Langton Capital – 2018-03-16 – JD Wetherspoon, Feb Tracker, Darwin & Wallace & other:
JD Wetherspoon, Feb Tracker, Darwin & Wallace & other:
A DAY IN THE LIFE:
Bit busy this morning with early JDW meeting and all. Just to say when talking about mixed metaphors yesterday we were reminded of one that sums up our approach to Brexit, namely ‘we’ll burn that bridge when we come to it.’
Also, with David Davis in Brussels on Sunday there may be ‘fruit at the end of the tunnel’.
Anyway, a new high (or low) in our drinking experiences in London yesterday with a round costing £25.60. Good job you can put it on contactless these days so it doesn’t feel ‘real’ until the bill comes in around the middle of the next month.
On a more serious note though, if this is how pubs in London are keeping their LfL numbers up (and I’d like to know what’s happening to volume) as shown in the Tracker below, then there could be some blowback later in the day. On to the news:
JD WETHERSPOON H1 NUMBERS:
JD Wetherspoon has this morning reported H1 numbers and our comments thereon are set out below:
• JD Wetherspoon has reported sales up 3.6% at £830.4m
• LfL sales in H1 were +6.1%. This number, which was pre-announced in January, is ahead of total sales with the latter reflecting the impact of pub disposals
• LfL sales have slowed to a still very good +3.8% in the first 6wks of H2
• Profit before tax is £62.0m against £51.4m last year
• EPS, which reflects higher profits, lower taxes and fewer shares in issue, was up to 45.7p from 33.8p last year
• The H1 dividend has been maintained at 4.0p
More on Trading:
• JDW chairman Tim Martin reports again that Brexit scares are a fallacy and that the government is taxing hospitality too heavily
• He says ‘in the six weeks to 11 March 2018, like-for-like sales increased by 3.8% and total sales increased by 2.6%.’
• Mr Martin cautions ‘the company anticipates higher costs in the second half of the financial year, in areas including pay, taxes and utilities.’
• Mr Martin continues ‘in view of these additional costs, and our expectation that growth in like-for-like sales will be lower in the next six months, the company remains cautious about the second half of the year.’
• He concludes ‘nevertheless, as a result of slightly better-than-expected year-to-date sales, we currently anticipate an unchanged trading outcome for the current financial year.’
Balance sheet, cash flow and other:
• JDW comments ‘net interest was covered 5.5 times by profit before interest, tax and exceptional items (2017: 4.6 times).’
• It points out that ‘total capital investment was £61.4m in the period (2017: £102.8m). £7.5m was spent on freehold reversions of properties where Wetherspoon was the tenant (2017: £55.8m), £35.1m on existing pubs (2017: £28.6m) and £18.8m on new pub openings and extensions (2017: £18.4m).’
• The company has taken an exceptional charge of £6.8m (2017: £7.3m) for disposed pubs
• Free cash flow was £36.8m (2017: £49.2m) after maintenance capex
• As at 28 January 2018, the company’s net debt, including bank borrowings and finance leases, but excluding derivatives, was £756.4m, an increase of £60.1m, compared with that of the previous year end (30 July 2017: £696.3m). This is partly the result of freehold purchases and share buy backs
• JDW says ‘for the foreseeable future, it is intended that the company’s net-debt-to-EBITDA ratio will be around 3.5 times.’
• JDW cautions ‘the ratio would rise for a temporary period, if there were, for example, a sudden deterioration in trading, in which instance the company would seek to reduce the level in a timely manner. Insofar as it is possible to generalise, the board believes that debt levels of between 0 and 2 times EBITDA are a sensible long-term benchmark.’
• The co says ‘as indicated previously, a higher level of debt may be justifiable when interest rates are low and other factors are favourable.’
• Re property during the period the group says ‘we opened three new pubs and closed 12, bringing the number open at the period end to 886. Following a review of our estate, in recent years, we placed around 100 pubs on the market, 88 of which have now been sold, are under contract or have been closed.’
