomorrow brings the Debenhams finals and the Inchcape Q3 update.
• Westgate Oxford Watch: Despite our worries about all the last-minute building works, the much-awaited Westgate shopping centre in Oxford opened on time yesterday morning. But although the joint developers Landsec (aka Land Securities) and The Crown Estate claim that 93% of the space is pre-let or in solicitors’ hands, opening day saw only about half the shops ready to open, albeit that included the main anchors John Lewis and Primark, as well as the likes of Uniqlo and Joules. Whether it turns out to be “a truly game-changing shopping and leisure experience” remains to be seen, but it is certainly an attractive centre. The Curzon Cinema should be a big draw and the Junkyard Golf Club will pull in the stag/hen parties, whilst the roof-top terrace restaurants (with their views across “the dreaming spires”) will be very popular in the summer.
• Chelmsford Watch: It is, amazingly, just over a year since the Bond Street centre (also anchored by John Lewis) opened in the middle of Chelmsford and it seems to have filled out well. The Everyman Cinema opened just before Christmas, the summer saw The North Face/Ellis Brigham open, Dr Martens opened last month and Phase Eight opens next week, whilst we have heard good reports from our Chelmsford correspondents of the Tiptree café, which is next to the Foyles bookshop.