Langton Capital – 2018-06-27 – Whitbread Q1, private equity, discounts, hotels & other:
Whitbread Q1, private equity, discounts, hotels & other:
A DAY IN THE LIFE:
Bit busy with Whitbread this morning, on to the news:
WHITBREAD Q1 UPDATE. LFL DECLINES BUT CO TO HIT EXPECTATIONS…
Whitbread has this morning updated on trading for the 3mths to end-May 2018 and our comments are set out below:
• Whitbread reports Q1 group total sales growth of 3.2% and ‘good progress with efficiency savings’
• It says it expects to ‘deliver full year results in-line with expectations’
• Premier Inn UK grew sales by 4.3% ‘driven by investment in new hotels’. LfL sales are down by 0.3% in accommodation and down by 1.9% in restaurants
• Costa UK sales were up 5.2% ‘through new store growth and Costa Express expansion’. LfL sales are down by 2.0%
• It says it is making ‘good progress in preparing Costa to be demerged from Whitbread’
• Whitbread reports ‘total UK accommodation sales growth ahead of the market at 4.3% in the quarter
• LfL sales are down by 0.3% in accommodation and down by 1.9% in restaurants. Premier Inn in total is down 0.9%
• PI says its ‘growth [is] driven by investment in new hotels, with 644 rooms opened during the first quarter’
• It says ‘flat like-for-like accommodation sales reflect market weakness and strong comparators’
• In Germany, the pipeline has grown to 31 committed sites, comprising around 6,000 rooms
• WTB says ‘Premier Inn’s flat like-for-like accommodation sales reflected the continuation of weak market conditions in London as comparatives from last year were very strong driven by inbound tourism.’
• It says ‘overall hotel market occupancy in London declined year-on-year, which was compounded through Premier Inn’s capacity growth of 13.8%.’
• It says ‘forward bookings have improved recently’
• In Germany, the group says ‘Premier Inn will also continue to add to the pipeline through a mixture of organic freehold and leasehold sites, supplemented with suitable bolt-on acquisitions.’
• Whitbread reports ‘UK sales growth of 5.2% in the first quarter driven by new stores and Express machines’
• It says ‘UK like-for-like sales declined by 2.0%, reflecting the general retail market conditions’
• The group adds ‘China started the year well with positive like-for-like sales’
• It says in the UK the ‘like-for-like sales decline resulted principally from footfall weakness in traditional shopping locations, whereas travel locations continued to show good growth.’
• Costa Express’s ‘UK sales growth in Costa Express was 9.6% for the first quarter, driven by machine additions over the last year’
Company overall, demerger etc.:
• Whitbread Chief Executive Alison Brittain comments ‘Whitbread has started the year growing total Group sales by 3.2%. We expect to deliver in-line with expectations for the full year and we continue to make strong progress on our efficiency programme.’
• Build it and they will come.
• Ms Brittain says re hotels ‘our new capacity has a short-term impact on like-for-likes but delivers good long-term sales growth.’
• The CEO adds ‘our F&B sales declined slightly due to lower footfall from adverse weather.’
• Ms Brittain says ‘both the budget hotel market and the coffee market present long-term structural growth opportunities, and whilst we are cautious of shorter-term trading conditions in the UK, due to well-publicised consumer trends, we are confident that we have the right strategies in place to enhance our UK and international market positions and ensure each business is well-positioned to thrive as a separate entity.’
• Re the demerger of Costa, WTB says ‘constructive early steps have been taken in preparation for the demerger and good progress continues to be made on the core infrastructure and efficiency work that was already underway.’
• The group says ‘a further update on the demerger will be provided alongside the interim results in October 2018.’
• Whitbread’s shares have recently given back a bit of ground.
• Today, the group has announced that, whilst the top line is moving forward, both of its major divisions are in LfL decline.
• Given the building, perhaps overbuilding, in both hotels (particularly in London) and coffee shops, this may not be a surprise.
• The group remains cautious on trading in the medium term.
