Langton Capital – 2018-08-31 – Whitbread, Restaurant Group, street food & other:
Whitbread, Restaurant Group, street food & other:
A DAY IN THE LIFE:
I know he’s a pack animal, and all, and it’s too deeply ingrained in his DNA to do much about, but out dog seems to take the prize when it comes to intense staring.
Of course, it’s most obvious when there’s food around but, even when he’s zonked out and taking a nap, his eyes will often be open and will be lazily following around whoever’s in the room in the hope that they either 1) drop a sandwich or 2) spot a rabbit that he hasn’t yet noticed.
And, whilst he’s an utter dimwit, he is pretty good at reading body language. The obvious stuff, reaching for your shoes, opening the fridge etc., he got as a puppy but now he’s atuned to the odd sharp movement, cocked ear or puzzled frown that indicate you might have heard the postman, spotted a bin lorry or have an inkling to get yourself a snack.
And you might even drop a sandwich while you’re at it. Have a good weekend, weather looks good & on to the news:
WHITBREAD TO SELL COSTA:
• Whitbread has announced that ‘it has entered into an agreement for the sale of Costa Limited…to The Coca-Cola Company, for an enterprise value of £3.9bn’
• This represents a multiple of 16.4x Costa FY18 EBITDA
• WTB says the sale ‘recognises strategic value of Costa’s brand strength, multi-channel presence and international growth potential’.
• WTB argues that a disposal represents a ‘substantial premium to the value that would have been created through the previously announced demerger given the Coca-Cola system’s global product, distribution and vendingplatform.’
• Group says the net cash proceeds are ‘expected to be approximately £3.8bn at completion, after adjusting for estimated transaction costs and separation costs.’ The group says ‘a significant majority of net cash proceeds intended to be returned to shareholders.’
• Whitbread ‘will also reduce financial indebtedness and make a contribution to the pension fund, which will both provide headroom for further expansion of Premier Inn in the UK and Germany.’
• CEO Alison Brittain says ‘I am delighted that we have agreed the sale of Costa to Coca-Cola for £3.9 billion. This transaction is great news for shareholders as it recognises the strategic value we have developed in the Costa brand and its international growth potential and accelerates the realisation of value for shareholders in cash. The announcement today represents a substantial premium to the value that would have been created through the demerger of the business and we expect to return a significant majority of net proceeds to shareholders. Whitbread will also reduce debt and make a contribution to its pension fund, which will provide additional headroom for the expansion of Premier Inn.’
• WTB comments ‘Premier Inn, the UK’s leading hotel business, will continue to develop its highly successful and unique business model, with even greater focus and financial investment. Premier Inn will continue to take advantage of the considerable structural growth opportunities in the UK and accelerate its network expansion in Germany. This will deliver strong return on capital and significant value to shareholders over the long term.’
RESTAURANT GROUP – H1 NUMBERS:
The Restaurant Group has this reported H1 numbers to 1 July and our comments are set out below:
• Restaurant Group reports LfL sales down 3.7% for the 26wks under review. Total sales down 2.1% at £326.1m.
• Adjusted EBITDA £20.1m versus £25.5m last year. Exceptional costs of £7.6m relating to onerous leases and property write-downs
• Statutory profits £11.7m versus £12.6m last year.
• Adjusted EBITDA £38.1m versus £44.3m. EPS 7.8p (not accounting for write-downs) versus 10.0p last year.
• Adjusted EBITDA margin has fallen from 13.3% to 11.7%.
• Dividend maintained at 6.8p per share. Bank debt £22.8m (2017: £19.3m). Group says the held dividend is ‘reflecting the Board’s continued confidence in progress against the plan.’
• Current trading: LfL sales in 6wks to 26 August up 2.4%, a good performance against the backdrop of continued warm weather
• It says results will be ‘broadly’ in line with market estimates.
• RTN confirms announcement from Food & Fuel that Brunning & Price has purchased the 11-strong business for £14.9m.
• The group says it is seeing ‘good momentum post the end of the World Cup with like-for-like sales up 2.4% for the six weeks to 26 August 2018.’
• RTN says ‘we expect to deliver an adjusted PBT outcome for the full year broadly in-line with current market expectations given the impact of adverse weather and the World Cup.’