• JD Wetherspoon has reported a good H1 but has cautioned a little on H2. The group says that the outcome for the full year will be ‘unchanged’.
• JDW says that if trading worsens, debt will rise. This should be temporary. Costs are rising and will impact H2.
• The group’s shares have been strong recently, buoyed by good trading and in the past by share buybacks. Poorer-performing sites have been (and are being) disposed of. Openings are at relatively low levels.
• LfL sales (which were pre-released in January) continue to be strongly ahead of last year. Certainly, H2 comps will be tougher but this is a good performance as comps are not particularly easy (JDW was +3.3% in H1 last year) and the economic background has been challenging.
• The group, in common with many other operators, says that it faces a number of headwinds in H2. JDW’s shares trade at over 18x this year’s earnings, which is not prima facie cheap.
• However, the group is a superlative operator and, with Mr. Martin’s views on Brexit well-known, the company is likely to continue to pull out all the stops to show Brexit problems re access to staff, costs of produce and the economic uncertainty that surrounds the process in general, will not prevent it from reporting good numbers.
• Some investors may be inclined to take profits, however.
• The group’s competitors may be feeling the pinch a little more acutely than JDW says it is and they may react accordingly. JDW does not operate in a vacuum and, if competitors continue to cut prices and offer deals, the company could be impacted.
• Feb Tracker in brief: Shows flat sales despite discounting against 2.7% inflation & rising costs. Pubs > restaurants, London > provinces.
• Feb Coffer Peach Tracker shows LfL sales up 0.2%. Down in real terms but pubs doing better than restaurants
• Feb Tracker says ‘the British public continued to go out to eat and drink in February – in spite of the cold weather.’ It says ‘negative media stories around restaurant chain closures’ did not put people off.
• Feb Tracker shows restaurants down 1.3% LfL despite inflation of 2.7% generally and higher rates still for staff costs etc.
• Feb Tracker shows pub chains +1.3%. London overall +0.8% with zero recorded for the rest of the UK. Peter Martin comments ‘most of the effects of the major snow disruption will show up in the March data, but even so, to come out effectively even for February as a whole shows the resilience of both the sector and consumers.’
• Feb Tracker says ‘what’s not clear is how the bad publicity around certain high profile restaurant brands closing sites has affected the market or individual choices.’ It may be that the news plus vouchering has actually been buoying rather than depressing the numbers.
• Coffer Peach says ‘contrary to media reports the eating and drinking out market remains stable.’ It says ‘the restaurant sector has had terrible press over the past few weeks but in reality, consumers are still eating out. We also continue to see pub operators out performing restaurants.’
• Tracker does not comment on footfall or margin. Though it does say it ‘shows frequency of eating out remaining stable. Peter Martin comments ‘where people choose to go in a competitive market where choice has never been greater is different matter, however. Our consumer research shows people are more willing than ever to try somewhere new.’
• Somewhat ominously RSM comments ‘operators would have been looking to shore up their finances ahead of March’s quarterly rent demands. This deadline typically coincides with a working capital low point for many and on the back of February’s weak data, could be the catalyst for further site closures and restructurings.’
• The Tracker comments that its ‘latest Business Leaders survey showed that senior executives are expecting more business failures this year and a pull back on expansion plans. It adds ‘new sites are still being opened but casual dining chains in the cohort are now rolling out at a rate below that of the pub companies. Over the last 12 months, total sales growth, reflecting new openings as well as closures, was 3.8% for restaurant groups compared to 4.3% for managed pub and bar chains.’
• Overall this is a challenging environment and, given the snow and the end-month VAT and rent demands, this month could be markedly worse.
• Rolling 12mth LfL sales growth is now 1.1%. Still below inflation. This splits as to 0.4% for casual diners & 1.4% for pubs. Wages in hospitality are said to be rising at a rate of around 6%.
