Langton Capital – 2019-01-23 – Marston’s, JDW, CAKE, discounting, access to labour, holidays & other:
Marston’s, JDW, CAKE, discounting, access to labour, holidays & other:
A DAY IN THE LIFE:
Too much going on this morning so will have to move straight on to the news:
PATISSERIE HOLDINGS – ADMINISTRATORS APPOINTED:
• Patisserie Holdings has called in administrators.
• The group says: ‘as a direct result of the significant fraud referred to in previous announcements, it has been unable to renew its bank facilities, and therefore regrettably the business does not have sufficient funding to meet its liabilities as they fall due.’
• Hence ‘the Directors have appointed partners at KPMG as administrators to the Company and its various subsidiaries.’
• Mr Johnson ‘has personally extended an unsecured, interest-free loan of £3m to help ensure that the January wages are paid to all staff working in the ongoing business.’
• The company adds ‘this Loan will also assist the administrators in trading as many profitable stores as possible while a sale process is undertaken.’
• The Administrators have said that 70 stores will close immediately. Buyers will be sought for around 121. KPMG says ‘our intention is to continue trading across the profitable stores, as collectively, the brands have a strong presence on the high street and have proven very popular with consumers.’
• CAKE has also announced that Canaccord has resigned as the company’s broker and Nomad.
• There isn’t a conclusion at this stage, not by a very, very long shot.
• However, if it’s possible for a deathly silence to reverberate around our little bit of the business world, then that’s what’s happening now.
• But any silence won’t last long. It’ll be followed by the noise of activity as KPMG, which has been in the company for a week or so, does what it believes needs to be done regarding the payment of staff, the closure of some units and the (hopefully profitable) continued trading of other.
• There’ll then be some tidying up and selling of assets to be done, then another silence and then, perhaps, when there is just a big hole that used to be occupied by £500m of equity value, the blame game will take centre stage.
• It is remarkable that a relatively simple business (you buy your cakes, you sell your cakes) could function at such a fundamentally incorrect level of perceived profitability that it could not be rescued by the package of loans and new stock put forward and recommended by directors & advisors in October last year.
• The subsequent facts suggest the underlying numbers were so utterly toxic that advisors concluded, despite £25m having just been shovelled in that direction, it was not worth putting more good money after bad.
• It feels to us as though there must have been a veritable cottage industry of quite skilled fabricators at work maintaining this fraud, so professionally and for so long.
• But now CAKE’s staff, creditors, landlords, lenders and shareholders are about to pay the price.
• A skilful bad guy can be a real threat but just how so many people (directors, advisors, auditors etc.) could have the wool pulled over their eyes so comprehensively and for so long is a question that won’t remain unasked forever.
MARSTON’S Q1 TRADING UPDATE:
Marston’s has this morning updated on trading to 19 January 2019 and our comments are set out below:
• Revenues across all of the group’s managed pubs combined is up by 1.4% over the 16wk period and up by 5.7% over the Christmas fortnight
• Margins are in line with last year over the 16wks as a whole. This is no mean feat given cost increases and the level of discounting elsewhere
Trading – Destination & Premium:
• LfL sales were up 0.5% over the 16wk period at the group’s Destination & Premium units. LfL sales for the Xmas fortnight were plus 4.5%
Trading – Taverns:
• Taverns LfL sales were +3.2% for the 16wk period and +8.6% for the fortnight including Christmas
• The group says ‘trading has continued to be strong’.
Trading – Leased & Tenanted:
• Net profits were up by 1% over the 16wks at Marston’s leased & tenanted pubs. Trading was ‘robust’
Trading – Beer Company:
• The purchase of Charles Wells has now annualised & beer sales are effectively LfL.
• Total product LfLs were +3.5% with own brands up 2.5%. Sales were strong in the off-trade and the free-trade.
Balance Sheet, Cash Flow & Debt:
• The group has updated on its debt targets saying that it aims to have reduced borrowings by c£200m by 2023.
• MARS will cut spending on new-build pubs to c£25m and it will concentrate on accommodation
• Disposals will edge up slightly and should settle at around £80m to £90m
• Cash flow from operations should be enhanced due to reduced pension payments, reduced capex (as above) and, over time, moves will be made to cut securitisation interest charges by £5m to £10m p.a.
• Marston’s has announced that it will maintain its dividend over this period
Conclusion & Outlook:
• The reduced spending on new builds, net of interest savings, could cost a net £1m p.a. for the first year with an additional £1m p.a. thereafter
• That said, risks will be reduced in what is a challenging environment via lower levels of debt, etc.
• CEO Ralph Findlay reports ‘Marston’s continues to perform well and this is a creditable performance in a challenging market.’