• The shares’ rating has contracted and, at less than 15x this year’s earnings, they are cheap compared with recent trading ranges.
• However, the outlook is a little more challenging and the Costa demerger needs to be executed.
• WTB has an impressive freehold estate, good brands and international ambitions but, with trading uncertain, the shares may remain under some pressure.
PRIVATE EQUITY & THE HIGH STREET:
Spreadsheets, spreadsheets, everywhere…
• Megalomaniacs often look at too small a map. Invade Russia, they say, it’s easy
• If capital costs 7% to 10% and the return on capital is 15% plus, then happy days…
• One restaurant may generate the above, so may ten
• But roll out 60 (see our Nought to Sixty pieces) & the equation may not hold
• And if you are one of 30 to 50 PE houses trying to put 60+ restaurants each onto the same High Streets, then there may be trouble down the line…
Current trading environment…
• Put an X next to whichever of these you think is favourable: World Cup, hot weather, poor retail footfall, rising labour costs, chef shortages, heavy discounting etc.
• Throw in a bland, lazy offer & you’ll be the next 40% off email in the Langton inbox
• And tricky trading will persist. GDP is 1% to 1.5% below trend, import costs could rise and capacity is an ongoing problem as are staff shortages
• Capacity will not be demolished & it is rarely boarded up. Beggaring your neighbour, possible only for the better operators, is one of the few ways forward
PE exits; what PE exits?
• So will PE get its money back?
• There will be exceptional exceptions (Pret, possibly Wagamama etc.) but IPOs are rare and Imperial College says exits are down 55% H1 2018 on last year
• Because, when all’s said and done, where are you going to find a buyer from?
• The answer is that there isn’t always an (easy) answer. Good operators will take share & the best are doing so. They are also slowing openings because, well, why wouldn’t you?
PUB, RESTAURANT & DRINK PRODUCERS:
• Plenty of discounts. Café Rouge 2-4-1 (50% off in our book), Prezzo 40% off, Bella Italia 30% off, Pizza Express 25% off
• Sovereign Mines of Africa has bought Turf to Table, a group of five inns in the Cotswolds
• Marstons’s said on Tuesday it had agreed a five-year distribution deal with American craft brewery Founders Brewing Company and believes such moves can help bolster its sales. The agreement follows Marston’s £55m acquisition of Charles Wells last year, which gave it the distribution rights to Founders’ selection of over 40 craft beers for a year. ‘We’re thrilled that the Founders philosophy and premium tasting portfolio is really starting to take effect here in the UK. We’re working with numerous independent operators, craft beer bars and the likes of Young’s, Castle Pub Company and Morrison’s to name just a few,’ said John Clements, head of commercial marketing at Marston’s.
• UKHospitality CEO Kate Nicholls has called the government’s announcement that large employers will be able to transfer up to 10% of their apprenticeship levy funds to multiple businesses ‘a step in the right direction to providing more flexibility in the levy’. It is hoped the change will increase the number of apprenticeships nationwide. In terms of further potential improvements to the levy, Nicholls said: ‘A good starting point would be enabling larger employers to use the levy for apprenticeship-related costs and for unspent levy funds to be spent helping SMEs to employ and develop apprentices.’
• OakNorth has provided The Inn Collection Group, which has seven sites across North East England, with a funding package to support its expansion.
• US-based retro-themed burger chain Sonic Corp reported another quarter of falling like-for-like sales, dragging shares down 8% in after-hours trading. System same-store sales, a key industry metric measuring sales growth at previously opened locations, were down 0.2%.
• The MCA has reported that customers are tiring of undifferentiated barbecue offerings and traditional Chinese and Indian takeaways. The Menu & Food Trends Report 2018 has shown that cuisines such as West African, Portuguese, Korean and Japanese have increased popularity.
• Hummus Brothers have entered into administration, propel have reported, with the six-strong group stating: ‘It is with a heavy heart we write this note to you. As you may have read in the press, a number of brands have been going through tough times on the high street. Like them, we have experienced a perfect storm of rising costs, reduced demand and oversupply in the market’.