PUB, RESTAURANT & DRINK PRODUCERS:
• Consumer credit levels are close to a 2008 peak and a worrying number of households may be ‘in too deep’ with their borrowing, according to the FCA’s Jonathon Davidson. He also warned lenders that the FCA would come down on firms whose businesses were based on people being unable to clear debts. Speaking at the Credit Summit in London, Davidson added that the consumer credit sector served around 39 million people with loans to help finance a car, a big purchase or so they could make ends meet towards the end of the month.
• Beleaguered wholesaler and retailer Conviviality has been doing the rounds with its stakeholders following a disastrous week that has seen its shares suspended and languishing at c100p (down from highs of c400p). The group announced this morning it is likely to go through with an equity fundraise to recapitalise the business.
• Bar restaurant chain Darwin & Wallace has reported numbers for the year to 26 May to Companies’ House. The group reports that its ‘sites all continued to be profitable and all key KPl’s were in line over the Company.’ D&W comments that ‘year on year sales of sites open throughout both periods showed a 7% increase. Total sales have increased from £6.3m in 2016 to just over £9.5m in 2017.’
• Darwin & Wallace comments that ‘despite supplier cost pressures we maintained our Food and Drink margins due to close co-operation with our suppliers and quarterly menu refreshes.’ The company reports that ‘site EBITDA grew from £1.522m in 2016 to £2.368m representing over 24.8% conversion on sales.’
• D&W reports that net profit after all costs and after taxation came in at £557,955 (2016: loss £103,200).’ There is no dividend for the year. The group operates five bars at No 11 Pimlico Road, No 32 the Old Town, No.1a Duke Street, No 197 Chiswick Fire Station’. Post year end, the group opened in the Battersea Power Station redevelopment. D&W will open in Wimbledon shortly.
• Barby Ltd, the holding company for Jamie Oliver’s Barbecoa brand, owes £3m to approximately 150 unsecured creditors and £3.7m to HSBC, the administrators’ report has shown. It has been estimated that the bank will receive £250000 of its £3.7m debt.
• The BBPA has published guidance for pubs on alternatives to plastic straws, including the use of recyclable and reusable options. Chief Executive of the group, Brigid Simmonds said: ‘Pubs are already working hard to reduce the amount of single-use plastics being used. This includes only giving straws to those who ask. One of the easiest ways pubs can continue to reduce plastic waste is by using environmentally-friendly alternatives to straws and the guidance we have published today will help pubs and all licensees in cutting back on their use of plastics’.
• Tenant/pub company relations have improved in the last year, the MCA’s definitive Tenant Track survey has revealed. Some 22.4% of entrants said their relationship with their pub co had improved in the last year, compared to 21.9% in 2017.
• A whey protein manufacturer from Hull (Whey Box) is set for rapid growth following a successful six-figure funding package from HSBC. The funding package will see the group’s production capabilities increase by 500%.
• Caffe Nero has announced plans to open a further 45 new sites by the end of its fiscal year in May.
• Diageo has acquired Belsazar GmbH, a premium aperitif from Germany. Belsazar should provide Diageo with the opportunity to strengthen its participation in the aperitif occasion and expand its brands across Europe.
• Sebeto Group Spa, the Italian operator of the Rossopomodoro pizza chain, has been bought by OpCapita for an undisclosed sum.
• China reports wine production dropping for the fifth year in a row to 10m hectolitres for 2017, down 5.25% yoy. Wine sales plummeted 9% yoy to $6.67bn, with the country being ranked only as the 6th biggest wine producer despite having the 2nd largest area under vine.
• SIBA’s Best Independent Craft Beer Restaurant has been awarded to the Caebahr restaurant, run by Bun Dubh Brewery on the Scottish Isle of Tiree.
60 SECONDS WITH LANGTON: HEALTH, DRINKING & PROVENANCE:
How did we get here?
• c80% of adult males smoked in the 1940s. Now it’s <20%.
