Langton Capital – 2018-09-14 – JD Wetherspoon, Ten Ent, Bill’s, John Lewis & other:
JD Wetherspoon, Ten Ent, Bill’s, John Lewis & other:
A DAY IN THE LIFE:
Lot of admin to catch up on, form-filling and the like. And JD Wetherspoon has reported FY numbers so a shade busy. On to the news:
JD WETHERSPOON FULL YEAR NUMBERS:
JD Wetherspoon has this morning reported its full year numbers to 29 July and our comments thereon are set out below:
• JDW reports LfL sales up 5.0% for the year
• Total revenue £1.69bn vs £1.66bn last year
• PBT £107.2m vs £102.8m
• EPS 79.2p vs 69.2p
• Full year dividend unchanged at 12.0p
• Chairman Tim Martin says ‘like-for-like sales in the six weeks to 9 September increased by 5.5%.’
• Mr Martin adds ‘the company has had a reasonable start to the financial year, but taxes, labour and interest costs are expected to be higher than those of last year, so we estimate that like-for-like sales growth of about 4.0% will be required for the company to match last year’s record profits.’
• Sales were up 5.2% in the portion of the year to 5 July. This suggests a slowdown in the remainder of July but, as the group says, sales picked up again in the 6wks to 9 Sept
More on Trading, new openings etc.:
• JDW says it is ‘pleased to report a year of progress for the company, with record sales, profit and earnings per share before exceptional items.’
• The co says it has generated EPS growth of 15.4% compound since listing in 1992
• Wet sales in the year were +5.1% with food sales also up by 5.1%. Machine sales grew by 2.9% and accommodation by 2.3%
• The group points out that net interest was covered 4.8 times by operating profit before interest, tax and exceptional items (2017: 4.6 times).
• Chairman Tim Martin says that costs will rise in the near term but, if the UK leaves the EU without a trade deal, food prices should fall
• The chairman also says that no-deal would mean the UK not paying £39bn to the EU. Dominic Raab and Mrs May have alluded to a reduced payment
Balance sheet, debt etc.:
• JDW reports total capital investment was £110.1m in the year
• The group saw a cash outflow of £0.6m.
• JDW says ‘in view of the level of capital expenditure and the potential for investments, the board has decided to maintain the dividend at its current level for the time being.’
• Total debt is £726.2m (2017: £696.3m) representing 3.4x EBITDA
• During the year, the company opened 6 pubs with 18 sold or closed. At the year end, JDW had 883 pubs open
• JD Wetherspoon has reported numbers ahead of estimates but held its dividend as it sees opportunities for growth or for purchasing assets that are currently leased.
• The company says that LfL sales will need to rise by 4% this year in order for profits to stand still.
• JDW’s shares have been strong for some time and, though not cheap, the company is a proven operator in tough conditions.
• The group’s shares trade at around 16x this year’s prospective earnings and yield less than 1%.
• Its recent decisions to take branded products from its bars could help margin though, as the company says above, it will need material sales growth in order to hold profits in line with FY18.
• The group does not operate in a vacuum and, if competitors continue to cut prices and offer deals, it could be impacted.
PUBS & RESTAURANTS:
• Restaurant company Dishoom has reported accounts to Companies’ House for the year to end-Dec 2017 saying that revenues rose from £27.8m to £35.6m but adjusted EBITDA fall from £2.98m to £2.25m and PBT slid from £1.75m to £0.87m.
• Richard Caring, the serial leisure sector investor has told the MCA that he received an approach regarding Bill’s last year but he didn’t think the chain ‘dressed well enough to be sold’.
• Prosecco is set to produce almost 600m bottles of fizz from the 2018 harvest, making it nearly double the yield of Champagne.
• Bristol has seen the greatest growth in managed pub and restaurant sales in the four-week period to 11 August. Data from CGA has shown that Bristol saw sales rise by 5.6% y-o-y.
• John Lewis has warned that profits have fallen to almost zero in H1 2018, as the chain matched discounting ‘extravaganza days’ by rivals. John Lewis stated: ‘With the level of uncertainty facing consumers and the economy, in part due to ongoing Brexit negotiations, forecasting is particularly difficult but we continue to expect full year profits to be substantially lower than last year for the partnership as a whole’.