• Mr Findlay comments ‘Taverns and the Beer Company both delivered strong trading over the core festive period in particular, continuing the trajectory of recent months, and our managed food-led pubs also returned to growth.’
• The company says ‘we operate in increasingly uncertain times from a political and macro-economic perspective and, as such, we remain cautious about the potential consumer outlook until there is more clarity. However, we are confident of delivering further profitable growth this year, whilst focussing on our strategic priorities of generating cash and delivering our stated £0.2bn debt reduction target between 2020 and 2023.’
• The company concludes ‘in addition, we are committed to maintaining the dividend at the current level during this period and believe that the combination of these actions will drive long term value for shareholders.’
• Marston’s has held margin in an environment in which many of its competitors have been discounting and in which costs have been rising. The group will experiment with price reductions in some areas as the game has always been to balance margins with like-for-like sales growth.
• The group has a relatively small presence in London (where trading has been good). likewise in some of the major city-centres
• the numbers confirm our view that wet sales have been outperforming food – in addition to which, Marston’s is indicating that accommodation sales have held up well.
• Overall, the group is not guiding to any change in profit forecasts and there should be a sense of relief that both sales are progressing well and that margins have been held.
• Marston’s shares continue trade on bot a PER and a yield of a little over seven. This is cheap in the context of a company where the estate is still growing in terms of both size and quality and where debt is now falling.
• Trading is not easy but Marston’s has a estate of well-managed and well-maintained, largely freehold properties. It is selling product that the consumer would like to buy at a price they are prepared to pay.
• Lodges, craft brewing and food (in the longer term) remain growth areas. Marston’s is a major brewer and has a large wet-led element to its estate and is well-placed to grow and to create further value for its shareholders.
JD WETHERSPOON UPDATES ON Q2 TRADING:
JD Wetherspoon has this morning updated on trading for 12wk period to 20 January & confirms that H1 profits will be down on last year. Our comments thereon are set out below:
• JDW says ‘for the first 12 weeks of the second quarter (to 20 January 2019), like-for-like sales increased by 7.2% and total sales by 8.3%.’
• The group adds ‘in the year to date (25 weeks to 20 January 2019), like-for-like sales increased by 6.3% and total sales by 7.2%.’
Balance sheet, debt etc.:
• JDW says ‘since the start of the financial year, the Company has opened 2 new pubs and sold 6.’ The group adds ‘we intend to open between 5 and 10 pubs in the current financial year.’
• JDW has spent £56m in the year ‘to date on buying the freeholds of pubs of which we were previously tenants.’
• The company says it ‘remains in a sound financial position. Net debt at the end of this financial year is currently expected to be around £10m higher than the level at the last financial year end.’
• JDW adds it ‘has agreed a new 5 year revolving credit facility of £875 million (previous £820 million) on attractive financial terms. The new facility matures in January 2024.’
Conclusion, current trading etc.:
• Chairman Tim Martin says ‘sales growth has been strong since our last update. Costs, as previously indicated, are considerably higher than the previous year, especially labour, which has increased by about £30m in the period, but also in other areas, including interest, utilities, repairs and depreciation.’
• He concludes ‘profit before tax in the first half is expected to be lower than the same period last year. Our expectations for the full year are unchanged.’
• JD Wetherspoon has reported that profits will be down in H1 but that the outlook for the full year is unchanged. With sales rising strongly, margins must be down in H1.
• This is once again a short trading statement with a considerable comment on Brexit attached.
• As previously commented, if this ratio reflects the split of effort that is being put into the running of the company, then shareholders may have something to think about.
• JDW remains a good company but it is not currently cheap. Forecasts are unlikely to change on this update.
PUBS & RESTAURANTS:
• UKHospitality has warned that the UK leisure sector needs access to labour in order to keep up with projected growth. Chief Executive of UKHospitality commented: ‘Historically low unemployment and high employment is driving labour shortages in sectors like hospitality. Our members are reporting that they are finding it increasingly difficult to fill vacancies. Businesses are concerned that they will not be able to find the employees they need to continue to grow’.
• The UK- based brewer Den!us has launched a light beer with a 3% ABV craft lager.
• Heineken has announced its intentions to launch a 0% alcohol Birra Moretti in March 2019.
• The Leeds-based brewery Northern Monk has rebranded its range and has released a gluten-free and low-alcohol beers after a £1.5m fundraise.
• Australian wine exports have increased 10% to AU$2.82bn in 2018, CEO of Wine Australia said: ‘These figures demonstrate strong international demand and they highlight how Australian wine exporters have worked diligently to develop and maintain international markets’.
