Langton Capital – 2018-01-25 – Greene King, Restaurant Group, Diageo, Fuller’s & other:
Greene King, Restaurant Group, Diageo, Fuller’s & other:
A DAY IN THE LIFE:
Langton still a bit traumatised after having to pay £1.99 for a bottle of water at Croydon East yesterday afternoon.
And to add insult to injury there’s a Sainsbury’s Local on the way back from Boxpark to the station. We could have bough six bottles for a quid, thrown three away and still been six times as well off. Aaargh.
Anyway, we’ve got trading statements coming out of our ears today so we’d better move on to the news:
• Langton has put together a compendium of around 3 dozen 60-seconds pieces (c200 words or so each) for distribution at £200 plus VAT, free to clients. Please let us know if you would like a copy.
GREENE KING – Q3 TRADING UPDATE:
Greene King has this morning updated on Q3 trading being the period to the 14th Jan 2018 and our comments are set out below:
• Greene King reports ‘we traded well over the Christmas period with Pub Company LFL (like-for-like) sales growth of 1.6% for the two weeks covering Christmas and New Year’s Eve’
• GNK says this was ‘in line with the market and against a strong period last year.’
• Greene King says ‘excluding the snow impact, LFL sales would have been up 3.4%.’ This ties in with the negative 2ppts or so impact implied by Marston’s earlier this week
• GNK adds ‘we achieved another record breaking Christmas Day in Pub Company with sales of £7.6m, up 2.6% on last year, and 154k meals sold.’
• The company reports, however, that ‘either side of the two Christmas weeks sales were slower, reflecting the tough underlying trading environment and additional snow impact.’
Further trading comment:
• GNK says Managed pubs were down 1.4% in LfL sales in the 37wks to 14 Jan. This is the same run-rate as that reported at H1
• The group says ‘our additional investment to enhance the customer experience, including being more competitive on price, having more team members available at key trading times and strengthening local marketing activity, will help to improve our competitiveness and relative trading performance.’ There is no comment on margins at this point.
• Leased & Tenanted pubs were +0.2% at week 36 against +1.5% at H1. This implies a negative performance over the last 10wks or so
• Brewing & Brands was down 0.9% against +0.3% at H1. Again, this implies a slightly worsened position over the last 10wks. GNK points out that the ale market across the UK as a whole was down 3.0%
• GNK reports ‘we remain on track to deliver targeted cost savings of £40-45m this year and our brand optimisation programme continues to deliver attractive returns of 25%’
Cash flow & balance sheet:
• Greene King reports ‘both our new build and disposal programmes are also on track with six new sites opened and 40 disposals completed in the year-to-date.’
• Greene King says it ‘has industry-leading brands, a strong and flexible balance sheet, and a sustainable dividend, leaving us well placed given the challenging market conditions.
• Greene King has reported numbers which suggest that, whilst Christmas itself was good, trading remains tough.
• January and 2018 as a whole could be challenging. Top line numbers are under pressure and margins are not likely to move up.
• Uncertainty is unavoidable and this will extend to forecasts. These are unlikely to rise over the medium term.
• GNK is prima facie cheap at these levels. It is one of the UK’s better-positioned pub companies and, with its shares now trading at a single-digit multiple, this may be an attractive entry point.
• However, the direction of travel is negative and the group has to execute on its strategy. There have been some signs of indigestion recently and cautionary comments may put off would-be buyers in the short term.
RESTAURANT GROUP – FULL YEAR TRADING UPDATE:
The Restaurant Group has this morning updated on FY trading to end-December and our comments are set out below:
• Group says total LfL sales for the year were down 3.0% with total sales including new openings down 1.8%
• This suggests a worsening in H2 as H1 LfLs were down only 2.5%
• Group says ‘we expect to deliver an adjusted PBT outcome for the 2017 full year in line with current market expectations’
• Restaurant group says ‘despite the challenging market in 2017, we continue to make good progress against the four key elements of our strategy’
• These are to re-establish competitiveness (re price & product), to be more efficient, to grow pubs & concessions and to cut costs
• RTN says its expectations for its leisure brands ‘remain broadly unchanged and reflect both our improving volume momentum and the significant price investments made in the middle of last year, albeit set against the backdrop of a market that has softened.’
• RTN says ‘the Group’s balance sheet remains strong and continues to benefit from good cash generation from our operations.’
• CEO Andy McCue says ‘in 2017 we made solid progress against our strategic initiatives, resulting in improved volume momentum in our Leisure business, a lower cost base and a more focused growth plan.’