• Portobello Brewing Company the West London craft brewer are collaborating with privately-owned London pub operator Remarkable Pubs. The partnership will see Portobello extend their brewing operations to the brewery housed in the Remarkable Pub the George and Dragon in Acton W8. Elton Mouna Managing Director of Remarkable Pubs said ‘This partnership gives Portobello additional brewing capacity to innovate with small batch production and gives our lovely pub the George and Dragon a real point of difference’
• London Union has announced its sixth Street Feast market, which will open in Wood Green.
• The value of private equity exits in the UK tumbled 55% in the first half of the year, from £13.6bn to just £6bn, according to figures from the Centre for Management Buy-Out Research (CMBOR).
HOLIDAYS & LEISURE TRAVEL:
• Thomas Cook is to shut its in-house bed bank Medhotels. Expedia and Webjet will take over contracting of its own-brand and partner hotels so that Thomas Cook can ‘focus on its core offering of holidays to its own-brand and selected partner hotels’. Thomas Hohn, chief of complementary at Thomas Cook, said: ‘The closure of the Medhotels business is a natural evolution of our strategy. The transformation of our complementary hotel partnerships will simplify our processes and give customers a better online experience with more choice.’
• Uber has been granted a short-term licence to operate in London but it has been put on probation for 15 months.
• The seventh edition of the Global Serviced Apartments Industry Report (GSAIR) shows that more than half of companies are using extended stay properties for business travel.
• A document presented to the European Commission last week shows whether UK citizens will be subject to visa requirements depends on the outcome of Brexit negotiations. Politico reports that MP David Jones, a former minister from the Department for Exiting the European Union, said he ‘would not expect’ a visa requirement to be introduced.
• A new study shows that 46% of UK parents have taken their children out of school to go on holiday, largely in order to avoid higher financial costs. Two thirds (62%) say that family holidays are too expensive when schools break up for summer, according to the poll of 2,000 parents for Co-op Insurance.
• Heathrow airport’s operator is moving its international headquarters from the UK to Amsterdam so that it keeps within EU legislation after the UK leaves the European Union. Spanish-owned Ferrovial currently runs its US, Canadian, Polish and UK operations from Oxford. Several companies have recently voiced concern over the impact of Brexit.
• New Zealand is set to introduce a tourism tax next year at around £18 on entry. The tax is expected to collect between NZ$57-80m annually, to be split between tourism infrastructure and conservation efforts.
• Triptease, a startup that helps drive direct hotel bookings, raises $4m from BGF and Notion Capital. The tech company has raised $13m in the last year.
• FabHotels, an Indian budget hotel chain, plans to expand its portfolio by 250% to 1000 hotels by FY19.
• Goldman Sachs economists have predicted that England may make it to the final of the 2018 World Cup. ‘For England fans who might find themselves daring to dream, our updated model predictions might constitute a beacon of hope,’ said Goldman’s report on Tuesday.
• Hipgnosis Songs, a music royalties fund founded by Merck Mercuriadis, will attempt to launch on the London Stock Exchange this week for the second time. The IPO will occur on Wednesday, raising roughly £200m.
FINANCE & MARKETS:
• MPC member Jonathan Haskel has given z downbeat assessment of Britain’s economy in a move that saw interest rate rise betting ease off
• Trump says Harleys should only ever be manufactured in the US
• Sterling down vs dollar at $1.322 but unchanged vs Euro at €1.1344
• Oil up at $76.56
• UK 10yr gilt yield up 1bp at 1.3%
• World markets: UK up, Europe down, US up and Far East down in Wednesday trade. FTSE should open up around 30pts
• Brexit etc.:
o EU summit this week.
o Queen signs Brexit bill into law
o BMW says ‘ongoing uncertainty’ is unhelpful & customs checks mean higher prices in the UK
o BMW says it ‘cannot’ manufacture in the UK if its supply chain is interrupted
o Motor manufacturing investment in the UK is down by around a half on last year per SMMT. It says ‘the current position, with conflicting messages and red lines, goes directly against the interests of the UK automotive sector which has thrived on single market and customs union membership.’
