Langton Capital – 2018-03-21 – Ten Entertainment, CVAs, 888, Boxercise & other:
Ten Entertainment, CVAs, 888, Boxercise & other:
A DAY IN THE LIFE:
Have you noticed how difficult it is to answer your mobile phone with gloves on?
I mean you jab and jab at that screen without discernible effect and all this while the thing is blasting the Birdie Song or whatever your ring tone is at you and making you look even more unprofessional than you no-doubt feel.
And if you’re wearing Thomas the Tank Engine mittens with no fingers then the whole thing is so much worse. You can smile embarrassedly at your frumpy fellow-passengers but you know full well that they’ve written you off as at least a twit but most likely a suspicious looney who’s somehow managed to wangle a day-release. On to the news:
CVAS — SUPPORTING BUSINESSES OR SPOILING THEM?
You can’t give her that!’ she screamed. ‘It’s not safe!’
IT’S A SWORD, said the Hogfather. THEY’RE NOT MEANT TO BE SAFE.
‘She’s a child!’ shouted Crumley. ‘What if she cuts herself?’
THAT WILL BE AN IMPORTANT LESSON.
CVAs on the rise…
• So says Terry Pratchett in Hogfather — and he has a point
• Mistakes must first be made if we are to learn from them
• Many operators have recently resorted to Company Voluntary Arrangements (CVAs) that radically reduce their cost structures
• More CVAs are likely to come in the months ahead
• We question whether the relief they bring outweighs the precedent they set
What does this mean?
• CVAs allow recognised operators such as Prezzo and Jamie’s Italian to stay in business
• This in turn provides stability for a wider ecosystem of suppliers and employees
• Typically the landlords suffer but this is often because they have made themselves part of the problem by pushing up rents
• The real, if indirect, victims of the CVA are the successful operators that don’t need them
• CVAs risk rewarding failure — good, sensible operators are penalised if irresponsible or undesirable businesses are bailed out and given advantageous terms
• There is a micro/macro disconnect here
• On a micro level, CVAs provide emergency relief to the entity and its stakeholders, saving jobs
• On the macro level, however, CVAs can distort and compromise the market, getting in the way of healthy and necessary corrections
• Terry Pratchett’s IMPORTANT LESSON is left to be learnt at a later date
CVA WORKED EXAMPLE – PREZZO:
• CVAs essentially involve an operator offering to cut rental payments whilst threatening to shoot itself in the head if this is not accepted.
• Operators propose rental cuts or site surrenders & then point out that the landlords would get even less back in an administration.
• If 75% of creditors agree with the above ‘shoot myself’ proposal, then any subsequent agreement is binding on all creditors.
• Prezzo’s CVA proposals are dated 2 March 2018
• It says if the CVA is not approved and implemented, Prezzo is likely to enter into administration.
• It says it has been unsuccessful in its business of selling pizzas and says it has seen increasing sales declines and has reported a falling revenue in the past year.
• It points to increased competition from other, arguably more successful, competitors. It has engaged in discounting and its margins have fallen
• It says its revenue dipped 3.3% year-on-year for the twelve months to December 2017. Like-for-like sales have dropped in this period by 8.1% year-on-year.
• It then turns to its landlords. It implies that its current business model and associated cost structure is no longer viable… Rental costs associated with underperforming restaurants are unsustainable. Many restaurants are loss making at an operating level. That is, they are really, really poor
• The directors believe that sales and market share will continue to decline until further investment can be made in restaurants and the estate rationalised. The CVA will give the company the ability to rationalise the restaurant portfolio by exiting restaurants that are unprofitable, securing rent reductions where restaurants are over-rented or can be made viable with a rent reduction, and facilitates negotiations with landlords of restaurants that have leases containing onerous terms.
• Prezzo has £155m in debt from lenders.
• It now wishes to move to monthly rents (including turnover rent on a pro rata basis), service charge and insurance (rather than quarterly) across the portfolio, to assist with cashflow
• It splits its restaurants into 4 main groups. Those it wishes to keep. Here it wants to move to monthly rents (47% of estate)
• Category 2 units, Prezzo wants a 2yr 25% rent cut (12% of sites)
• Category 3 it wants a 50% cut for 1yr then either a rent renegotiation or an exit (7% of units)
• Category 4 the group does not want to keep at all. It wants an 8wk rent cut and then a lease termination (30%)
• Langton Comment: Clearly Prezzo has got itself into a pickle – but should it be given a free pass?