• Mr McCue concludes ‘while the market has softened, we continue to benefit from strong cash generation and a healthy balance sheet.’
• RTN has reported that its expectations are unchanged but that the market has worsened. This is evident from the level of discounting now apparent.
• Today’s update does not comment on what margins are like (for 2017 and 2018), the level of discounting, any further provisions, disposal of boarded up units, whether or not the dividend will be maintained etc. etc.
• RTN’s valuation is in flux.
• The group has little debt though it must incorporate the capital liability of leases from FY19 and its fixed charge cover was only around 2x last seen – and that is 1) for normalised profits and 2) was before material cuts to forecasts.
• Short term RTN must continue to execute on its strategy. News flow is arguably likely to be negative. Certainly, comps are becoming easier but, as mentioned above, price cuts will hit LfL sales and these and also cost increases will impact margins.
• Prima facie, with group is relatively cheap as it is yielding 5.4% but execution is key & the competition will not stand idly by whilst RTN gets its house back in order.
JD WETHERSPOON – H1 UPDATE CONFERENCE CALL:
Following its H1 update this morning, JD Wetherspoon hosted a conference call for analysts and our comments thereon are set out below:
• What does ‘slightly improved result’ for the year mean? It’s vs Bloomberg consensus of £99.2m. Langton is on £101.0m.
• The comments at the foot of this Q&A session suggest that the exit rate in FY17/18 could be negative. This implies that FY19 numbers may need to be pulled back.
• No menu changes till May 18. Will be evolutionary. Pizzas are being phased in.
• Can you disaggregate the LfL number of 6%? No. Will give a bit more at H1 numbers.
• What % is going through App? Low single digits (of total sales) but this is ‘slowly rising’. Group is ‘pleased’ with the launch. Sales are higher but this is a food rather than drink issue.
• Margin? Will Q2 be < Q1? What about the year as a whole? No comment. This is not the primary focus. Phasing (i.e. uptick) will be more in H1 than H2.
• There are more costs coming through in H2. Living wage goes up in April etc., sugar tax comes in, business rates will rise. Most drink is inflation linked. Food is more commodity based.
• What impact did the World Cup have 4yrs ago? It will be impacted by the times of the games (pretty good this time round) and how far England goes in the tournament. The impact of the World Cups over the years has been mildly negative, say 1% to 2% down.
More on Balance Sheet etc.:
• Freehold reversions; what sort of yield? Same as for the last year.
• Closures in H2? Between zero & ten units. Group is now lapping earlier closures suggesting that LfLs and total sales should broadly move in line from now on.
• H2 trading? Tougher but not radically so.
• Drinking in airports? Could be phased out over a few years. But bars have codes of conduct in place already. This is <2% of total JDW sales. In airports, it’s weighted towards food & coffee. Alcohol should be <1%.
• Do you expect H1 profits up and H2 profits down? Yes.
• JDW has confirmed that current trading is strong but that H2 will be a little more challenging. Consensus forecasts should move up to around the levels shown above.
• However, the momentum may be negative as H2 will be down and H1 will be up. The exit-rate therefore could be flagging up somewhat lower numbers going forward.
• Shares are not cheap but this is a good operator. JDW should benefit from trading down but it could lose some business to the supermarkets if the consumer comes under more pressure.
PUB, RESTAURANT & DRINK PRODUCERS:
• Fuller’s has released its trading update for the 42 weeks to 2oth Jan 2018, with sales in managed Pubs and Hotels rising 3% LfL and profit from tenanted inns increasing 2%. Simon Emeny, Chief Executive of the group said: ‘“These are a good set of figures in what remains a challenging trading environment’, he commented the following on the strategy of the business ‘Our long-term vision and prudent financing keep us well-placed to maintain our strategy of investing in our pubs, our portfolio of premium beer and cider brands, our people and our marketing. We will next update the market on 8 June 2018, when we announce the Company’s full year results for the 52 weeks to 31 March 2018’.