• Drinking per capita peaked around 2004
• Projecting this forward, some operators are pushing healthy, vegan options etc.
• This may be a bridge too far
Problems in practice
• Social trends are often complicated. E.g. Boozed up Britain headlines are misleading, but obesity is at record levels and everybody’s sitting down too much
• Operators need to know their customers & accept they may be hypocritical
• They want value, quality, and provenance, but will only pay so much for it
• What’s more, demands change as customers start a family, buy a house etc.
• Ultimately picky consumers succumb to parenthood, they lack the energy to eschew McDonald’s, white bread, processed food etc. when they’re getting no sleep
So, what should operators do?
• Establish that a market currently exists for the product Don’t push water uphill. Don’t rely on ‘educating’ would-be customers
• Establish that your market has a future. Don’t try to hold back the tide
• Take a view as to the size of the opportunity. Vegan tapas is a thin market in Barnsley. Pizza will work
• Then stick to your knitting & do what you do well. Don’t skimp on quality. Accept low margins if necessary. Offer permanent good value
HOLIDAYS & LEISURE TRAVEL:
• US hotels reported a 1.1% increase in occupancy to 68.1% for the week of 4-10 March 2018, with average daily rate up 2% to $131.46 and RevPAR growth of 3.1% to $89.53.
• BBC reports parents who have taken their children out of school for holidays during mid-term have been fined a combined £24m. Parents are reportedly working the cost of fines into their budgets.
• The International Hotel Investment Forum saw a note of caution despite all the positive current and forecast statistics. KSL Capital Partners said ‘there are clouds on the horizon, a lot of industries will be impacted, ours included, but I remain positive’.
• The UK treasury is opening a consultation on the impact of Air Passenger Duty and VAT on the long-haul travel industry of Northern Ireland in particular.
• Spotify is to debut on the New York stock market on 3 April in a ‘novel’ direct listing and founder Daniel Elk commented: ‘Since Spotify isn’t selling any stock in the listing, we’re really entirely focused on the long-term performance of the business.’
FINANCE & MARKETS:
• Sterling down vs dollar at $1.3931 but up vs Euro at €1.1316
• Oil up a couple of bucks at $65.18
• UK 10yr gilt yield unchanged at 1.43%
• World markets: UK up marginally yesterday with Europe up and the US down. Far East down in Friday trade
• Brexit etc.:
o David Davis in Brussels on Sunday to sort things out.
o An agreement (really just an agreement that it would be good to agree) is likely next week. Bloomberg says ‘Davis has avoided going to Brussels in recent months for the kind of high-profile negotiating rounds he engaged in last year, which tended to end in awkward joint appearances with Barnier. If he’s on his way to Brussels, it probably means he thinks a deal is nigh.’
o FT reports a ‘political declaration on a transition next week will still give valuable assurance to companies.’ This even if there is nothing concrete.
o Unilever votes with its feet. It will focus its HQ in The Netherlands after 100yrs in the UK
PRIOR DAY LATER TWEETS:
• Later tweets: Conviviality: Langton still can’t think of a good (or even a non-bad) reason why you would forget about a £30m bill to the Revenue
• Any Matthew Clark disruption would be negative for the pub industry. Not sure many of these guys have got a Plan B at present
• Unilever consolidates HQ in Holland, Russia bullying UK, GDP slowest in G20. If this is all part of the plan, then perhaps look again at the plan?
