Langton Capital – 2018-03-05 – Revs’ analysts’ meeting, snow, CVAs, costs & other:
Revs’ analysts’ meeting, snow, CVAs, costs & other:
A DAY IN THE LIFE:
So, having survived two snow days last week and a power cut at the weekend, Langton now has to find a train this morning that’s running down to London from the North East.
That may or may not happen but, as we’re moving our furniture into the new office on London Wall tomorrow, we had better find a way.
Incidentally, our arrival on London Wall will mean that two mighty finance houses, Deutsche Bank and Langton Capital, will be almost side-by-side on the same street. Property values are bound to soar. On to the news:
REVOLUTION BAR GROUP – H1 NUMBERS – ANALYSTS’ MEETING:
Following its H1 update this morning, Revolution Bars Group hosted a presentation for analysts and our comments thereon are set out below:
• A strong end to the period helped edge like-for-likes for the 26 weeks up by 0.4% (+1.9% for the 27-week period, which includes New Year’s Eve).
• Sales in the four weeks between 4 December and 31 December +5.9%.
• That said, the overall trend over the past four years has been one of moderating like-for-like sales growth.
• Revolution faces the same cost headwinds as everybody else – staff costs increased by £600,000 and rates increased by £500,000.
• Four new venues opened in H1, all trading ahead of expectations (Belfast, Solihull, Putney, and Inverness).
• Returns from venues open for a second year averaging 37.3%, with Belfast performing particularly well.
• There are some £9.5m of total exceptional charges in the period and, since this is the difference between an adjusted operating profit of £6m and a reported operating loss of £3.7m, we view this as worthy of comment.
• Some £2.2m of fees have gone towards M&A activity. Considering Revolution was the company being bid for, it raises the question of why it has been left footing this bill. Surely the onus is on the bidding company?
• It also seems a lot to spend on corporate advice, considering the deal was botched and led to the resignation of the group’s CEO and CFO.
• One might argue that the £705,000 charge related to changes in executive management is a part of normal business and should be included in the adjusted figure.
• The £5.6m onerous lease charge casts doubt on the group’s claim of a ‘self-funding roll-out’.
Balance Sheet etc.:
• Starting net assets of £35.2m minus total comprehensive loss of £3.4m minus a £765k share-based payment minus £1.65m of dividends gives ending net assets of £29.4m on a market cap of £85m.
• Given market conditions, it might be prudent to keep dividends flat for a year or two. Revolution has taken on £3m of debt, suggesting this dividend is not being financed from profits.
• On a related note, if Marston’s and Greene King were not paying dividends already they might think that their profits might be better deployed elsewhere.
• For example, Enterprise Inns Group and JD Wetherspoon continue to buy back shares at these levels.
• Debt is up £3m to £10.5m and will go up more towards the end of the year as RBG sets about three new openings. This suggests, contrary to what management says, that the group’s roll-out is not self-funding.
• £5.6m exceptional charge on onerous leases following ‘more robust analysis of trading performance’ has not resulted in plans to close any bars.
• Two new Revolucion de Cubas opening in H2 (Birmingham and Newcastle) and a minimum of six sites opening in FY19 (including Bristol, Glasgow, and Southampton).
• Headwinds will remain, but the group is implementing cost efficiencies (including improved labour scheduling and a new four-year supply agreement with Matthew Clarke), which should deliver results in FY19.
• Revolution’s food offer should improve once incoming Food Director Simon Dobson gets his feet under the desk – at present, food is just 15% of RBG’s sales.
• With incoming CEO Rob Pitcher rounding off the picture, shareholders will be optimistic of some stability at the top.
• Revolution Bar Group has maintained the pace of its cash-fueled roll out and Revolucion de Cuba appears to be hitting its stride. Its pipeline is secure and the sites it picks offer a degree of security in that they are big sites, often in Community Impact Zones, where it is harder to get a license and more difficult for landlords to find appropriate tenants.
• That said, the sector’s headwinds are fierce, and the group’s overall like-for-like trend over the past five years has been of moderating increases. Management says the group is focusing on ‘premiumisation’ (aka ‘making things more expensive’) but that the bulk of like-for-like sales growth is coming from volume. Regardless, we note the possibility of Revolution ‘maxing out’ a la Restaurant Group and hitting a price point that no longer offers value for money.
• The group’s image as a standalone company has been tarnished somewhat by a botched merger with Deltic. If Revolution would allow itself to be acquired for c200p, what does that say about the group’s perception of its own value?
