Langton Capital – 2018-02-26 – Caffe Nero, margins, lipstick, Loch Fyne & other:
Caffe Nero, margins, lipstick, Loch Fyne & other:
A DAY IN THE LIFE:
So we’re sitting here waiting for The Beast to arrive and can confirm that there’s a dusting of snow in East Yorkshire.
It’s set to get a bit worse and, as it’s not forecast to get above freezing again until next weekend at the earliest, the trade might have to keep its beer gardens under wraps for a little longer than usual this year.
Anyway, wrap up warm and it’s time for the news but if you are getting this email forwarded and would like to go on the list directly or if you would like to recommend it to one of your colleagues, please just hit the subscribe button and/or suggest that your colleague does too.
60 SECONDS: DOING A DIGNITY – WHO’S NEXT?
There’s a well worn path…
… and it leads to a cliff edge
• Many public companies, in search of forever-growth, have walked said path
• Recent examples include Tesco’s c£250m profit misstatement in 2014, Restaurant Group’s profit warnings in 2016, and, most recently, Dignity’s slightly undignified tumble
What are the signs?
• The company is usually described habitually and unthinkingly as high quality and with strong competitive moats
• An over-emphasis on margin, perhaps at the exclusion of other, longer-term metrics
• A track record of maxing out prices and under-investing in its estate
• Sometimes accompanied by management rhetoric depicting ‘challenging’ market conditions but equally as likely to come as a bolt from the blue
So, who’s next?
• We note the current online migration of retail. Demand for physical units is softening
• And yet Intu Properties has achieved ‘strong results in a challenging retail environment’
• Despite this challenging retail environment, Intu is charging its new long-term leases at 7% ahead of previous rents…
• The above sounds a little like maxing out to us — we are sceptical of the sustainability of this increase in net income
• Which in turn makes us wonder what motivated the group’s merger with Hammerson — inspiration or desperation?
• Applying the Pigstick. Trans: Blathering more and more lipstick on a pig to disguise its core ugliness.
• Good photo in the original piece and, as we suggest above, we believe that you can fool some of the people, some of the time. But, in a competitive industry with few barriers to entry, hard-charging margins are a dead end.
• Ask Restaurant Group. And now Dignity amongst others. Daft margins are ultimately indefensible. Branding is great but there’s still a reason that even McDonald’s charges only a little over a quid for a plain burger.
• We spent a chunk of 2012 and 2013 comparing and contrasting the approaches of JD Wetherspoon and Restaurant Group. We looked at their margins, freeholds & operating techniques. The share prices crossed in 2015 (both were around 650p to 700p) and now the JDW share price is 5x that of RTN.
• So, reversing out of the blind alley into which it had driven via higher margins has cost RTN 80% of its value relative to JDW. That may be worth thinking about.
PUB, RESTAURANT & DRINK PRODUCERS:
• Caffe Nero has reported numbers for the year to end-May 2017 saying that revenues grew by 8%.
• Nero says its ‘strategy of significant capital expenditure and global expansion as brand goes from strength to strength’.
• Nero reports full year positive LfL sales of 3.7%. It says ‘the business has achieved an unprecedented 80 consecutive quarters of positive like for like sales growth since its inception in 1997, with these latest results marking another successful year for the business, which has remained focused on a steady UK and global expansion programme.’
• Nero says it ‘plans to open a further 85 stores worldwide and to create a further 650 jobs in 2018.’ Chairman Gerry Ford comments ‘this year we have continued to focus on expanding our store base and delivering exceptional quality across our coffee products.’ The group has introduced a new App for rapid payment and loyalty rewards that has been particularly successful with our customers.’
• Sunday Times reports Greene King looking to sell Loch Fyne. GNK paid £68m for the casual diner in 2007. MCA reports the business generates £33m of sales and £3m of EBITDA annually.
• Discounting still heavy and it’s March later this week. Prezzo offering 30% off food, Pizza Express 25% off.
• EI Group on Friday bought back 289,105 of its own shares for cancellation at 126.1p per share
• New Look reported set to close stores.
• Moody’s has reported that Coke’s plans to use repatriated cash freed up by President Trump’s tax changes to reduce debt is credit positive. Moody’s says ‘the plan, revealed during the company’s fourth-quarter earnings call, is credit positive because it will reduce the Coca-Cola system’s gross leverage, as measured by debt/EBITDA, by approximately 0.3x-0.4x by the end of 2018.’ Moody’s reports ‘revenue has declined because of currency headwinds.’
• The Deltic Night Index reports customers spending 13.8% more on nights out (£59.49) but a 9.1% fall in food spend over the last 12 months. 58% of the 2,200 respondents said they went out at least once a week and found younger users were more likely to use Snapchat than Facebook on a night out.
• Wagyu beef prices have kept at near record levels as international demand is booming. Wagyu beef is known for its marbling quality, but Japanese consumers are having to turn to cheaper imports.
• Toys R Us has told potential buyers of its European business to lodge offers by the end of Monday, according to Sky News. The division contains more than 230 shops in 10 markets and several private equity firms are understood to be interested.