• Diageo has reported its interim results for the six months ended 31 Dec 2017, showing that net sales were up 1.7% to £6.5bn and operating profit was up 6.1% to £2.2bn. The group have increased its interim dividend by 5% to 24.9p. Chief Executive of the group, Ivan Menezes commented: ‘These results demonstrate continued positive momentum from the consistent and rigorous execution of our strategy. We have delivered broad based improvement in both organic volume and net sales growth. We have increased investment behind our brands and expanded organic operating margin through our sustained focus on driving efficiency and effectiveness across the business’. On current trading Mr Menezes said: ‘Our financial performance expectations for this year remain unchanged. We are confident in our ability to deliver consistent mid-single digit top line growth and 175bps of organic operating margin
• JDW shares rose >2% yesterday on upbeat Q2. Group has suggested that H2 growth could be negative (in earnings terms) implying momentum going into next financial year (with tough comps) could also be negative.
• US fast-casual chain Slim Chickens is planning to launch in the UK and is understood to be working with recently strengthened Giraffe operator Boparan Restaurant Group (BRG). MCA writes that the c70-strong group has appointed advisers to seek out sites in central London and the south east.
• Stella Artois and Water.org have launched a co-branded limited edition bottle and can of Stella which, which, when bought, will help finance clean water access to people in the developing world.
• Food hall concept Market Halls has announced its first three locations, in Oxford Street, Victoria, and Fulham, with three more London sites and a further three regional halls to be announced this year. Founders Andy Lewis-Pratt and Simon Anderson told MCA that they are targeting 10-12 food halls overall, with probably locations including Liverpool and York.
• JD Wetherspoon is temporarily out of sirloin, rump, and gammon steak after a labelling mix-up from suppliers. The pub company, which recently posted strong like-for-like sales growth over the festive period, said that normal service will be resumed as soon as possible.
• Spain’s 2017 grape harvest is expected to be 20% lower than last year, according to provisional estimates by the Ministry of Agriculture, due to spring frosts, heatwaves and drought. The current 207/18 vintage stands at 35.6m hectolitres compared with 44m hectolitres in 2016.
• Fever-Tree has overtaken Schweppes as the best selling mixer brand in certain categories in the UK. Fever-Tree now has a 39% market share on the off-trade, compared to Schweppes’ 31%.
• The Co-op has cut prices meaning that some products will now be 40% cheaper, as the chain looks to support post-Christmas shoppers.
• Companies that reward their CEOs with more modest salaries perform better financially, research from Vlerick Business School has explained. The study examined the pay habits of CEOs and CFOs in 861 companies in the UK, Germany, France, Netherlands and Belgium.
• Starbucks has announced it will add a new employee and family sick-time benefit and increase wages due to the updates to the US tax law. The new benefits have been valued at $250m for more than 150,000 employees.
HOLIDAYS & LEISURE TRAVEL:
• GfK reports summer 2018 bookings were up 7% yoy for the first full week of the year and up 4% to date, with average selling price up £51. Soaring summer demand for Turkey may be coming at the expense of the higher-priced Canaries and Balearics.
• Royal Caribbean Cruises has reported FY numbers saying earnings beat estimates at $7.53 per share. RCL says 2018 adjusted earnings are expected to be in the range of $8.55 to $8.75 per share.
• RCL net income for FY17 was $1.63 billion vs $1.28 billion last year. CEO Richard Fain reports ‘our teams worked hard to achieve the Double-Double goals and now they have done it.’ Mr Fain continues ‘each of the brands performed excellently during the past year raising their guest satisfaction and employee engagement scores to new heights.’ The CEO concludes ‘this augurs well as we focus on our previously announced 20/20 Vision.’
• Re FY18, RCL says ‘the company’s booked position for 2018 is better than last year’s record high and at higher rates. North American and European consumers continue to drive strong demand for all of our main products. These trends, coupled with strong onboard spend and a positive outlook for our Asia Pacific products, are positioning the company for a 9th consecutive year of yield growth.’
• Silver Travel Advisor’s annual survey reports high-spending older travellers now make up a smaller share of the over-50s travel market than before, with those spending more than £3,000 per person per year dropping from 48% to 40%. The proportion spending £5,000 plus dropped from 24% to 13%.
• Due to Donald Trump’s tax reforms, over 125,000 US-based Walt Disney Company employees will receive a one-off $1,000 cash bonus.
• Portuguese football star Cristiano Ronaldo is to team up with Portugal’s top hotel chain, Pestana, in the opening of a new hotel in Marrakesh.
• Travel to the US has fallen by 4% in the first seven months of 2017, with some travel operators naming it the ‘Trump slump’ as they blame President Donald Trump for the recent downturn.
• Shearings Holidays reports a strong January with summer sales up 19% yoy, calls to the operator’s call centre up 51% and increased web traffic.