• Of course, it is not a ‘free’ pass. Certainly not for the landlords and not so much for the company, either.
• But this is a very distorting process for the market as a whole. See our earlier comments.
PUB, RESTAURANT & DRINK PRODUCERS:
• Too late now but Harvester was doing 50% off mains until yesterday.
• Other discounts. Prezzo, ASK, Bella Italia & Pizza Express are 40%, 30%,30% and 25% off respectively
• Wagamama is to introduce what it calls the “Uber for diners” in what it claims is a world’s first. Customers will download an app & then they can order, eat and go. The cashless payment process was developed alongside Mastercard. Wagamama says the app will save an average 12 minutes per meal through easier ordering and bill payment.
• EI Group yesterday bought back 260,924 shares for cancellation at 117.3p each.
• CBRE comments that ‘the demand from new-entrants, niche operators and investors for managed pubs remains strong and there could be an opportunity for current owners to pass on their non-core pubs before the cost of keeping them becomes noticeable.’
• CBRE adds that ‘operators facing ever-more demanding investors and mounting challenges have tended to focus on premiumisation and the strength of their brand, estate and people.’ It suggests that, essentially jacking up prices and looking for customers who will pay them, may no longer be enough.
• McDonald’s has embarked on a programme to cut its greenhouse gas emissions by 36% by 2030. It says ‘this is the equivalent of taking 32 million passenger cars off the road for an entire year or planting 3.8 billion trees and growing them for 10 years.’
• Sky reports Carpetright ‘is racing to secure emergency funding to pave the way for a longer-term restructuring plan in the latest sign of the crisis engulfing Britain’s high streets.’ It says the group is after more than £10m from prospective lenders.
• Rent to own operator PerfectHome is to pay out £2.1m to customers after it was criticised by the FCA for effectively adding extra charges onto its bills for insurance before goods were delivered and for failing to cancel payments when contracts were cancelled.
• In the US, DineEquity (owner of Applebee’s and IHOP) has become Dine Brands Global. The newly-rebranded operator has seen material negative LfL sales at Applebees in seven of the last eight quarters.
• The Department of Coffee and Social Affairs has strengthened its position in London following the acquisition of Tap Coffee, the MCA has reported. The 18 strong group will continue to operate the three Tap sites under its present brand.
• Shortages in labour and increasing operational costs will result in operators become more dependent on autonomous kitchen equipment in the future, says Catering Equipment Solutions. Managing Director of the group, Anna McNamara said: ‘We need to start thinking quite seriously about how operators are going to automate or change the processes in their kitchens. There is a shortage of staff now, let alone when we get out of the EU, and that is going to become even more of a challenge for those running kitchens’.
• US wine exports fell by 5.5% in 2017 to $5.53bn, marking the end of seven years of consecutive growth. Wine institute California said the drop was due to a ‘strong dollar, heavily-subsidized foreign wine producers and competitors forging free trade agreements in key markets’.
• Karaoke concept bar Lucky Voice reports sales up 17% in December 2017 and up 8% for 2017 as a whole. According to Pub and Bar, Lucky Voice had shown a strong start to 2018 with sales up 20% in January and February.
• CBRE quotes Deltic data showing average spend on a night out rose by 13.8% to £59.49 between November 17 and January 18. Consumers are spending 26.6% more on pre-drinks, 25% more on transport, 30.5% more on entry fee, 19.4% increase on drinks in the venue but 9.1% less on food.
• UK retailers can now link to products on their own sites on Instagram, with social media service launching its shopping concept in the UK.
• The UK based packaging and paper company DS Smith has stated it could recycle all 2.5bn coffee cups thrown away in the UK each year. Following a trial initiative, DS Smith claims it has the capacity to reprocess 45,000 tonnes of coffee cup waste, 50% more than the UK currently uses annually. GM of the group, Peter Clayson said: ‘“We have been working around the clock to solve the throw-away coffee cup challenge, as enjoying a latte has become part of British culture. We could recycle up to two and a half billion cups each year, but we need the recycling collection infrastructure to be far better if we are to reach the goal of recycling every last cup’.