• A popular Chinese restaurant chain, Xiabu Xiabu, has seen nearly $190m wiped from its market value after a pregnant woman found a dead rat in her soup.
HOLIDAYS & LEISURE TRAVEL
• National Caravan Council reports over 1m caravans are currently owned by UK holidaymakers. The Caravan & Motorhome Club saw a 12% uplift in summer bookings on the back of the weaker pound and good UK weather.
• Michael O’Leary, chief executive of Ryanair has stated that the budget airline was ‘willing to accept strikes’ if it meant that it could keep ticket prices low. Ryanair cabin crew in Spain, Portugal and Belgium staged a 48-hour strike in July, leading to the cancellation of about 600 flights.
• E. coli has been blamed as the cause of death of the British couple who died after falling ill at a holiday resort in Egypt. The Egyptian authorities has stated that there were no toxic or harmful gas emissions or leaks in the couple’s room.
• STR data has shown that the US hotel industry saw occupancy decline 3.5% to 61.7% during the week of 2-8 Sept, with ADR increasing 1% to $121.95 and RevPAR falling 2.4% to $75.25.
• Manchester City has reported a record year financially saying that, in the 2018 season, it generated £500.5m in revenues, up 6% on last year. Pre-tax profits were up £1m at £10m.
• Gambling group GVC Holdings has stated that it has found an extra £30m of cost savings from its £4bn acquisition of Ladbrokes Coral, as the group reported solid H1 results. The group benefited from the World Cup tournament in July.
TEN ENTERTAINMENT H1 NUMBERS:
Ten Entertainment Group Wednesday released its numbers & trading update for the half year to 1 July 2018. Our comments are set out below:
• Solid organic and acquisitive growth has been obscured by extreme, weather-driven swings in like-for-like sales.
• We note that July falls outside of the reporting period, when hot weather materially affected performance over the period. The August +9.8% figure also comes despite a tough comparative in 2017.
• Group adjusted EBITDA is only ‘broadly’ in line. That said, total sales were up an encouraging +7.7%. Of this, 3.1% was like-for-like, proving the company’s current ability to drive growth in its existing estate.
• One site has been closed, leaving TEG’s total estate at 43 sites. Four new sites have been bought, another four have adopted ‘Pins & Strings’ and two units have been refurbished.
• Ten Entertainment Group has three key growth routes: incremental organic growth, growth through acquisition and ongoing investment into both its estate and support platform.
• Organic growth has been encouraging, overall, with like-for-likes up 3.1% in the period. However, a tricky July since then – where LfLs tumbled 18.6% — has brought the average for the year down to 0.8%.
• According to management, the last time the company had such extreme swings in like-for-likes was over a decade ago.
• Spend per head increased 1.9% to £14.65, with increases in all categories (bowling, machines, drink and food). Games per stop has also jumped 70% from 223 to 378 as a result of investment and improved tech.
• Lease re-gears, in which TEG takes advantage of the landlord’s appetite for an experiential offer on its retail development by renegotiating leases at cheaper rates, are helping margins.
• TEG has reduced the rent bill on two sites by a combined 15% in exchange for committing to the site for a longer period. Management will take advantage of similar opportunities as and when they come up.
• Refurbishment was completed at two sites during the half – Worcester, acquired in 2016, and Rochdale, acquired in 2017.
• TEG is also excited about a new ‘bolt-on’ annex at an adjacent unit to Star City in Birmingham, in conjunction with a lease re-gear that includes a rent reduction, a rent-free period and a £300k capital contribution from the landlord on top of the added space.
• This should increase capacity by six lanes to 28 and management hopes more deals of this nature can be negotiated with future re-gears.
• The group has made ‘good progress’ with its Pins & Strings roll-out, with four completed this period and another eight scheduled for H2. This will make for 18 sites with the technology by FY2018. The four sites completed in the period were Acton, Cambridge, Dudley and Eastbourne.
