Langton Capital – 2019-03-01 – Revolution, Wm Hill, Pat Val, pubs vs restaurants, optimism etc.:
Revolution, Wm Hill, Pat Val, pubs vs restaurants, optimism etc.:
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A DAY IN THE LIFE:
The Bearded Dragon arrived yesterday, and I would make two observations, namely 1) it’s very tiny, 2) it’s clearly an optimist as it’s looking at all of us as potential food when it gets bigger and 3) I’m bemused by the fact that nobody will tell me what it cost.
Anyway, the little beast is now sitting in its vivarium with its mouth open, hoping to catch flies. Failing that, I presume it will leap onto some defenceless piece of cabbage and tear it to pieces accompanied by some Jurassic Park music and a variety of horrible tearing noises.
And very happy it looks to. And our daughter’s happy, mum’s happy and I’m happy – buth that may not last as I’ll be checking the credit card bills carefully and, if Ernie or whatever his or her name is cost more than a small family motor car, then I will not be amused. On to the news:
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NEWS IN TWEETS’ CLOTHING – top news in <140 chars.
• New management team brought in to turn around Patisserie Valerie has been told it is no longer (after 2wks) required
• Supply & demand in pubs & restaurants. Impact of weather, football etc. See Premium Email (cheap as chips) for detail.
• Revolution warns on profits, talks of ‘challenging’ start to H2 trading. Currently trading a material 7.3% down LfL. Some one-off items
• Over two thirds of F&B business leaders ‘are feeling optimistic’ says CGA. See comments on optimism bias etc.
• Trade bodies say proposals on NMW legislation ‘needs work’. Further comment on Loungers, BrewDog, Boxpark etc.
• Easter holiday prices down 24% says TravelSupermarket. That’s gotta hurt. TCG to appoint Will Waggott as Chief of Tour Operating
• Marriott misses numbers. Uber IPO process. Wm Hill reports £687.9m loss. After exceptionals, unsurprisingly.
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Today, we’re looking at PUBS VS RESTAURANTS. We’ll follow up next week with comments on supply & demand in the pub & restaurant markets, discounts, CVAs etc. & are laying the ground for MORE WORK ON IFRS16 IN THE FUTURE. See foot of email for detail.
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PATISSERIE VALERIE SHEDS MANAGEMENT – AGAIN:
• FT reports the new management team brought in to turn round Patisserie Valerie has been placed on gardening leave
• the team agreed only 2wks ago to continue with the company under its new owners. CEO Steve Francis ‘was told last week that his services were no longer required’ reports the FT. New owner of a majority of the remaining sites, Causeway Capital, has declined to comment on the situation.
• The FT suggests that the new management team, Messrs Francis, Iley & Mr Peralta ‘had formed a plan to improve stores and the bakery operation, which would have needed fresh investment and additional working capital. They had also agreed to put their own money into the company in return for an equity stake.’
• Shareholders in the Patisserie Holdings that was listed on AIM until 25 February no longer have any financial interest in the company. Some of the assets, but not the PLC itself, were sold to Causeway.
PUBS VS RESTAURANTS No1 – 1 March 2019:
• To take a view on pubs vs restaurants, we need to look at several factors.
• Today, we cover demand and supply in brief outline. Then we consider the time frame. That is, secular trends versus shorter term factors.
• On Monday we’ll look at the impact that excess supply is having in the restaurant market. We’ll consider what you’d expect to see (CVAs, discounts etc.) if this persists and what, if anything, can be done about it.
• On Tuesday, we’ll look at property tenure, the illusion that leases are ‘flexible’ and generally compare the prospects of pubs & restaurants with that in mind.
• Secular: Rather than go into the history of it, suffice it to say that vertical drinking in the on-trade peaked in 1979 and pubs have been either closing or focusing more on food, families, females & accommodation, ever since. This is unlikely to change though there is still a need for a ‘third space’. This is much more likely to be a pub than it is a restaurant – though coffee shops are certainly resurgent.
• Cyclical, short term & one-off factors impacting demand: World Cups come and go. The weather last year was very helpful to the drinks industry. The biggest room in the pub is the beer garden but weather will revert to the mean over time. Talk of ‘premiumisation’ is arguably unlikely to survive a recession.
• This has been falling for some time. CAMRA reckons around 14 pubs per week are still closing, equating to around 1.5% per annum. But this is a unit rather than revenue measure. New, larger, food-led or accommodation pubs are still opening. One of these could be worth five closed units. Looking forward, the number of closing pubs should slow & capacity (though not as much as might at first be suggested), continues to come out of the industry.
• Secular: Demand has been good. But this isn’t a secret – see supply, below. More women in the workplace & convenience suggest that demand could remain firm. Prices, compared to cook-at-home costs, are good – but this is truer in pubs than in it is in the casual diners. In the latter, upselling, £3.50 olives, costly water, coffees & a 12.5% service charge routinely double the expected bill.
• Shorter term demand was negatively impacted by the World Cup (temporary) and the hot weather (maybe a one-off) but slowing footfall on retail and leisure parks could be longer-lasting. Amazon etc. are impacting restaurants indirectly by reducing town centre visitation. -Similarly, on the High Street, footfall drivers (Woollies, BHS, some HMVs etc.) have been shutting for some time with a corresponding negative knock-on to restaurants.
• Secular: Driven by cheap money, overoptimism etc., this has been pretty drammatic with the Coffer Peach Tracker routinely indicating 2%, 3% or more increases in capacity per annum. Which is understandable in an upswing but can be extremely damaging in a slowdown.
