Langton Capital – 2018-10-12 – Pat Val developments, Compass, holidays post Brexit etc.:
Pat Val developments, Compass, holidays post Brexit etc.:
A DAY IN THE LIFE:
Patisserie Valerie has managed an average of two RNSs a day for the last couple of days and, if speculation that the group may announce a pre-pack as early as today (BBC etc.) then it may continue to provide us with work.
Nothing as we write. No pressure to do it ‘before markets open’ of course, as the shares are suspended. On to the news:
YESTERDAY’S STOCK MARKET UPDATE – Co cannot carry on without cash injection.
• Patisserie Holdings yesterday updated further on its situation saying that:
o 1. There is ‘a material shortfall between the reported financial status and the current financial status of the business.’
o 2. It says: ‘without an immediate injection of capital, the Directors are of the view that that is no scope for the business to continue trading in its current form.’
• The above has led the Evening Standard & others to suggest that perhaps only chairman and 37% equity owner Luke Johnson can move quickly enough to provide funds.
• This is a rock or a hard place. Potential accusations of favouritism, preferential treatment etc. will have to be weighed against the prospects of the business closing, the jobs of 2,500 people etc.
• The Standard says some are suggesting ‘trading in the shares will resume at a fraction of their pre-crisis value, then he [Mr Johnson] will buy the business himself for a snip.’
• Others are now suggesting a pre-pack as soon as today. No announcement at time of writing.
FURTHER THOUGHTS – Co apparently in good health in May this year, cash flow healthy, cash in the bank, acquisitions possible & directors sell stock.
• Although CAKE has moved swiftly to update the market, we are little-the-wiser as to what has caused the company’s current cash crunch.
• The FT and other sources have speculated that an administration (and a potential pre-pack) could come as soon as today (Friday).
• On 15 May, at the group’s H1 numbers, CEO Paul May reassured shareholders that ‘the Group remains cash generative and the Board has declared an interim dividend for this financial year of 1.44 pence per share.’
• Mr May said ‘our business model converts profit to cash efficiently and delivers consistent and predictable cash flows.’
• It is hard to see how these statements are consistent with the position that the group currently finds itself in.
• Mr May, who is also a director at Restaurant Group, said CAKE was ‘well positioned to make strategic acquisitions should appropriate opportunities arise.’
• The group, according to Sky, which frankly has a history of getting these things right, was said to have been earlier this year preparing a bid for café chain Gail’s, which is also owned by chairman Luke Johnson. Sky suggested that a £35m placing was being organised but the bid for Gail’s did not go ahead.
• The FT points out that this year ‘Paul May, CEO, and Chris Marsh, the finance director who was suspended on Wednesday, have sold a total of 3.3m shares…realising gains of about £4.5m.’ The FT also says that ‘Lee Ginsberg, head of the group’s audit committee, sold shares in June [and] James Horler, the other non-executive director, has also sold stock this year. Neither responded to requests for comment.’
• Of course, directors have to be able to sell shares from time to time otherwise they end up with far too many of their financial eggs in one basket.
• The FT says today ‘underlining the seriousness of the situation, a person familiar with events said on Thursday that PwC, the professional services firm, was “in there and gearing up for an administration, which could come on Friday”. The person added that administration was not the only option open to the group.’
IMPLICATIONS OF RECENT ANNOUNCEMENTS:
• If creditors demand cash up front, then Pat Val will suffer a working capital outflow.
• This is likely happening as we write.
• The scale is hard to quantify but, if it were to equate to the supplies relating to say 8wks sales, it would mean 8/52 x £120m times the cost percentage of goods sold, say 30%. That equates to around £6m.
• That, added to the £1m owed to the HMRC and the cash shortfall of perhaps £28m, gives circa £35m.
• This is a large sum but, in the context of a group that was worth perhaps £450m on the stock market earlier in the week, it would be a shame if it brought the company down.
• There will clearly be a major stewards’ enquiry into what happened. We still don’t know what happened but auditor Grant Thornton’s performance will come under scrutiny.
• Why are the shares still suspended? It’s the nature of these things that suspensions persist but, in theory, any news that there is, is in the market. Although perhaps that isn’t true yet.
• The Tesco accounting scandal (pressure to hit targets, make bonuses) comes to mind. Ditto the cash crunch faced by Conviviality (poor accounting) and the overstatement of performance and understatement of risks at Carillion (poor accounting, understatement of risk, overoptimism etc.). Mr Leeson at Barings hid liabilities in his desk & many others have done the same over the years. Not pleasant company for the shareholders of CAKE to find themselves in.
PUBS & RESTAURANTS:
• Greene King has announced the appointment of Peel Hunt alongside Citigroup as joint broker.
• Darwin & Wallace has announced that its 7th site, no17 Dickens’ Yard, will open in the heart of Ealing on 10 November.
• Stonegate Chair Ian Payne has won the British Beer and Pub Association Chairman’s Award at the industry leaders annual dinner in London.
• Ping Pong Fight Club is returning to Leeds with Chinese beer brand, Tsingtao.
• US restaurants performed strongly in Q3. LfL store sales were +1.2%, the best since end-2015.
• The WSTA reports that sales of wine and spirits in UK pubs have risen by £270 million to reach just under £6 billion in the past year.
• Compass Group has announced the appointment of Karen Witts to its Board as Chief Financial Officer.
• PE house TPG has invested in payments company FreedomPay Inc.