Site Acquisition and Tenpinisation:
• Net new space contributed 4.6% of sales growth and the group has already acquired four new sites this year (Warrington, Chichester, Luton and Leeds), although all four sites require ‘significant investment in both systems and facilities’.
• These sites contributed a trading loss in the period of £140k but the group is confident of delivering a return on investment ‘in line with [its] historical levels of c.30%’ and expects a positive contribution from Q3 onwards.
• Overall, Ten Entertainment Group will probably be happy with these results. Weather-related disruption is no secret and was flagged up well in advance of its half year update, but there will no doubt be a degree of frustration that like-for-like swings have obscured steady operational progress.
• The group’s strategy of consolidating a fragmented market makes for a roll-out with good visibility and high returns on investment. That said, the roll-out is finite and it is unclear how TEG will grow in ten to fifteen years’ time, once it operates an estate of 80-100 bowling sites.
• There is also the inconvenient fact that Essenden ran into trouble before being taken private and rebranded as Ten Entertainment. Along with that is the uncertainty that comes with CEO Alan Hand stepping down in December and the large director sales reported in October of 2017, when three directors sold a combined £30.6m of stock at 180p.
• The introduction of IFRS 16 is also a blot on the horizon. TEG has an annual rental bill of over £11m and non-cancellable operating lease commitments of £142.7m. This is substantial for a company with a market capitalization of c.£150m and will cause ‘material increases in depreciation and finance costs’.
• Assuming the wheels don’t come off, and accounting changes are anticipated by the market, TEG has a lot of low hanging fruit to aim for. Pins & Strings is transforming the group’s Games Per Stop metric and freeing up staff to focus on more customers rather than bowling lanes. Acquiring underinvested sites and ‘Tenpinising’ them is now a tried and tested way of generating profit and driving like-for-like growth in future years.
FINANCE & ECONOMICS:
• Bank’s MPC votes unanimously to leave rates at 0.75% with QE at £435bn. Bank says ‘in emerging market economies, indicators of growth have continued to soften and financial conditions have tightened further, in some cases markedly. Recent announcements of further protectionist measures by the United States and China, if implemented, could have a somewhat more negative impact on global growth than was anticipated at the time of the August Report.’
• Sterling up at $1.3117 but unchanged vs Euro at €1.1216
• Oil down to $78.35
• UK 10yr gilt yield up 1bp at 1.50%
• World markets: UK down yesterday, everywhere else up.
o Britain still aims to secure a deal with the EU based on Chequers’ proposals reports number ten.
o Britain’s threat not to pay the £39bn does not extend to contractual obligations. These, unquantified, would still be payable in any circumstances. FT says it is ‘pretty much inconceivable is that the UK would use “no deal” to pay nothing to Brussels at all.’
o John Lewis says that it didn’t blame Brexit for the 99% slide in its profits. Dominic Raab has said that businesses shouldn’t use Brexit as an excuse for poor performance. John Lewis says it was the weaker pound that hit it.
o Government says UK drivers may need an international drivers’ license to drive on the continent in the event of no deal. Ditto mobile phone roaming charges would come back. Healthcare reciprocality not mentioned.
o Bank says disorderly Brexit could force house prices down by as much as 35%. It would make them more affordable for younger people but hit the wealth of older consumers and impact spending as a result.
PRIOR DAYS LATER TWEETS:
• Later tweets: Delivery considerations. May not be a good idea, over time, to give away (and perhaps subsequently lose access to) customer information
• Is increased food delivery a lucrative area of growth or a reaction from a position of weakness on the part of restaurants?
• London hotels register very good august with REVPAR +8.2% per STR. Occupancy up 5.6% and rate +2.5%.
• Brexit Secretary Dominic Raab says UK won’t pay £39bn divorce bill if unable to agree deal. Other suggest it’s a contractual inevitability
START THE DAY WITH A SONG:
Yesterday’s song was Peaches by the Stranglers; today who sang:
Well, hot and heavy, pumpkin pie,
Chocolate candy, Jesus Christ
Ain’t nothing please me more than you
RETAIL NEWS WITH NICK BUBB:
• Nick is taking a well-earned break.