• Meal kit company Quitoque has sold its majority stake to Carrefour.
• Purple, a leading WiFi provider, has joined forces with CRM platform Airship to offer clients a solution to collecting, storing and broadcasting customer data. The duo have worked together with their client Revolution Bars Group to collect customer data from Purple’s WiFi splash screen when logging into WiFi in venue. Dan Brookman, Airship’s Commercial Director, said: ‘Our client Revolution were thrilled with the results that we managed to achieve from this campaign, generating hundreds of warm leads for their sales teams to take up’.
HOLIDAYS & LEISURE TRAVEL:
• Somewhat worryingly, the CBI singles out ‘cheaper hotel rooms’ as one of the reasons for the drop in CPI in February,
• The CBI has told travel industry leaders that the agreement on ‘a large part’ of the Brexit ‘will give business the timings it needs’. Campaigns director at CBI, John Foster, said the agreement ‘would give three years of certainty for business’ but that ‘progress on Monday comes with a big caveat that they need to agree more’.
• More than 150 UK travel industry leaders discussed the impact on Brexit yesterday at an Abta event. The travel association has been encouraging the government to focus on aviation access and open skies, staff support for holidaymakers as well as visa-free travel and protection of consumer rights.
• Aslef has told members in Acton Town to stage a 24-hour walk out on Wednesday in regard to the treatment of a driver regarding safety breaches. TfL expects to run about 60% of service on the District Line due to the walk-out.
• Thursday (22nd) will see disruption to flight and public transport in France as workers go on national strike. Industrial action is being taken to protest labour law changes by president Macron.
• STR reports US hotel occupancy up 1.2% to 61.7%, ADR up 2.3% to $126.38 and RevPAR increasing 3.5% to $78.02 for February 2018.
• Toyota has become the latest motor operator or manufacturer to suspend US tests of driverless cars on public roads. This comes after an Uber vehicle struck and killed a cyclist. Toyota was concerned about the “emotional effect” of the incident.
• Ten Entertainment reports FY numbers saying it has had a ‘strong maiden year’ with ‘good trading [and] clear growth prospects’
• Ten reports it has ‘delivered a strong financial and consistent operational performance and comfortably met the objectives set out at the time of its IPO in April 2017.’
• Ten reports total sales +5.5% at £71m with LfL growth of 3.6% ‘driven by both increased spend per head and footfall’
• Ten reports Group adjusted EBITDA up 14% to £19.0m (FY16 PF2: £16.6m) with adjusted PBT +18% to £13.0m
• Ten has purchased 3 sites during the year and refurbished 6.
• Current trading for Ten is positive. The group says ‘sales in the first 11 weeks of FY18 have started positively, with like-for-like sales year to date at 1.7%. Inevitably there was a trading impact from the unusual disruption caused by the widespread snow in week 9, resulting in a c.1.1% impact on the like-for-like performance, without which the business would have achieved like-for-like sales year to date of 2.8%.’ Chairman Nick Basing says ‘Ten Entertainment Group has met its initial aims set out at the time of IPO. These results are a positive step towards fulfilling its long term potential.’
• Ten CEO Alan Hand comments ‘with an excellent proposition that is designed to take advantage of the growth of customer demand for experiential activities, Ten Entertainment Group has much potential.’ He says we ‘will continue to deliver our exciting plans for 2018.’
• US boxercise operator Omni Fight Club is reported to be looking for its first sites in the UK as part of a wider European roll-out. Property Week reports it has earmarked more than 50 target locations. PW comments ‘the brand, which runs high-intensity boxing workout classes under the strapline ‘Fun Tough Fitness,’ has secured master franchisees for the UK, Ireland, Spain and Portugal.’ It says ‘in the UK it has appointed Savills to find sites of between 2,600 sq ft and 5,400 sq ft with a ceiling height of at least 3.8 metres in areas with high population or employment density.’
• Facebook shares fell a further 2.6% on Tuesday following calls for tighter regulation of tech firms from politicians in the US, UK and Europe. Twitter was down more than 10%.