o Business calling for urgency in negotiations and certainty as to the future
PRIOR DAY TWEETS:
• Later tweets: World Cup and F&N delivery. See comments in email. http://www.langtoncapital.co.uk/?p=1638
• China to buy more from EU, Harley to move some production to Brazil. Unintended consequences Donald, unintended consequences
• BMW, Airbus warn. Jeremy Hunt says should keep quiet & ‘f— business’ says Boris Johnson as he no-shows for Heathrow vote. No, really
• Value of private equity (PE) exits falls 55% in H1 as masters of universe mess the bed. CVAs etc. correlated to poor financial management
• Plenty of discounts. Café Rouge 2-4-1 (50% off in our book), Prezzo 40% off, Bella Italia 30% off, Pizza Express 25% off
• Carpetright confirms it’s in a mess. Not new news but first 8wks of current year ‘heavily impacted’ by restructuring disruption.
START THE DAY WITH A SONG:
Yesterday’s song was Chase the Devil by Max Romeo. Today, who sang:
It’s the morning and just we two.
I’ll stay with you darling now,
I’ll stay with you till my seas are dried up
RETAIL NEWS WITH NICK BUBB:
• Grocery Market Share Watch: Nielsen said yesterday that despite promotions around the World Cup and Father’s Day the grocery industry saw sales slow to a modest +1.5% over the four weeks to June 16th, but the detailed figures from its rival Kantar (for the 4 weeks to June 17th) reported slightly better growth of 1.9% (including Non-Food), in line with its measure of grocery price inflation. However, Aldi/Lidl stepped up to grow by a combined 11.1% in the period, whilst the “Big 4” slumped to just 0.3% growth overall. None of the “Big 4” did well, although Morrisons was best, with +1.4% gross. Tesco was down by 0.6% and Sainsbury was down by as much as 1.8%, which was pretty shabby. Ex-Non Food, Sainsbury was only down by 1.2%, but on the same basis M&S Food was up by 3.2% gross (albeit that is boosted somewhat by new stores).
• John Lewis Partnership: According to a Retail Week website scoop, the JLP Strategy update today (which is being announced to analysts at the new Westfield White City store at 8am) will focus on harnessing the power of the partnership concept, with the stores to be renamed “John Lewis & Partners” and “Waitrose & Partners”. What that does for customers remains to be seen, but it can safely be assumed that JLP has no intention of selling the struggling Waitrose business, despite the rumoured overtures from Amazon…
• John Lewis Watch: After price-matching the recent Debenhams and House of Fraser Sale promotions John Lewis is now into its own end-of-season Clearance and the Sale began well, but trade wilted as the weather warmed up last week …Yesterday’s weekly sales overview from JLP flagged that w/e June 23rd saw gross sales dip by 2.1% up (over 3.5% down on a LFL basis, on our calculations). Home sales were down by 3.7% gross, Fashion sales were down 0.1% gross and Electricals were down by 3.4% gross (although TV sales were still good). Over the last 21 weeks, John Lewis is running up cumulatively by 1.5% gross (broadly flat LFL), which is still nothing to write home about.
• Waitrose Watch: Over at Waitrose, sales of picnic and barbecue yet again failed to fare as well as might have been expected last week, as gross sales were only 0.2% up in w/e June 23rd (nearly 1% down LFL), with Waitrose still blaming the fact that the comp was tough, as the weather was warmer last year, although they say “trade accelerated significantly as temperatures soared towards the weekend”… The cumulative sales picture for the last 21 weeks is +1.5% gross for Waitrose (just under 1% up LFL), which still seems a bit below par for the supermarket sector, even if the business has done better than Sainsbury over the last month (according to Kantar).
• News Flow This Week: Tomorrow brings the JD Sports AGM and trading update. And, with the end of the month (and the first half of 2018) coming up really quickly, the monthly GFK Consumer Confidence index is out first thing on Friday.