• Further concerns might be raised about the group taking on debt to pay dividends, the fact that it will take on more debt towards the end of the year to help finance three new sites, and its significant £5.6m onerous lease charge.
• Considering the above, we are cautious about the company’s prospects in what is proving to be a hostile environment for the majority of operators.
PUB, RESTAURANT & DRINK PRODUCERS:
• Trade hit by snow. Hoping that it will have cleared fully in time for Mothers’ Day (next Sunday). It should have done.
• Snow a major irritant. Though snow in Feb or early March is less bad than snow in December (which also happened) or bad weather in May, August etc. Overall, it’s not what the trade wanted to see.
• Destination pubs impacted but city centres also quiet as people either didn’t travel or dashed home quickly, forgoing evening drinks.
• Quick dash out in York on Sunday shows designer outlet (McArthur Glen) absolutely rammed (it’s under cover & weather unpleasant) whilst the city centre was very quiet.
• Lesson for the UK? US analyst Recount has reported that the number of restaurants in the US fell by 2% last year. LfL sales also fell. Recount says outlet numbers declined by nearly 11,000. There are in the region of 550,000 restaurants in the US as a whole. Gecount says ‘there’s just too many restaurants. Those underperforming had to close.’
• Carluccio’s has appointed advisors to assess its strategic options, becoming the latest casual dining group to do so in response to difficult trading. A CVA is perhaps the most likely outcome.
• Chief Executive of Prezzo, Jon Hendry-Pickup has told the MCA that their recent CVA will see 98 of its units close. Hendry-Pickup said: ‘People see the letters CVA and they have an impression of what that means – that a business has been forced into that situation. What we are doing is proactively managing the fact that the market has changed and we need to get this business in the right shape to suit that’.
• Prezzo is estimated to owe banks and suppliers around £220m, as the group seeks a CVA to reduce costs. Directors have blamed large increases in costs from wages and business rates for its financial difficulties.
• The Restaurant Group is believed to putting some of its prime sites up for sale (including its two-storey Chiquito restaurant in London’s Leicester Square) following mounting pressure in the sector. The Restaurant Group’s share price has fallen 30% in the last year. The group reports FY numbers on Wednesday. Whilst the group has held it to date, it may decide the time has come to cut or pass its dividend.
• EI Group Friday bought back another 313k of its own shares for cancellation at 120p per share
• The US pizza brand. Sbarro is to re-enter the Russian market, due to encouraging economic recovery signs. The chain used to be Russia’s top pizza chain, however, most of its outlets were closed in the past few years after its local partner got into financial trouble.
• Casual Dining Group has announced that they are trading ahead of the market, reporting 2.2% LfL sales growth in the year ended 28 May 2017. The group saw revenue climb 10% to £329m.
• The Laine Pub Co has reported LfL sales have increased 11% in the year ended 30 June 2017, to £35m.
• Remarkable Pubs group is to open a new craft beer and fish and chip shop themed pub in Hackney.
• Hawthorn Leisure, the c300-strong pub operator, has appointed Sapient Corporate Finance to advise on its current strategic options, the MCA has reported. The group increased EBITDA by 10.1% to £9m in the 12 months to 25 December 2016, its third year of significant growth.
• Licensing laws will be relaxed so that the public can celebrate the royal wedding in May, allowing pubs to stay open until 1am over the wedding weekend.
• The Sunday Times has reported that millennials have become increasingly concerned with the cost of food rather than its healthiness. The Aviva survey has shown that three quarters of young people were interested in eating more healthily but found themselves unable to afford the food.
• The US based, Habit restaurants Inc., is to test breakfast offerings in a handful of its drive-thru locations.
• Sky News has reported that Toys R Us are telling customers that they may only have days to secure big discounts following the chain’s UK collapse.
• Toys R Us has cut prices as administrators begin the closure of its stores nationwide. Administrators have said some stores will shut immediately, but that it was still undecided how many in total would close.
• Soft drinks have cut sugar levels by 15% as the new sugar tax looms.
• RPC reports sales at the UK’s 20 biggest online-only retailers rose by 23% over the course of 2017. Total around £8.4bn. RPC says ‘from being virtually unknown five or 10 years ago, many online-only retailers are building strong brands and grabbing more and more market share.’
HOLIDAYS & LEISURE TRAVEL:
• HVS reports that ‘European hotel values see impressive gains as demand booms’. It says values rose by 3.9% across last year as a whole. HVS reports ‘business and consumer confidence, as well as GDP growth in Europe, are all riding high. Hotel demand is strong in the majority of European markets, with low levels of new supply in most cities pointing to robust performances across the board.’