• CEO Andy McCue says ‘over the last six months we have delivered against our strategy, creating a more competitive and balanced business, more closely aligned to the growth segments of our market.’
• The CEO continues ‘the turnaround of our Leisure division continues to plan and shows further progress.’
• RTN says ‘our Pubs and Concessions businesses have traded strongly, with both businesses expected to deliver significant total sales growth this year.’
• RTN says ‘we remain focused on developing our offering to meet consumers’ evolving demands and behaviours.’
• Overall, the group concludes ‘following a positive like-for-like sales performance in recent weeks, we remain on track to deliver an adjusted PBT outcome broadly in line with current market expectations for the full year.’
• In many instances, the use of the word ‘broadly’ by companies has indicated a slight miss.
• Including acquisitions, the group will operate 39 new restaurants this year.
• Restaurant Group seems to be guiding to negligible downgrades and it has been able to point to strong trading (albeit really only in line with inflation) since the end of the World Cup.
• This is no mean feat given the continued hot weather, retail footfall declines and the fact that its own prices are lower than they were and that the group subsequently has to sell more meals in order to stand still at the LfL line.
• The group has made some tough decisions and, as we mentioned earlier this year ‘you can’t make an omelette without ripping the bandage off, not in this industry you can’t.’
• It remains a long road back. At one stage, RTN’s market cap exceeded that of JD Wetherspoon.
• We believe that the dividend should have been cut two years ago. But it wasn’t and, despite the fact that IAS 17 comes into effect for accounting periods after January next year, the dividend may be held going forward.
• Capitalising lease liabilities will provide easier comparison with freehold (and debt) heavier companies such as JD Wetherspoon, Marston’s and Greene King.
• Short term RTN must continue to execute on its strategy. News flow is arguably likely to be negative. Certainly, comps are becoming easier but, as mentioned above, price cuts will hit LfL sales and these and also cost increases will impact margins.
• Prima facie, with group is relatively cheap as it is yielding 6.3% but execution is key & the competition will not stand idly by whilst RTN gets its house back in order.
60 SECONDS ON STREET FOOD – FROM STREET TO SEAT:
London street food:
• The London street food revolution has been in full swing since 2010, with the likes of Pizza Pilgrims and Meat Wagon leading the way
• Many of the first wave street food vendors such as Patty and Bun and MEATliquor have now got permanent sites and are expanding
• The industry’s low barriers to entry encourage those with cooking skills to enter the market
The current market:
• Food court operators such as Kerb and London Union are providing many traders with semi-permanent sites
• Street food courts are seen as an early stage in the gentrification of an area, Kerb- Kings Cross, Boxpark-Croydon, London Union-Canada Water
• The street food revolution may be better quality but it comes with a £££ price. It’s a world where hipster image trumps value
Where to from here?
• Street food is a useful tool for property developers
• Food court operators have greater security in income than food traders
• For traders to make meaningful money they have to look at brick and mortar sites.
• Food courts act as incubators for potential restaurant concepts, investors can scour these markets for opportunities
PUBS & RESTAURANTS:
• The Whitbread owned, Beefeater, has increased visits at every day-part as a result of site and menu refreshes, according to the latest MCA Brand Monitor. Share of visits at breakfast increased by 0.3% to 3.7%, between June 2017 and June 2018; with lunch up 0.6% to 2.8% and up 0.9% to 4.4% at dinner.
• Jamie Oliver has stated that his restaurant group ‘simply ran out of cash’ after the group faced a ‘perfect storm’ of cost pressures, the FT has reported.
• Lucozade Sport has announced it will test its drinks and gels in edible pods, which should biodegrade at the same rate as fruits and vegetables.
• Wholesaler Vernon Mascarenhas has told MCA that weather-related food shortages will have a ‘massive impact’ on large restaurant chains and could force restaurants to increase prices by 15%. Mascarenhas commented: ‘This is not just a flash in the pan. This is going to affect us right through until the next harvest in the spring, and the problem for growers is that they have no idea what’s going to happen next year,’ but added ‘I think dining out in the UK is relatively cheap so a 15% price rise won’t be enough to put many people off.’