• Mark Zuckerberg has been formally requested to appear before MPs to answer questions about user data. The summons comes after a reported data incident between Facebook and Cambridge Analytica.
• 888 Holdings reported full year numbers yesterday. Its shares fell by around 6.5% as it said it had seen ‘continued strategic progress with record revenue.’ CEO Itai Freiberger says ‘888 has delivered another year of progress achieving record revenues of US$541.8 million and a 12 per cent increase in Adjusted EBITDA.’ He says ‘current trading since the start of the year is in line with our expectations with average daily revenue 6% above the previous year, representing an 8% increase when adjusted for the withdrawn markets.’ Mr Frieberger concludes ‘888 is a resilient and diversified operator with scalable proprietary technology. The Group has a number of significant growth opportunities ahead and the Board is confident of another year of operational progress.’
FINANCE & MARKETS:
• CPI fell to a 7mth low of 2.7% in the year to February. The ONS comments ‘many of the early 2017 price increases due to the previous depreciation of the pound have started to work through the system.’ Salaries did not rise accordingly so the working public took the hit.
• ONS says lower petrol prices and cheaper hotel rooms helped bring inflation down.
• Some suggesting that lower inflation will put the Bank of England off putting up interest rates in May. The Bank’s MPC meets tomorrow.
• Concerns about a potential global trade war dominated this week’s G20 Finance Ministers’ meeting
• Sterling down vs dollar at $1.4012 and lower vs euro at €1.1424
• Oil up at $67.51
• UK 10yr gilt yield up 5bps at 1.49%
• World markets: UK, Europe & US up yesterday with Asia also higher in Wednesday trade.
o All agreed though, as Guardian points out again, “nothing is agreed until everything is agreed”
o Bloomberg says Brexit relief may not last. CBI is looking for a second transition period to follow the first
o Michel Barnier says the most difficult negotiations will come at the end of the Brexit process
PRIOR DAY LATER TWEETS:
• Later tweets: Travelodge reports 2017 figures up on 2016 but cautions on current trading & tough comps for this year.
• easyHotel has secured lease for purpose-built 100 room super budget hotel in Cambridge. The hotel should open in 2019
• UK PLCs sold to foreign bidders. Need to sell £10bn per month to pay deficit. Michelin ‘values skills, experience & knowledge of Fenner’
• UK & EU agree to agree. Transition 21 months. Ulster may stay in single market. Business divided on whether or not it’s a relief
• CPI has eased more than expected to 2.7% in the year to February. Cost of living squeeze somewhat reduced
QUESTIONS, QUESTIONS (6): High Street: Is it healthy, sick or dying?
• I think we can rule out ‘healthy’, so, is it sick or dying? As ‘dying’ is an absolute, we’ll plump for ‘sick’. But it needs to improve if sickness isn’t to proceed to death. High (and upward only) rents (along with wages etc.) mean that costs are sticky on the way down. In fact, let’s keep it simple, they don’t go down. But, with a CVA, they suddenly do. So, are CVAs more or less likely to proliferate? That’s an easy one.
QUESTIONS, QUESTIONS (7): Matthew Clark (Conviviality): Consequential risks?
• There will be frantic, fund-raising discussions going on behind the scenes. On balance, our belief is its likely Conviviality will secure the funds it needs. If it didn’t, there would be a risk to pub deliveries. Also, bad debt risk for drinks suppliers. Many use invoice discounting (but some don’t). Free trade distributors would see a silver lining if a major competitor were to stumble.