• HVS reports that euro valuations of transactions ‘were also challenging for the UK, due to a weak pound, with hotels in each city registering a small decline in euro terms. Birmingham and Manchester hotels saw a slight increase in sterling values. Likewise London’s hotels grew in value by 4.3% in sterling terms.’
• Further travel disruption continued over the weekend due to the severe weather conditions.
• The Hotel Booking Agents Association (HBAA) reports average spend per meeting and per delegate up 21.2% to £1,954 and 21% to £88.35 respectively in 2017. London was at the top of the list in regional terms, attracting £33 million of business, but Birmingham was not far behind at £28.3 million.
• China’s HNA group is planning to sell its 25% stake in Park Hotels, with the stake currently valued at $1.4bn.
• Caroline Parot, CEO of Europcar Group, reported that revenue growth helped drive adjusted corporate EBITDA up 4.6% to €264m. Parot also said ‘The acquisitions of Buchbinder and Goldcar are transformational for the group and will help us deliver our 2020 Ambition while they clearly confirm the role we want to play in our industry’s European consolidation process.’
• Paddy Power Betfair reports that it ‘notes media speculation regarding CFO succession and confirms that Alex Gersh has advised the Board that he intends to step down from his position after six years with the Group once a successor has been appointed.’ The group says it ‘has appointed an executive search firm to assist with the process of appointing a successor.’
• Lego has announced that its leaves, bushes and tree pieces will be sourced from sugarcane going forward. The move is part of the Danish company’s pledge to use sustainable materials in its products and packaging by 2030.
FINANCE & MARKETS:
• Bad weather to impact economy as a whole. High Street hit with destination retail centres also hurt.
• Bank governor Mark Carney has called for crypto-currencies including Bitcoin to be regulated.
• China should grow by around 6.5% this year reports its government
• Trump says trade wars are good and easy to win. Europe drawing up list of US products (bourbon, Harleys etc.) to hit in retaliation
• UK construction PMI rose to 51.4 in Feb from 50.2 in Jan. The much bigger services PMI is announced at 9.30am this morning.
• Sterling little changed vs dollar at $1.3786. Down markedly vs Euro at €1.1194.
• Oil up nearly a dollar over the weekend to $64.62
• UK 10yr gilt yield up 1bp at 1.47%
• World markets: UK & Europe down on Friday but US higher. Asia mostly down in Monday trade
• Brexit etc.:
o Mrs May asks EU to be flexible. She has conceded on EU migrant rights, no solution on Northern Ireland
o Irish PM Leo Varadkar comments that UK PM Theresa May still does not fully recognise the implications of leaving customs union
PRIOR DAY TWEETS:
• Later tweets: Discounts continuing into March as pre-packs & CVAs kick in. Pizza Express 25% off food, ASK 30% off mains, Toby two-for-£10 meals
• UK Manufacturing PMI down a bit in Feb (55.2 from 55.3) but Construction PMI picks up from 50.2 to 51.5. Anything >50 implies expansion
• PM to lay out plans for Brexit later today. EU has already enshrined into 120pgs of print the agreement struck in December
• BDO High Street Tracker. Fashion down 4.4% (after 4.5% fall in prior year) in week to 25 Feb. This was before the snow
• US kicks of trade row. Hits Canada. And EU a bit, but the latter can hit back. UK standalone could be a different story.