• The US government shutdown has resulted in numerous federal agencies failing to conduct routine work. The Food and Drug Administration to Homeland Security has stated that it has been unable to conduct routine food inspections.
• Young’s has acquired the 15 strong, Redcomb Pubs, Limited for £34m. Recomb is reported to generate an EBITDA of £4m.
• Hotel Chocolat has reported revenue up 15% for the 13 week period ended 30 December 2018, compared to the same period last year. Angus Thirlwell, Co-Founder and Chief Executive Officer, said: ‘This was another strong Christmas for Hotel Chocolat. Our new store openings contributed 5% of the growth in the period, with the balance coming from existing stores, digital and wholesale channels. Our wholesale partnerships were notable successes with strong growth, balancing lower margins with lighter capital investment’.
• Starbucks is discussing the possibility of bringing its delivery service to the UK, following a successful partnership trial with UberEats in US cities.
HOLIDAYS & LEISURE TRAVEL:
• UNWTO World Tourism Barometer reports international tourist arrivals totaled 1.4bn in 2018, up 6% yoy. The 1.4bn milestone was met two years earlier than predictions had anticipated back in 2010. Arrivals to the Middle East and Africa were up 10% and 7% respectively, whereas Europe and Asia were up 6% with the Americas trailing at 3%.
• Whitbread yesterday announced that it had bought back another £4.7m of its own shares for cancellation at £49.29 per share.
• AccorHotels announces Orbis Hotel Group’s outstanding shares are to be valued at €22 each, leading to a total consideration of €337m. The French hotel giant launched a tender offer in November last year for all the shares outstanding in the Polish company that it did not already own.
• Marriott International announces it signed management and franchise agreements for 816 properties, comprised of 125,000 rooms, growing its pipeline to 478,000 rooms in 2018. During the year the company opened nearly 500 properties with 80,000 rooms.
• EasyJet claims the Gatwick drone sightings are a ‘wake-up call’ for all UK airports as the budget airline attributed a £15m cost to the incident. Around 82,000 customers were affected by 400 flight cancellations.
• Escape Hunt, the escape rooms operator has reported trading has been slightly ahead of board expectations for the financial year to 31 December 2018. The group opened three owner-operator sites in March 2018, with a further five being opened in Q4 2018. Richard Harpham, Escape Hunt Chief Executive Officer, said: ’We are delighted with the inaugural performance of our owner-operated sites, and especially over the Christmas period, which provides further evidence that experiential leisure is a bright spot on the high street as consumers seek out experiences. The strong pre-bookings for Doctor Who themed escape games also demonstrates the appeal of Escape Hunt’s IP strategy’.
• Sony is to move its European headquarters from the UK to the Netherlands in order to avoid disruptions caused by Brexit.
• William Hill plans to close up to 900 betting shops as the maximum stake on FOBTs will be capped at £2 from April. The company reported a tough 2018 with operating profits down 15%
• Huawei chairman Liang Hua declares the company could withdraw from the US and the UK if it continues to face restrictions.
FINANCE & ECONOMICS:
• Unemployment in the UK rose by 8,000 in the quarter to end-November. The number of people employed also rose and the unemployment rate fell from 4.1% to 4.0%
• Average earnings rose at a rate of 3.3% in the year to November. Wages are now growing comfortably ahead of inflation, which is currently 2.1%.
• Nonetheless, Market has reported that ‘UK households start 2019 on downbeat tone as job security falls at fastest pace for 11 months.’ The UK Household Finance Index rose this month to a three-month high of 44.8, still well below the 50.0 that would indicate a neutral outlook.
• Markit says ‘there was no financial respite at the beginning of 2019 for UK households, with survey data showing current finances once again deteriorating. Expectations remain anchored upon this downbeat trend continuing throughout the year ahead.’
• Sterling up at $1.2944 and €1.1382. Oil down at $61.76 and UK 10yr gilt yield unchanged at 1.32%. World markets all lower yesterday with Far East down in Wednesday trade.
• Brexit & politics:
o Some hardline Brexiters falling in line behind Mrs May for fear of not achieving Brexit at all.
o CBI says North-east England would suffer the biggest decline in economic output of any UK region in the event of a no-deal Brexit
o Pets at Home is stockpiling dogfood. There’s a relief.
o Brexit-backing billionaire James Dyson is to move his company’s head office to Singapore. The company announced last year that it would build its electric car in the Singapore.
PRIOR DAY LATER TWEETS:
• Later tweets: You buy CAKEs, you sell CAKEs: how do you end up in this position? Competency questioned. Banks, auditors, esp directors. Buck stops where?