HOLIDAYS & LEISURE TRAVEL:
• The ABTA Travel Convention in Seville has been told that a ‘disastrous’ no-deal Brexit will not happen. Saga Travel CEO Robin Shaw has said that a deal will be done in any case as the costs of not doing one are too great for boths sides.
• Elsewhere, fears have been expressed that January sales, traditionally very strong for summer of the same year, will be poor this year ahead of the 29 March Brexit Day. Alistair Rowland, group general manager for specialist retail at The Midcounties Co-operative, said: “Concern about Brexit is creating a lag in volumes for forward bookings. If there is no deal this side of Christmas, January will be tough.”
• London Luton Airport had its busiest-ever September last month, as more than 1.5 million passengers used the airport.
• US hotels reported occupancy down 0.9% in the week to 30 Sept with rate up 2.4% and REVPAR 1.5% higher
• Liverpool could become the first city in the country to introduce a hotel tax.
FINANCE & ECONOMICS:
• The US Fed will keep on raising rates to combat a tightening labour market reports Kansas City Fed President Esther
• President Donald Trump has said that Fed policies are “ridiculous”
• Mr Trump says his trade policies have hurt China. He says “I have a lot more to do.” Mr Trump told Fox News that China had lived too well for too long.
• Sterling up v dollar at $1.3237 but down v Euro at €1.1406
• Oil down a little further at $81.24
• UK 10yr gilt yield down 4bps at 1.68%
• World markets: down yesterday with Far East mixed in Friday trade. London forecast to open up about 30pts.
• Brexit etc.:
o FT says it would be ‘technically challenging’ to hold another referendum.
o OBR says an “abrupt and disorderly” Brexit could have a severe short-term impact on the UK economy
o OBR points out lack of precedents make the impact difficult to predict. It points out that the 3-day week in 1974 cut GDP in one quarter by around 3%.
PRIOR DAY LATER TWEETS:
• Later tweets: Pat Val has moved quickly to fess up. But it must pay its £1.14m tax bill or face the High Court on 31 Oct.
• CAKE must retain the support of its suppliers, its staff and its customers. Working capital requirement will likely rise. May need funds.
• Non-fatal damage needs to be very, very quickly topped out and dealt with if it is not to worsen and become a really major problem.
• CAKE – Not what the doctor ordered. No good interpretation. It’s all shades of bad. Best of luck to all concerned, say we.
• Revolution Bars Group last night announced that merger talks with Deltic were off.
• ‘High growth’ stocks clobbered. Fevertree -30% in month, Games Workshop -21% in month, Gear 4 Music -45% in year
• UK / EU deal possible for next Weds says M Barnier. UK just needs to agree to all EU demands, dump Ulster etc.
• Pat Val RNSs that it has a ‘material shortfall between the reported financial status and the current financial status of the business.’
• CAKE says ‘without an immediate injection of capital…there is no scope for the business to continue trading in its current form.’
• Room for chairman or PE or both to swoop in and save the day. But existing shareholders are being prepared for the worst…
START THE DAY WITH A SONG:
• Back on Monday. Team are swanning around Warsaw.
RETAIL NEWS WITH NICK BUBB:
negotiations with some landlords, and the first evidence of that comes today in the form of the news that Sports Direct is buying the freehold of Frasers in Glasgow from the council for no less than £95m (which is more than he paid to buy the whole business from the administrators). Time will tell if that is money well spent, but this is one of the flagship HoF stores and the promise is that Sports Direct “will invest in the property to further elevate and enhance this iconic department store”, although no figures are mentioned and completion of the deal will not take place until Jan 2020, oddly enough…
Kingfisher: It doesn’t seem that long ago that Kevin O’Byrne was CFO at Kingfisher (he’s now CFO at Sainsbury), but it’s actually over 6 years, so perhaps we shouldn’t be surprised at yesterday’s news that his Scottish successor, Karen Witts, is moving on, to fill the CFO vacancy at the catering group Compass. In case you’re wondering, the latter is a much bigger company, with a market cap nearly 5 times the size, and at Compass she won’t have to endure the constant Anglo-French infighting that seems to bedevil Kingfisher…
Trade Press: Retail Week magazine has not been published this week, but Drapers magazine is out today and the striking cover is a photo of the beach scene created for the Paris Fashion Week Spring 2019 catwalk. In terms of News stories, the main focus is on the fact that any French Connection buyer is going to need deep pockets, quoting our view that there is unlikely to be a great deal of interest in the business and that the brand has always been expensive. Drapers also flag that Mike Ashley is looking at buying several House of Fraser freeholds, independent footwear retailers have reported a slow start to autumn trade and fashion suppliers have warned that a spate of cuts to credit insurance cover is “killing” their ability to do business. In terms of features, Drapers have an article about the success of Boohoo’s fast-growing Pretty Little Thing brand (quoting our view that, as well
BDO High Street Sales Tracker: We flagged on Wednesday that Home sales at John Lewis continued to struggle last week and today’s BDO High Street Sales Tracker for medium-sized Non-Food chains for last week, w/e Sunday Oct 7th, also highlights that their Homeware sales were weak, 6.8% down on last year (including Online), albeit against quite a tough comp. BDO Fashion sales were marginally up last week, however, and Total sales were up by 0.4% (3.7% down in terms of Store LFL sales and up 12.9% Online).
News Flow Next Week: Things are busy again next week, kicking off with the Footasylum interims on Tuesday, closely followed by the latest Kantar/Nielsen grocery sales figures. The ASOS interims are on Wednesday. Then Thursday brings the ONS Retail Sales for September and the John Lewis Cheltenham store opening.