• Casual Dining Group is aiming to reach 250-300 international franchise sites over the next three to four years, according to the group’s chief operating officer James Spragg.
• Speaking at the Casual Dining Show, Loungers boss Nick Collins warned that operators who focus on rolling out sites quickly risk losing sight of the customer.
• London Union’s new Street Feast food market in Woolwich will have stalls for regulars Yum Bun, Burger & Beyond, Yumplings, and Ink. Newer names set to sell food include Salt Shed, Henhaus, Lava Bar, and Rust Bucket Pizza Co.
• The ALMR has welcomed the government’s revised position on allowing European Union citizens arriving in the UK to remain in the country. Chief executive Kate Nicholls added: ‘Once the UK has left the EU, we are calling for a bespoke migration system for non-graduate EU workers, outside of existing arrangements, that offers preferential status to EU citizens, linked to a broader trade deal – and focuses on sectors and occupations with staff shortages. It is now vital for business confidence that there is absolute clarity and certainty of the rights of those who move to the UK during any transition period, and the future rights of all who move and work post-Brexit.’
• In 2008 63% of operators polled for the MCA’s Top of Mind survey, said that healthier eating was the most important long-term consumer trend affecting the UK food and hospitality sector, this figure has fallen to 26% in 2018.
• The German distillery ‘Glen Buchenbach’ can keep its name following an EU court ruling that it does not infringe Scotch whisky’s protected status.
• A petition that has received nearly 10,000 signatures is demanding the government place a 5p charge for plastic straws.
• UK food and drink exports to China have increased by 28% in 2017 to £564.4m, according to data from the UK’s Department of Environment, Food and Rural Affairs.
• BrewDog is planning to open a brewery in China, its second largest international market.
• Southern Comfort Black is set to have a high profile launch in the UK in March 2018. Dan Bolton, managing director of Hi-Spirits, said ‘Southern Comfort Black has an exciting new blend that puts whiskey right back at the heart of the brand’s proposition.’
HOLIDAYS & LEISURE TRAVEL:
• Amadeus claims that the low-cost long-haul airline model will continue to have a significant effect on the global aviation landscape with low-cost carriers set to grow by 11.8% each year until 2023.
• Airbnb’s founder Brian Chesky tells Sunday Times the group has given a lot of thought as to how to get involved in aviation.
• Luke Johnson has told his Sunday Times column readers that ‘box-ticking hypocrites’ tried to remove him from the board of Elegant Hotels. He points out that he is the largest shareholder in the company. He says ‘surely it is helpful to have an unpaid non-executive director with more than 25 years’ experience in the hospitality industry, especially when there are millions of pounds at stake?’ Coincidentally, Nassim Nicholas Taleb has a new book out called ‘Skin in the Game’ in which he makes the point that observers who do not risk their own money do not have the same moral authority behind their comments as those investors that do.
• Sky News reports owners of Betfred are close to selling a 25% stake in The Tote. Deal would likely imply a value of c£150m for The Tote and effectively crystallise a loss as Betfred paid £265m for the betting company in 2011.
• Gfinity has announced that it has been appointed as Global Tournament Operator for Forza Racing Championship 2018. It says ‘Gfinity will be responsible for managing the live playoffs in Seattle and Mexico City with drivers competing for a $75,000 prize pool at each event.’ CEO Neville Upton says ‘our partnership with Microsoft goes from strength to strength and this is further proof of the quality of our team and services we provide that we have been appointed as the global operator for the Forza Racing Championship 2018.’
• Samsung’s latest flagship smartphones, the Galaxy S9 and S9+, will focus on new and improved camera capabilities. New slow-mo software and low-light lens features will be the main selling points, but experts say these only represents minor upgrades.
FINANCE & MARKETS:
• Bank Deputy Governor Sir Dave Ramsden sees need for rate rise sooner rather than later.
• Sterling up at $1.4015 and €1.137.
• Oil up over a dollar over the weekend at $67.50
• UK 10yr gilt yield down 3bps at 1.51%
• World markets: UK mixed on Friday with Europe and US higher. Far East higher in Monday trade
• Euro CPI down in January
• US jobless claims hit 45yr low in US last week
• Brexit, politics etc.:
o Donald Tusk says Thursday’s Brexit fudge is based on ‘pure illusion’.
o Tory rebels may vote with Labour to defeat customs union vote.
o City AM says Labour MPs to vote against Brexit deal in move to trigger second referendum. Transition period could be 5yrs or more. The voter base will be considerably changed over that period.
o Corbyn seeking middle ground, Starmer commits Labour to staying in the Single Market. Unclear whether it is The single market or A single market but, with winners regret setting in, it could position Labour well should the next election come before the UK / EU split next March.
o Corby says Brexit does not necessarily spell doom. Davis says it will not plunge us into a Mad Max environment. But where is the upside. Remain bus telling us it’s costing us £2bn per week.
o Starmer projecting voice of reason.
o Botched government Brexit debacle could usher in hardest-ever left wing socialist government in UK. Some voters see this as a price worth paying to stay in the EU and on the right side of history.
