Langton Capital – 2018-08-20 – Langton Capital – 2018-08-20 – Restaurant trade, July Tracker, overcapacity, sunshine…
Restaurant trade, July Tracker, overcapacity, sunshine…
A DAY IN THE LIFE:
So, we’re back in the UK and, despite a 1hr wait in line to show our passports in Hull, our home-town, of all places, everything went smoothly. We have concluded that Europe remains interesting, it couldn’t care less about Brexit and Continental cyclists, particularly in the low-lying bits, are every bit the aggressive, entitled nut-jobs that you find in the UK. Although there will be exceptions.
Anyway, we decided that we might change our dog’s name from Barnie to Captain Cuddles because, as he’s a rather aggressive, eight-stone mass of muscle and slobber, it seemed amusingly ironic.
However, the thought of calling ‘Cuddles? Captain Cuddles?!’ at the top of one’s lungs as he does something else unspeakable on the High Street, was a bit off-putting.
We’ve also decided to do an audit of his toes as, inbred and somewhat demented as he is, we’re not sure whether he’s got 24 or 25. He certainly has more than the required five on each limb, that’s for sure. On to the news:
TRADE TRACKER – JULY 2018:
• CGA Peach Tracker says that restaurant sales fell by 4.8% in July (against inflation of 2.3% and restaurant inflation of more than that)
• Heat blamed for poor numbers.
• Pubs, particularly wet-led pubs, did well in the warm weather with LfL sales +2.7%. Total LfL sales across pubs + restaurants exactly zero.
• CGA Tracker concludes ‘restaurants toil in summer heat, while pubs make hay.’
• Langton has pointed to overcapacity and new-building as sources of future problems for restaurants for some time now.
• This has led to discounting and, hitting slack demand and hot weather, restaurant sales on a LfL basis are under severe pressure.
• CGA says ‘July’s heatwave was good news for Britain’s pubs – but heaped more pressure on the country’s restaurant chain.’ CGA’s Peter Martin comments ‘continued sunshine and England’s longer than expected participation in the World Cup meant July followed a similar pattern to the previous month of June, when pubs were up 2.8%, except that restaurants were hit even harder. The fall of 1.8% in trading in June just got worse in July.’
• Drink-led LfLs were +6.6% on the tail end of the World Cup and the weather. Food sales in pubs were down 3.0%. This accords with Q3 comments made by MARS, MAB and others.
• CGA says ‘drink-led pubs and bars performed by far the strongest with like-for-likes up more than restaurants were down. Food-led pubs also suffered in the sun with negative like-for-likes, although not as dramatically as the restaurant operators.’
• RSM says ‘these results continue the trend we’ve seen since the end of April. Weather and the impact of major social or sporting events remain the biggest factors when it comes to sales in the out-of-home market.’
• RSM says ‘a sales drop of 4.8% year-on-year will be particularly painful on top of ongoing cost pressures [for restaurants]’
• RSM says ‘the long hot summer could not have come at a worse time for food-led operators and time will tell whether the more moderate temperatures we’ve experienced in August will provide some much-needed respite.’
• 12mth moving LfLs are now up 0.5% in the year to end-July compared with inflation of 2.3%.
• Coffer Lyons looked for silver in the cloud saying ‘London had a particularly strong month with overall like-for-like sales up 2.6%. This was driven predominantly by the capital’s pubs market – buoyed by England’s unexpected progression at the World Cup – which were trading 6.1% ahead. The rest of the country had a more difficult period with like-for-like sales down 0.9%.’
• Total sales including new-build in July was up 2.7%, suggesting that, as LfL sales were zero, some 3% capacity has been added in the last 12mths.
• Conclusion re restaurants? Herd like short-termism, cheap cash & lazy me-tooism etc. leads to over-capacity. Latter meets sunshine, World Cup, falling retail footfall and slack demand & chickens come home to roost.
• There are winners, however. Fulham Shore (Franco Manca) hosts its AGM on Thursday this week, for example.
• Restaurant Group announces H1 numbers (to June so not including the poor July referred to above) on 31 August. Given issues with the weather, England’s participation in the World Cup, discounting, slack demand and declining retail footfall and now the overall data presented by CGA Peach, they could make for an interesting read.