START THE DAY WITH A SONG:
Yesterday’s song was Cut Your Hair by Pavement. Today, who sang:
Stay in the shadows
Cheer at the gallows
This is a round up
This is a low flying panic attack
RETAIL NEWS WITH NICK BUBB:
• ScS Group: Today’s interims from ScS cover the 26 weeks ended 27 January and LFL sales order intake growth of 2.2% was pleasing, but our heart skipped a beat when we read that “trading in the last seven weeks has softened, with the LFL order intake falling 5.3%”. But ScS was quick to say that this was principally due to the adverse weather conditions experienced in the week commencing 25 February and that the other 6 weeks of the recent trading period were flat with last year. CEO David Knight says “We expect that the retail market will continue to remain challenging in the short to medium term, and we are conscious that the Group still faces the key Easter and May bank holiday trading periods. Despite the challenging trading conditions, the Group continues to deliver profitable growth and the Board is pleased with the Group’s year to date trading, which is in line with its
• John Lewis Watch: After the bounce-back in the previous week from the snow disruption at the beginning of March, John Lewis found the going a bit harder last week, with yesterday’s weekly sales update from JLP (for w/e March 17th) revealing that gross sales were only 1.4% up (less than 1% up on a LFL basis, on our calculations), “with the end of the week seeing parts of the country impacted once again by snow”. Fashion sales were up by 1.8% gross and Electricals were up by 7.5% gross, but Home sales were down by 5.4% gross. After the 7 weeks of H1 so far John Lewis is now running down by 0.2% gross (nearly 1% down LFL). The BDO High Street Sales Tracker figures for last week will run to the close of play on Sunday March 18th and, as the snow hit harder on Sunday than the Saturday, the outcome announced on Friday morning will be quite a bit worse than the John Lewis figures for last
• Waitrose Watch: Over at Waitrose, last week saw gross sales up by 2.4% in w/e March 17th (just under 2% up LFL, on our calculations). The cumulative outcome for the last 7 weeks is now +5.2% gross, which is a healthy c4.5% up LFL.
• Carpetright: The share price took yet another ominous lurch down yesterday, to just 41p (capitalising the company at only £28m) and today has at last brought official update from Carpetright confirming that it is considering a CVA to dump some of its worst stores, but also announcing a short-term £12.5m working capital loan from one of its luckless shareholders, Meditor, and saying that it is exploring an equity funding of £40m-60m…Wilf Walsh, the CEO, says: “I am pleased that we have secured this additional support from one of our major shareholders as we continue to explore the feasibility of a CVA and a conditional equity issue. These further cash resources will enable us to make the necessary decisions free from short term funding pressure. The aggressive store opening strategy pursued by the Company’s previous leadership has left Carpetright burdened with an oversized
• Mothercare: The embattled Mothercare (which is now capitalised at just £27m) has also issued an update this morning, to confirm that “the discussions with its lenders on the terms of its existing financial facilities are progressing constructively…As previously indicated, we are also exploring additional sources of financing to support and maintain the momentum of our transformation programme and we are engaged in preliminary discussions on securing such additional financing”.
• Today’s Press and News: The Ocado update gets plenty of coverage in today’s papers, with the Guardian, the FT and the Daily Mail focusing on the impact of the snow disruption, whilst the Telegraph flags that the company has said that it will probably need to raise more funding to finance any more Overseas licensing deals. Tempus column on the Times has a detailed look at the outlook (“Ocado’s real prize is on foreign shores”) and says the shares are a Hold up at this level. The Daily Mail also flags that Mothercare has called in KPMG to help on its financial problems.
• News Flow This Week: There should be news soon on the Conviviality fund-raising and the New Look CVA vote is scheduled for today. Tomorrow brings the Ted Baker finals and the ONS (aka “the Planet 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.
• News Flow Next Week: Ahead of the long Easter weekend, there is a fair bit going on next week. Tuesday brings the Moss Bros finals and Game Digital interims, together with a Sainsbury analyst’s trip to their revamped Redhill store. The DFS interims are on Wednesday, along with the CBI Distributive Trades survey for “March”. The GFK Consumer Confidence index for March is then published first thing on Thursday.
• Easter Watch: Note that just as Mothering Sunday was earlier this year (March 11th, compared to March 26th last year), Easter is also earlier this year (Easter Sunday is April 1st, compared to April 16th last year). Next year it swings around again and Easter will be much later, with Easter Day on April 21st (which is almost as late as it can be). In principle, Easter falls on the Sunday following the full moon that follows the Northern Spring Equinox… Late Easters are usually good for the High Street as the weather should be better, with early Easters always carrying the risk of snow…
• NB “The Daily Retailer” is going to be on holiday now until after Easter. We’ll be back, bright and early, on Tuesday April 3rd.