• Plan B seems to be to repeat Plan A. Mrs May running clock down & discounting all solutions other than her own. Dialogue of the deaf
• Sky quotes Border Force believing that cross channel freight could fall by 75% to 87% in the first 6mths of a no-deal Brexit.
• Billionaires behind their walls of money say ‘no-deal, no-problem’. For the rest of us, not so much. At least PETS is stockpiling dogfood…
• Markit says UK Households ‘start 2019 on downbeat tone as job security falls.’ Says ‘expectations remain anchored upon this downbeat trend’
START THE DAY WITH A SONG:
Yesterday song was Fly Away by Lenny Kravitz. Today who sang:
She’s got eyes of the bluest skies,
As if they thought of rain
I hate to look into those eyes
And see an ounce of pain
RETAIL NEWS WITH NICK BUBB:
• Today’s News: Joules came out with its solid Christmas trading news back on Jan 8th, so today’s interims (for the 26 weeks to Nov 25th) are more a reminder of the strength of the business model, with PBT growth of 15% ahead of the company’s initial expectations. At Burberry, despite sluggish sales in Q3 and worries about China, the company has held its full-year guidance, thanks to cost savings. The Hotel Chocolat update for the last quarter looks good, with total sales up 15%. Finally, WH Smith, ahead of its AGM today, has issued an update for the last 20 weeks, with Travel Retail sales up 3% LFL and the High Street only down 2% and has flagged that the recent US acquisition is going well.
• Today’s Press: We haven’t had time to read many of today’s papers, as we are rushing to get to the Christmas trading review by Deloitte in the City, but the collapse of the Patisserie Valerie chain overshadows the reassuring updates yesterday from Dixons Carphone and Pets at Home. The Lex column in the FT looks at both Patisserie Valerie (“the fake British bake off”) and Dixons Carphone, arguing that the activist investor Elliott Advisers should encourage Dixons Carphone to scale up by buying the struggling German electrical chain Ceconomy (aka Media Markt). The Times’ headline about Pets at Home focuses on Brexit stockpiling: “Pets chain makes sure Brexit will be no dog’s breakfast”. In other news, the Daily Mail has a story about cost-cutting at Tesco (“Hundreds of Tesco jobs set to be axed in boss Dave Lewis’s drastic bid to cut costs”), the Telegraph and City AM flag that Sports
• Retail Sales Watch: All the focus in the sector now is on how well January (the 4 weeks to Jan 26th) turns out on the High Street, after a decent start (see the JLP figures below), but we haven’t seen the final word yet on how bad the outcome was for December…The wretched Office of National Statistics (ie the ONS or what we mockingly call the “Planet ONS”) reported that non-seasonally adjusted total Retail Sales by value were up by 2.1% last month (ex-petrol), helped by implausibly strong Small Retailers growth…But the BRC-KPMG measure of gross sales (which focuses on Large Retailers, but doesn’t capture the likes of Amazon) was only flat (down by 0.7% LFL). So, who was right? The ONS or the BRC-KPMG? Well, the consultancy group, Retail Economics (RE), which was founded by Richard Lim (who used to run the monthly BRC-KPMG Retail Sales survey) has just come out with its own detailed
• Waitrose Watch: Moving on to January, the Waitrose business was seen as one of the relative losers in the supermarket industry over Christmas, but trading this month has been better. In JLP’s weekly overview yesterday morning, Waitrose reported a decent 2.9% increase in gross sales (c3% up LFL) last week, in w/e Jan 19th. That shifted the cumulative sales run-rate up a notch, to -0.2% after 25 weeks of H2, with just one week left in the financial year. With no new store openings to speak of, the slight implied fall in LFL sales is still disappointing, but Waitrose has been working hard to protect gross margins by cutting back on discounting and price promotions.
• John Lewis Trading Watch: The good late run at Christmas at John Lewis has continued into January and last week was again quite decent, as the w/e Jan 19th was up 0.7% gross (c1% down on a “LFL” basis, excluding new stores like Westfield), as the Clearance Sale continued. In terms of sales mix, Home sales were down 1.0% gross last week and Electricals were 3.1% down, but Fashion/Beauty sales were up by 7.2% gross. Gross margins have been under a lot of pressure, in contrast to Waitrose, but the cumulative H2 sales run-rate is still +0.4% gross after 25 weeks (c1.5% down LFL).
• News Flow This Week: This evening brings the Marks & Spencer Spring Fashion preview for analysts (although the Fashion press have already been to see the new range and there should be some write-ups in the papers). Tomorrow is a quiet day for news (although BDO are holding their Annual Retail Trading review, with assistance from the estimable Retail Economics), but on Friday we get the Bonmarche update and the CBI Distributive Trades survey for “January”.