• Langton suggested nearly two years ago that RTN should cut its dividend as a part of its restructuring and recovery programme. It has not yet done so. Given that it is cutting prices and its LfL sales will remain under pressure, this may happen at some point going forward.
• Restaurant Group has little debt but IFRS 16 will require it to capitalise the liability of its leases from 1 Jan 2019. This will level the playing field in terms of the optics with largely (MARS, GNK, MAB) and significantly (JDW) freehold businesses as the latter do have debt on their balance sheets. For some time this has maybe suggested that highly indebted companies are more risky than those with large lease liabilities.
PUBS & RESTAURANTS:
• McDonald’s Corp has announced it will invest $6bn in modernising many of its US sites. Steve Easterbrook, McDonald’s CEO and president said: ‘Continuing to reinvest in the brand and keep it relevant for customers today is what it’s all about’.
• MCA data has indicated that the big three fast food brands having their market share eroded. McDonald’s, KFC and Burger King were shown to have 58% of the market in 2018 down from 61% in 2016.
• Office Outlet, one of the UK’s biggest stationery retailers has asked some of its landlords for a three-year rent holiday due to rising costs and weak sales.
• The Treasury says there is high public support for using the tax system to reduce waste from single-use plastics and is now looking at ‘smart, intelligent incentives’ to address the issue.
• Chancellor Philip Hammond is expected to announce new taxes in the autumn budget that will encourage manufacturers to use more recycled plastic in their products and dissuade them from using packaging which is hard to recycle, per Sunday Times. The Treasury had previously suggested that there could be new taxes on coffee cups and takeaway boxes, pointing to the success of the 5p charge on plastic carrier bags that has reduced their use by more than 80%.
• Rules around e-cigarettes should be relaxed as it is less harmful than smoking and a useful tool to help kick the habit, according to a report by MPs.
• More than a third of farmed fruit and vegetables never reach supermarket shelves due to the fact that they do not meet consumers’ expectations of how they should look. A study from the University of Edinburgh found more than 50 million tonnes of fruit and veg are discarded across Europe every year.
• Moody’s has said that ‘Constellation [Brand]’s speculative bet on cannabis is credit negative, but brings large opportunity’. It says ‘the investment is credit negative because it is a pricey, highly speculative and leveraging bet that Constellation and Canopy will be able to benefit from the upcoming legalization of recreational cannabis in Canada and ongoing legalization efforts in other markets. It also marks a significant deviation from Constellation’s core alcoholic beverage business as it moves the company into an entirely new sector that risks distracting management.’
• Child Poverty Action has reported that low-earning parents working full-time do not make enough money to support even a no-frills lifestyle.
HOLIDAYS & LEISURE TRAVEL
• Per Travel Weekly, vice-chairman of Ogilvy Rory Sutherland said ‘We’re going to have restrictions on tourism. There is no other solution. ’The jet set’ was 200,000 people in the 1950s. It’s going to be two billion. Tourism taxes may be necessary to prevent overcrowding. We may have to tinker with differential pricing for tourists.’
• Chinese visitor numbers to the US dropped 8.4% yoy in August with the ongoing tit-for-tat trade war being blamed. The biggest impact is on bookings for group travel from China to the US, currently behind for the rest of 2018 by 34.4% compared to last year.
• STR reports US hotel 2018 and 2019 performance is expected to exceed earlier forecasts. The 2018 forecasts predict RevPAR up 3.2%, ADR up 2.6% and occupancy up 0.6% with 2019 seeing RevPAR up 2.6%, ADR up 2.4% and occupancy up 0.2%.
• Airbnb partners with Wego, the largest online travel marketplace in the Middle East and North Africa. Airbnb listings will now be listed as results on Wego’s platform.
FINANCE & ECONOMICS:
• Greece is now formally out of its bailout.
• Sterling up vs dollar at $1.2745 and down vs Euro at €1.115
• Oil up slightly at $71.62
• UK 10yr gilt yield up 1bp at 1.24%
• World markets: UK up Friday, Europe mixed, US up. Far East higher in Monday trade.