PRIOR DAY TWEETS:
• Later tweets: Oversupply (esp. food), resultant discounting, Brexit & rising costs impact confidence in the industry. CGA says challenged ‘mounting’
• See Langton 60 sec. on who’s going to ‘do the next Dignity’. That is gouge consumers then say, oops, sorry. Good pic of pig w. lipstick too
• Weather cold next week with Met saying the UK could experience the coldest weather for 5yrs. Beer garden openings delayed…
• ONS cuts UK growth est. 0.5% to 0.4% for Q4. B of E eyes interest rate rises, jobless rate up but Cabinet at Chequers solve Brexit. All good
• Brexit could take 5yrs. Or infinity. Leader in waiting Rees Mogg loses monocle, splutters Pimms on cravat, gives butler good thrashing…
• Langton gets the keys to its new office today. Beers all round. We should be moving in later in the week or next week but, for the moment, please communicate via email. MIFID II is now in operation.
START THE DAY WITH A SONG:
Last Friday’s song was No Rest For the Wicked by Cage The Elephant. Today, who sang:
The love we share,
Seems to go nowhere
And I’ve lost my light
For I toss and turn, I can’t sleep at night
RETAIL NEWS WITH NICK BUBB:
• Hammerson: Today’s finals from shopping centre giant Hammerson are the last chance for the company to boost its share price ahead of the upcoming FTSE 100 index review and they seem to have put their best foot forward, reporting a 5% increase in NAV and a 6% increase in EPS. The headline of the statement is “Well Positioned Portfolio and Record Leasing Drives Strong Performance” and CEO David Atkins makes the eye-catching comment that “Not all retail is equal and not all locations are well placed to support the future needs of brands”. As for the Intu deal, the message is that “We are on track with our acquisition timetable and integration planning”, with completion expected in Q4, after CMA approval…
• ABF (Primark): Mighty Primark is becoming a key anchor store for many shopping centres, so Intu and Hammerson will be relieved to hear in today’s pre-close from Primark’s parent, Associated British Foods, that the UK business is still doing well, with LFL sales up by 4% in the 24 weeks to 3 March, despite a tough October. Total UK sales were up by 8%, including new space, implying a strong increase in clothing market share. Overall LFL sales at Primark were down by 1%, interestingly, implying weak sales in Europe, as “the business in the US continues to make progress”.
• Saturday Press: There were plenty of photos in the Saturday papers of a shifty-looking Dominic Chappell (the serial bankrupt who bought BHS off Philip Green), after he was fined £87,000 for failing to provide information about the BHS pension fund. The Times had a double-page spread about the efforts of US hedge funds to get Tesco to “bump” the price of its offer for Booker, ahead of next week’s key vote by shareholders, flagging that “Tesco boss to face down the Booker rebels”. The Times also revealed that an ex-Aldi executive called Lawrence Harvey is leading the secret Tesco plan to launch a new discount chain. The Guardian had an interesting article about “The High Street’s other Philip”, ie Philip Day, the “low profile and debt averse” boss of the acquisitive Edinburgh Woollen Mill group. The Telegraph highlighted that the Toys R Us chain in the UK is still on the brink of going
• Sunday Press: The main focus in the Sunday papers was on the follow up by Oliver Shah, the Retail correspondent and City Editor of the Sunday Times, on his scoop last week that the beleaguered Philip Green is in talks to sell his struggling Arcadia fashion empire. And his story about leaked emails and secret dinners with bankers 2 years ago (which hit the front page of the main paper, with the headline “Secret memo turns heat on Topshop boss”) was quite damning, despite Philip’s repeated denials…Disappointingly, however, there were no new revelations in the additional feature in the Business section about how badly Arcadia is trading, apart from highlighting that the big Arcadia pension fund deficit is putting potential buyers off…The Mail on Sunday also flagged that the Pensions Regulator is keeping a close eye on the rumoured Arcadia sale process. More interestingly, the Mail on
• News Flow This Week: Tomorrow brings the Greggs finals and the Inchcape finals (and the Boohoo pre-close?). On Wednesday we get the monthly GFK Consumer Confidence index, the eagerly-awaited Tesco and Booker EGM’s and the Travis Perkins (Wickes) finals. The Howden finals on Thursday (as we move on into March) will then give us a further insight into the outlook for the ubiquitous “white van man”.
• CBI Watch: We are pleased to say that the silly monthly CBI Distributive Trades survey released on Friday didn’t get its usual uncritical coverage in Saturday’s papers, as there was no coverage, as far as we can see…For the record, it flagged that Retail sales growth slowed for the third month in a row in the year to February and that only 32% of respondents reported that sales volumes were up on a year ago last month, with 24% saying that they were down, giving a “percentage balance” of +8%.
• Dreams Watch: We flagged on Friday that there should be some news this week on the embattled Steinhoff (and its UK operations like Poundland), via the much-awaited publication of its restated 2015/2016 Accounts and the 2017 results, but we were very remiss in saying that its UK furniture subsidiaries include Dreams and Bensons…We should have said Harveys and Bensons…The fast-recovering bedroom furniture business Dreams is, of course, owned by the private equity business Sun European and is about to announce its 4th year of growth and record sales and profits. Despite the tough UK market, Dreams’ MD Mike Logue has done a good job of turning the business around.