START THE DAY WITH A SONG:
Yesterday’s song was ‘Bang Bang’ from, to our surprise, Cher’s second album and released in 1966. Most people (ourselves included) know it as the Nancy Sinatra cover… To round off the week, who sang:
Oh, people they don’t understand,
No, girlfriends, they don’t understand
In spaceships, they won’t understand
And me, I ain’t ever gonna understand
RETAIL NEWS WITH NICK BUBB:
• Conviviality: After its series of bizarrely timed announcements shareholders will be grateful to see that the increasingly beleaguered drinks distributor Conviviality issued an update at the normal time of 7am today to reassure them that the discussions with all its “stakeholders” about its future funding requirements are going well (even though “funding” was mis-spelt as “finding”). They will be less pleased to hear that the “company is engaging with its advisers and broker regarding the possibility of an equity fundraise to effect a recapitalisation of the business”, even though that looks an inevitable solution to the financial problems of the business, despite the difficulty in valuing the equity, with the shares still suspended at 101p (capitalising the group at just £185m)…
• Trade Press (1): The front cover of Retail Week magazine today is a photo of a New Look store, with the headline “Do CVA’s save retailers?”, flagging up a feature article on “How BHS, Mamas & Papas and others may hold lessons for New Look”. RW also has features on “Retail Week Live 2018” (“The big industry talking points from our flagship event”) and “Partnership Pressures” (“Can John Lewis and Waitrose bounce back from a profits slump?”). In terms of News stories, RW highlights the news that sale hopes are fading for Maplin and that Halfords, Mountain Warehouse and Ryman are said to be leading the chase to snap up pockets of the collapsed Maplin’s store portfolio; John Lewis Partnership’s full-year profits plummeted as its restructuring costs and margin pressure took a toll and Shop Direct has appointed its new CEO from the bingo halls group Rank. And in his column the Editor
• Trade Press (2): Drapers magazine today is a special High Street edition, with feature articles on “Who owns the biggest names on the UK High Street” and “How experiential shopping malls are bucking bricks-and-mortar’s downward trend” and the Editor thunders in her column “Don’t write off the High Street just yet”. The main News stories in Drapers are that Retailers are calling for greater support from the Government to revitalise the High Street; the New Look CVA ‘does not go far enough’ according to industry experts and Charlie Mayfield, the Chairman of John Lewis Partnership, said the business will continue to invest and “step up” to the challenging market.
• BDO High Street Sales Tracker: We flagged on Wednesday that John Lewis regained a lot of lost ground last week, after all the snow disruption, thanks to the earlier fall of Mothering Sunday, but today’s BDO High Street Sales Tracker for small/medium-sized Non-Food chains for last week, w/e Sunday March 11th, flags that Fashion Store LFL sales were only 2.4%, albeit the comp was +3.5% last year. Including Homewares and Lifestyle chains, however, total Store LFL sales were up by 8.2% (vs +3.9% a year ago). And overall Online sales were very strong, up by 22.4% (versus +37% a year ago), with Online Fashion sales 18.5% up.
• News Flow Next Week: A busy week kicks off on Monday morning with an analyst’s preview visit to the new John Lewis store that opens in the Westfield London shopping centre extension on Tuesday. The Ocado Q1 is also on Tuesday and then the Kingfisher finals and ScS interims are on Wednesday. Thursday brings the Ted Baker finals and the ONS Retail Sales figures for February, together with the “Retail Week Awards” (aka “the Retail Oscars”) in the evening. Then we get the much awaited Next finals on Friday.
• TIPS Watch: The great 4-day Cheltenham jumps racing Festival concludes today and our alter ego, “Honest Nick”, is again bringing you his each-way Tips. And, with the Irish sweeping the board yesterday, he was again reasonably pleased with his efforts on Day 3, after a nightmare start, with the favourite Terrefort coming second in the 1.30, Sort it Out flopping in the 2.10, his banker Un De Sceaux coming only second in the 2.50 and L’Ami Serge failing to run into a place in the 3.30…But then The Storyteller won the 4.10, to save the day, even though he was the 5-1 favourite! As for today, we don’t think the Irish will have things quite so much their way and in the 1.30, the Triumph Hurdle, Apple’s Shakira or Redicean should prevail, whilst in the big race at 3.30, the Gold Cup, Native River might just sneak it over Might Bite. But the big races are best watched as spectacles, with the