• Brexit & politics:
o Reuters reports PM Theresa May still faces pressure from Jacob Rees Mogg & others to go for a no-deal exit next March. Rees Mogg told the Sunday Times ‘if she sticks with Chequers, she will find she has a block of votes against her in the House of Commons.’
o Co-founder of Superdry donates £1m to campaign for a people’s vote on the final terms of Brexit.
START THE DAY WITH A SONG:
Last Friday’s song was ‘Are You Gonna Be My Girl’ by Jet. Today who sang:
Didn’t ask you why,
What could I say
I was far away
You just walked away
RETAIL NEWS WITH NICK BUBB:
• Mulberry: The upmarket accessories brand Mulberry has become the first House of Fraser concession operator to come clean on the damage done by the collapse into administration, warning today that it will have to provide £3m in exceptional costs in the first half (to end Sept) on its 21 units and that, as trading in HoF has been particularly challenging recently, the key second half results will be badly affected if sales trends continue. It will be interesting to see if other HoF concession operators like ScS and QUIZ also come out and try to quantify the damage…
• Saturday Press and News (1): The main talking point in the Saturday papers was the revelation in the creditors report by EY that House of Fraser went bust owing nearly £1bn, including £30m to XPO, the logistics firm at the centre of the warehouse dispute that has closed the HoF website, as noted by the FT, inter alia. The Times went to town on the HoFsituation, with a double-page spread headlined “Brands left counting the cost, from Gucci to Google”. The Times also flagged that Philip Day’s businesses were owed over £2m by HoF and that he disputes EY’s claim that he withdrew his late rival bid for HoF and the Times also noted that Mike Ashley claims to be “too busy” to meet with MP Frank Field to discuss the HoF pension fund situation and his view that Mike Ashley could come up “smelling of roses” if he does the right thing. The Times also highlighted the contrast in Manchester between
• Saturday Press and News (2): In other news, the Daily Mail’s “Hero of the Week” was Roger Burnley of Asda, after reporting improved Q2 trading, whilst the market reports in the Telegraph and the FT flagged that Kingfisher was hit on Friday by broker downgrades after their disappointing Q2 update, including a Sell note from UBS.
• Sunday Press and News (1): The Sunday papers were almost a Sports Direct/House of Fraser-free zone, although Oliver Shah of the Sunday Times weighed in to the debate, highlighting in his column that “Ashley rushes in as middle ground crumbles”, noting that “we are only at the start of a wave of high-profile retail collapses” and thundering that “Most physical retail is becoming a permanently less profitable business. The implications for banks, landlords and suppliers are huge”.
• Sunday Press and News (2): The most interesting stories in the Sunday papers were the Observer front-page scoop that Julian Dunkerton has pledged £1m to finance detailed polling by the “People’s Vote” campaign for a second Brexit referendum (claiming that if Brexit had happened 20 years Superdry would never have been able to become a global success) and the Sunday Telegraph front page Business scoop that Amazon has emerged as an aggressive bidder for a tranche of the Homebase stores to be closed by Hilco, in order to get warehouse space for its burgeoning distribution operation.
• Sunday Press and News (3): In other news, the Sunday Telegraph and the Sunday Times both flagged that the former Staples UK office supplies business, now owned by the turnaround firm Hilco and called Office Outlet, is having to close its worst stores. The Sunday Telegraph also noted that losses at the Thorntons business now owned by the Italian confectionery giant Ferrero nearly doubled to in the year to August 2017 as revenues slumped, as shops were closed and supermarket supply was targeted. And the Sunday Times revealed that the Retail veteran Rob Templeman has been brought in to broker the dispute between the Jack Wills founder, Peter Williams, and the private equity owners BlueGem.
• News Flow This Week: Things are very quiet this week, leading up to the Bank Holiday weekend, and the only real scheduled news is the latest monthly Kantar/Nielsen grocery market share figures tomorrow morning, although no doubt the Sports Direct/House of Fraser situation will still fill some column inches, as will the silly CBI Distributive Trades survey for “August” on Thursday.