• Snow & pubs. They don’t mix. Losing a week in Feb is less bad than Xmas, May, August etc. but it was still pay week
• Trade has fingers crossed that bad weather clears in time for Mothers’ Day. Looks quite promising at this stage
• Langton has got the keys to its new office. Triumph of persistence over bureaucracy. We’ll be occupying rooms 80-81, no65 London Wall, EC2M 5TU. We should be in by midweek 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 Dancing in the Dark by Bruce Springsteen, today who sang:
I thought that I heard you laughing,
I thought that I heard you sing
I think I thought I saw you try
RETAIL NEWS WITH NICK BUBB:
• Saturday Press: The Mothercare warning on Friday didn’t get quite as much coverage as we expected in the Saturday papers , but the Guardian went to town on it (“Crisis in the High Street: now Mothercare meets bankers”) and the news that the company needs help from its banks was also picked up by the FT and Times. The Business editorial in the Times noted, wryly, that the so-called joke bid from Destination Maternity of the US in July 2014 for Mothercare (230p cash and 70p in equity) now looks rather attractive…There was plenty of other news out on Friday, including the announcement that Mike Ashley has increased Sports Direct’s stake in Debenhams to nearly 30% and wants a stronger strategic partnership, as flagged by the FT and many of the market reports (it was the lead story in the Times’ report: “Sports Direct helps lighten gloom at Debenhams”). The Telegraph and Times flagged that
• Sunday Press: The impact of the bad weather on the High Street was the main focus in the Sunday papers, with the main Business story in the Mail on Sunday headlined “The Big Chill…icy blast puts High Street in peril”, warning that the slump in footfall last week could push more struggling chains over the brink. The Mail on Sunday also noted that John Lewis Partnership will be the first big retailer to talk about the impact of the snow, with its finals on Thursday, and flagged our view that the Partnership Bonus will be held at 6%, despite the expected fall in profits last year. The Observer also went overboard on the impact of the “Beast from the East”, running a front page story that snow disruption cost the UK economy £1bn a day, but the Economics correspondent of the Sunday Times brought a more sensible viewpoint to the debate, arguing that it is too soon to tell how the “swings and
• Tesco: The protracted Tesco/Booker merger completes today at last and Booker’s listing is cancelled. Today’s formal announcement from Tesco contains no new information of any great consequence and we will have to wait until April 11th for any more news, via the final results. Given the new shares being issued, if the share price holds at Friday’s close of 202p, the Tesco market cap will rise from £16.5bn to £19.7bn (which is bigger than the whole of Sainsbury, Morrisons, Marks & Spencer and Ocado put together).
• MySale: Mike Ashley’s punts in the stockmarket have not gone that well recently and his strategic investment in the “flash” Sale website MySale is still below water, but he will be pleased to see today, via the MySale interims that the recovery continues. CEO Carl Jackson says “It has been a great start to the new financial year and we approach the second half with confidence, with an exciting range of strategic opportunities ahead”.
• Debenhams: At 10.23am on Friday morning the embattled Debenhams announced that Sports Direct had increased its stake in from 23.1% to 29.7% (by buying a chunk of shares from Schroders, it would appear) and at 10.39am Liam Rowley, the new Head of Strategic Investments at Sports Direct, issued a brief statement: “We see huge value for both companies in a strategic partnership between Debenhams and Sports Direct. There are obvious synergies that can be achieved through the integration of our respective web operations. We also see opportunities to work together internationally. Importantly, there is scope for greater collaboration in the UK in order to roll out an elevated offering to consumers. We believe Sports Direct can complement Debenhams very well across the spectrum”. Well, there is little evidence so far that inserting Sports Direct concessions into Debenhams stores has been a
• John Lewis Partnership Bonus Watch: As usual, the main interest in the much-awaited John Lewis Partnership final results on Thursday will be in the size of the Bonus and the view of the Retail outlook. In terms of the y/e Jan profit outcome, trying to forecast the movements in Central Costs and the Interest Charge is tricky, as these key lines of the P&L are volatile and prone to “one-off” distortions and pension movements, but, given the underlying pressure on Waitrose and John Lewis operating profits, our best guess is that group pre-tax profits will be 10% down for the year at £333m, before exceptional items. Even so, that would leave room to edge up the Bonus, after last year’s big cut, if the Board felt confident and/or brave about the year ahead, but a same again 6% Bonus is the most likely outcome.
• Weather Watch: It has been very cold in London over the last week, but memories about “the weather” are always notoriously short-term and often too London-centric…so, ahead of tomorrow’s BRC-KPMG Retail Sales survey for “February”, we turned to the Retail weather consultants Planalytics and their regular monthly overview of how last month’s weather “should” have affected trading on the High Street…And their overview for the calendar month of February was that the month overall was “Winter Finally Arrives” and that “Cold Helps Final Winter Clearance”. The first 20 days of the month were cool and dry, but the Arctic blast in the last week really swung the overall outcome: the average temperature across the country in February was 3.9C, 2.1C degrees below last year, but only a tad below “normal”! As February is a transitional period for Clothing, weak sales of Spring ranges offset the
• News Flow This Week: Tomorrow brings the BRC-KPMG Retail Sales for February (with the 4 weeks to Feb 24th likely to again have had enough Food sales momentum to more than offset the weakness in Non-Food) and the latest monthly Kantar/Nielsen grocery sales figures. On Wednesday we get the Lookers finals and the start of the two day “Retail Week Live” conference in London and then Thursday brings the much-awaited John Lewis Partnership finals.