• UKHospitality has commended the Liberal Democrats’ plans to abolish business rates but stressed that action must be taken immediately to support hospitality businesses. UKHospitality Chief Executive Kate Nicholls said: ‘The Lib Dems’ recognition that we need radical reform on rates and a complete overhaul of the system is positive for hospitality businesses. A move away from a property tax is positive, although any future system must also incorporate a tax on digital businesses to ensure they pay their fair share. We need action immediately, however, or hospitality businesses will continue to struggle against unfair taxes and there will only be further closures. In the short-term, we need to see a freeze of the multiplier, expansion of the pub relief to incorporate the wider sector and positive plans to use digital tax revenue to slash rates for community businesses.’
• Like-for-likes at PizzaExpress’ UK and Ireland business fell 0.7% in the first half of the year as a result of both snow and hot weather, although underlying like-for-likes grew 0.9% over the 26 weeks to 1 July 2018. Jinlong Wang, group chairman and chief executive officer of PizzaExpress, said he expects the UK trading environment to remain challenging.
• Food & Fuel has announced that it is to be purchased by Restaurant Group’s Brunning & Price subsidiary.
• Food & Fuel’s 11-strong estate ‘of prime London gastro pubs, was started in 2006 by Karen Jones, Jo Cumming and Peter Myers’. Karen Jones comments ‘we have owned and operated our pubs for over twelve years’ but says their future ‘we best secured under the umbrella of a larger and well-regarded company’. Brunning & Price has paid £14.9m for the group representing 8.1x unit profits of £1.9m.
• Jones, Cumming and Myers will continue to operate their 7-strong JV with EI Group.
• Fleurets has announced that its chairman, Martin Wills, will be retiring at the end of September after 34yrs with the firm.
• The FT has said that WH Smith is perfecting the art of ‘piling it low and selling it expensive’.
• As previously flagged, payday loan company Wonga has gone into administration.
• Amazon has opened its second Amazon Go convenience store in the US. Another two are currently being planned.
• New research shows that the number of UK breweries has increased by 64% over the past five years, creating an overcrowded marketplace. This growth has been helped in part by tax breaks such as Small Breweries’ Relief, introduced in 2002, but also due to the rising popularity of craft beer and independent breweries. The research, provided by financial intelligence provider Plimsoll Publishing, suggests that many of these breweries are trying to compete with rising costs, falling margins and a lack of investment, and hence further buyouts could be on the cards.
• Carlsberg plans to invest €100m (US$117m) to upgrade its Kronenbourg brewery in Obernai, France. ‘Today, Carlsberg’s rich heritage and close ties to France are perfectly united with our ambitions to invest further in our successful French business,’ said Carlsberg CEO Cees ‘t Hart.
• ‘We are proud of our position as the leading French brewer and of the impressive growth of Kronenbourg 1664 inside as well as outside of France. In order to continue to grow, we need to invest, and today’s announcement It is a testament to our shared values and promising growth opportunities.’
• The Rural Development Programme for England (RDPE) has provided Derbyshire-based real ale producer Peaks Ales with £222,000 of funding to convert its micro-brewery into a visitor centre.
• The plastic bag fee could be increasing to 10p as part of the government’s plan to tackle plastic pollution.
• In an effort to reduce plastic waste, Aramark has committed to reducing the use of single-use disposable plastics across its global operations by 2022.
• Papa John International, Inc.’s board has fired the company’s founder and largest shareholder, John Schnatter in response to accusations of malfeasance and incompetence.
HOLIDAYS & LEISURE TRAVEL
• VisitBritain predicted a bumper 7.3m staycations over the August bank holiday, primarily due to this summer’s warm weather. UK chain Hallmark Hotels reported a year-on-year rise in July and August bookings of 96% – up 2,000 – across its 26 properties.
• In relation to the deaths of a British couple in Egypt, Thomas Cook has stated ‘chief executive Peter Fankhauser has flown to Egypt today to meet with the Egyptian prime minister, His Excellency Dr Mostafa Madbouly. They will discuss the recent tragic deaths of Mr and Mrs Cooper in Hurghada and the ongoing investigation by the Egyptian authorities.’
• Mark Warner will re-open a the Paleros Beach Resort on the Ionian coast of Greece in May 2019 after being completely redesigned in a multi-million Euro investment.