• The mayor of Venice has promised to investigate why a group of Japanese tourists were handed a £970 bill for a plate of fried fish, four steaks and a bottle of wine. The group paid the bill but contacted police after returning to Bologna, the mayor stepped saying ‘If this disgraceful episode is confirmed, we’ll do all we can to punish those responsible. We are for justice – always!’.
• STR reports strong Europe-wide hotel performance for 2017 compared to 2016, with occupancy +2.4% to 71.9%, ADR +3.1% to €110.51 and RevPAR +5.6% to €79.46. For the UK, a favorable exchange rate attracted an influx of international tourists whilst the industry showed resilience to terror attacks, with occupancy +0.5% to 77.4%, ADR +3.6% to £92.32 and RevPAR +4.1% to £71.49.
FINANCE & MARKETS:
• UK unemployment fell to 1.44m in the 3mths to end-Nov per ONS. The unemployment rate remains at a 40yr plus low of 4.3%.
• UK wages grew at 2.4% in the year to November, still some way below inflation which, in November, stood at 3.1%.
• ONS reports ‘demand for workers clearly remained strong.’ It adds ‘nevertheless, inflation remains higher than pay growth and so the real value of earnings continues to decline.’
• NIESR reported yesterday ‘UK labour market statistics released today show employment in the 3 months up to November 2017 is at a record high, driven by an increase in full time employment. However, vacancies are also at an all-time high, revealing difficulties for employers in some economic sectors, including those with a high proportion of migrant employees facing the challenges of Brexit’.
• NIESR adds ‘sectors with high vacancy rates include those with relatively high proportions of migrant employees, including from the EU. Accommodation and food services, where one in six workers are EU migrants is one such sector. The challenges of attracting and retaining workers are likely to increase with prolonged uncertainty about the terms of the UK’s departure from the EU’.
• Sterling strong vs dollar at $1.4287
• Pound up vs Euro at €1.1487
• Oil up over a dollar at $70.96
• UK 10yr gilt yields up to 1.41% from 1.36% yesterday.
• World markets: UK sharply down to move to 3wk low. Europe & US also down. Far East lower in Thursday trade
• Brexit, politics etc.:
o Boris tries airport island, garden bridge in London, cross-channel bridge and £100m per week extra for NHS. Has got none of it. His bikes and plenty of photos of him stuck on a zip line are still around though.
o Brexit dividend of perhaps £5bn a year will not materially exceed divorce payments for many years. UK GDP is c£1.9tn. If growth rate post Brexit slips by 1%, we will be £19bn worse off year one, £38bn worse off year two, £57bn worse off year three etc. etc.
o Polish PM says UK can’t have its cake and eat it on Brexit payments’
• Langton is between offices. Please communicate via email. MIFID II is now in operation.
START THE DAY WITH A SONG:
Yesterday’s song was ‘Alright’ by Supergrass, but today who sang the following:
Father wears his Sunday best,
Mother’s tired, she needs a rest
The kids are playing up downstairs
RETAIL NEWS WITH NICK BUBB:
• ASOS: In its Q1 update today (for the 4 months to Dec 31st), the Online fashion giant ASOS has reported that Retail sales grew strongly, by +28% in constant currency, with an accelerated performance in the UK (sales growth of +23%, “in a challenging market”). With Retail gross margin up by 80bps, in line with plan, there is no change to FY18 financial guidance. CEO Nick Beighton says “Following this strong start to the year, we remain confident in our full year guidance and the delivery of our planned investments in infrastructure to support our global ambitions”. Conf call 8am.
• Vertu Motors: The Gateshead-based Vertu Motors is the 5th largest UK motor retailer and it has issued a trading update today to warn it expects its results for y/e Feb to be “moderately below market expectations”, “following further declines in the new car market…and a softer general consume environment”.
• New River Watch: We have flagged before that the community/convenience based shopping centre and retail park property company NewRiver Retail is bigger than you might think, with a market cap of nearly £1bn and in its Q3 trading update on Friday it flagged that “grocers, convenience store operators and discount and value retailers, which are at the core of our portfolio, had a good quarter, underpinned by positive LFL sales over the Christmas trading period”. And it went on to say that “the discount retail sector is forecast to grow by 36% over the next 5 years: faster than Online”. And the source for this view? The Retail research company GlobalData (aka Verdict/Conlumino), which said in a report this month on “Retail Market Growth Forecast 2017-2022” that Discount retail will grow by +35.7%, compared with Online (including “click and collect”) of +35.5%…