• STR data shows U.S. hotel occupancy was flat at 69.5% during the week of 19-25 August, while ADR increased 1.8% to $127.55 to lift RevPAR up 1.8% to $88.69.
• Apple acquires Akonia Holographics in a move linked to Apple’s interest in augmented reality. The company reportedly plans to release consumer AR glasses within the next few years.
FINANCE & ECONOMICS:
• Sterling down against dollar at $1.3012 but up vs Euro at €1.1151.
• Oil up at $77.73
• UK 10yr gilt yield down 2bps at 1.45%.
• World markets: All down yesterday and Far East down in Friday trade.
• Brexit etc.:
o Panasonic moving HQ from London to Amsterdam.
o Raab still confident. Bookies the other way.
o France ‘to help the UK leave the EU’.
PRIOR DAYS LATER TWEETS:
• Later tweets: Restaurant Group H1 numbers tomorrow. Betting on minus 4% LfLs, some talk of green shoots, bad July, better August & held dividend.
• JD Wetherspoon boss Tim Martin tells Brightbart News he is working towards a no-deal Brexit, which would be good for the country
• Evolution continues in retail. Uber aiming for 400 sites but 52% of BHS stores still boarded up 2yrs after collapse
• HotStats reports better August for UK hotels. Staycations on the up.
• Dominic Raab confident of getting a deal. Bookies still disagree but EU is talking about a ‘bespoke’ relationship
• WH Smith tail wagging dog. Travel good, high street still about screwing more & more margin from moribund sales. Overall, in line.
• John Lewis fashion good, electricals & homeware bad. Waitrose hit by cooler weather after good summer sales overall
START THE DAY WITH A SONG:
Yesterday’s song was, of course, I’m Gonna Be (500 miles) by The Proclaimers. Today, who sang:
Bight your lip, and take a trip,
Though there may be wet road ahead
And you cannot slip
RETAIL NEWS WITH NICK BUBB:
• Consumer Confidence Watch: The widely followed monthly GFK Consumer Confidence index was published overnight and makes surprisingly good reading, with the overall index rising to -7 in August from -10 in July, matching the 2018 highs struck in March and May. Economists who took part in a Reuters poll had mostly expected the reading to remain at -10. Joe Staton, GfK’s client strategy director, said “We are just months away from the Brexit crunch but there is no sign – yet – of any crash in consumer confidence. The core index continues to muddle along in negative territory, but Armageddon seems a distant prospect”. But polling was done in the first half of the month, when the heatwave was still with us, infusing consumers with a mellow mood, and time will tell how the recent “Brexit babble” about a “no-deal” affects confidence next month…
• Trade Press: Neither Retail Week or Drapers magazine have been published today, because of the Bank Holiday, but both have been working hard on features for their websites, eg Drapers have features on Mike Ashley and Philip Day’s collision course over House of Fraser (“An epic timeline of the twin-track career histories of Mike Ashley and Philip Day, which led them to clash over House of Fraser”) and Is Turkey’s supply chain unravelling? (“As the Turkish lira slumped to a record low earlier this month amidst political and economic turmoil in the country, Drapers investigates what impact it might have on the fashion industry”).
• BDO High Street Sales Tracker: We flagged yesterday that sales at John Lewis did not exactly sparkle last week, despite helpfully autumnal weather and a soft comp, and today’s BDO High Street Sales Tracker for small/medium-sized Non-Food chains for last week, w/e Sunday Aug 26th, is also subdued. The BDO figures are, it should be noted, unweighted…but, for what it’s worth, BDO Fashion Store LFL sales were 4.0% down and, including Lifestyle and Homewares sales, Total Store LFL sales were down by 1.1%. Total Online sales (which are still separately reported by BDO) were up by 17.1%, however, with Online Fashion sales alone up by 20.4%.
• News Flow Next Week: Things are busier next week, as we head into September, kicking off on Tuesday with the BRC-KPMG Retail Sales for August and the Halfords Q2 update. On Wednesday we get the John Lewis Oxford Street revamp launch, whilst Thursday brings the Dixons Carphone Q1 update/AGM and then the Carpetright AGM is on Friday.