• Shorter term: You can’t switch off restaurant supply at a tap. Most restaurants are leasehold (more comments to follow). The landlord won’t take the keys back and, if he/she does, then the next best use for a closed restaurant is still as a restaurant. Supply is very sticky. Having said that, CGA AlixPartners say supply fell (for the first time in 9yrs) by 0.1% in December last year.
So, what does this mean?
• Underlying out-of-home demand for drink is questionable. The push for pubs towards food & accommodation is sensible. Premiumisation is helpful but finite. Supply is relatively benign.
• For restaurants, supply is a real problem. Furthermore, demand, which should hold up, has not been tested in a recession. Retail park footfall is under pressure. It’s perfectly possible for macro demand for meals out to rise but for each individual restaurant to see trade fall if too much supply has gone on. Tomorrow, we’ll investigate the implications a little more fully.
REVOLUTION – SEEING ‘CHALLENGING’ TRADING WARNS ON PROFITS:
• Revolution warns on profits, talks of ‘challenging’ start to H2 trading.
• The Revolution Bars Group has reported H1 numbers to end-Dec saying that revenue rose to £78.5m (2017: £73.8m) but that LfL sales fell by 0.4%.
• Revolution says it generated an operating loss of £3.1m in the six months to Christmas (which included the hot weather) against a £3.7m loss last year. The basic loss per share is 6.2p against a loss per share of 6.8p last year.
• RBG says LfL sales were less bad in Q4 (at minus 3.1%) but, against inflation of 2% and bar cost inflation of more than that, margins are clearly under pressure.
• RBG says it opened 5 new sites in H1. These ‘are trading well’.
• RBG warns ‘trading at the beginning of Q3 has been challenging with LFL sales of minus 7.3% in the 8 weeks to 23rd February 2019 but improved in the first three weeks of February at minus 5.5%.’
• RBG says a number of one-offs impacted trading. It says ‘sales are expected to improve significantly as we come up against softer comparatives for the remainder of the financial year.’
• EBITDA is now expected to be in the range £11m to £12m.
• CEO Rob Pitcher says ‘while Revolución de Cuba has performed well and delivered growth in the reporting period, it is clear that the lack of investment into the Revolution proposition is impacting performance.’
• Mr Pitcher says ‘we have therefore decided to prioritise the refurbishment programme over new openings. We expect trading to improve as we come up against softer comparatives for the rest of the financial year.’
GENERAL NEWS – PUBS & RESTAURANTS:
• A poll conducted in partnership with CPL Online has found that over two thirds of leaders in the eating and drinking out sector are feeling optimistic about their business’ prospects over the next 12 months, however, only 39% are confident about the market in general.
• Phil Tate, group chief executive of CGA, a co-publisher of the aforementioned poll, said: ‘Our Business Leaders’ Survey reveals an industry caught between instinctive confidence for growth and caution about the challenges they face. It is encouraging to find that more than two thirds of leaders are optimistic about prospects for 2019 but concerning that far fewer feel upbeat about the market as a whole. We are also seeing a growing divide in confidence levels between pub operators, many of whom enjoyed a good 2018, and the restaurant sector, which endured a tough year’.
• Brigid Simmonds, Chief Executive of the BBPA, has responded to a Department for Business, Energy & Industrial Strategy consultation on National Minimum Wage rules, commenting: ‘Working practices are very different today compared to when the National Minimum Wage legislation and regulations were first created. This is especially the case for the brewing and pub sectors, which work in an ever more flexible, agile environment where employees and employers increasingly seek a better work/life balance’.
• Kate Nicholls, Chief Executive of UKHospitality has also made a statement about the minimum wage consultation, commenting: ‘There does, however, need to be additional clarity and flexibility around the regulations. We have some significant concerns about the current interpretation and clarity of the regulations and worry that some businesses believe they are complying when they are not. Recently, we have seen some of our members punished because HMRC compliance officers appear to be making up the rules as they go along’.
• Heineken is to sell its 0.0% ABV beer to pubs and bars in draught format.
• Heineken’s US division has announced that it will reduce its workforce by 15%. Bjorn Trowery, spokesperson for Heineken USA commented: ‘We are modifying our sales team structure to align with our strategy and to enable more efficient ways of working. This will help Heineken USA be more cost effective, and allow us to reinvest behind our brands and business in the US’.
• Loungers Chairman Alex Reilley has commented that the group can compete with the likes of Wetherspoon, Pret and Greggs for scale, with plans to open 25 new units a year. The group currently operates 142 sites across the UK and aims to reach 500 locations in the coming years.
• BrewDog has announced it intends to open 33 new bars this year, taking the group to over 100 sites.
• The Manchester-based restaurant and bar group, East Coast Concepts has appointed Simon Kaye as managing director as the group targets further growth across the UK.
• Boxpark has appointed Zonal as its technology partner, installing Zonal’s Aztec EPoS system across its latest venture at Wembley Park.
• The private investment group Ardian has bought the Italian beverage solutions company Celli Group for an undisclosed fee.
HOLIDAYS & LEISURE TRAVEL:
• Brexit uncertainty has contributed to the median price of Easter holiday prices falling 24% over the same period last year. TravelSupermarket’s travel commentator Emma Coulthurst said:‘For this Easter, it is not hard to currently find well-reviewed holiday bargains to family-friendly resorts on the Spanish mainland and in Ibiza and Majorca, Portugal, Malta and Corfu for under £500 in total for a family of four, which is virtually unheard of for the school holidays and just shows you how much more affordable it is to holiday abroad this year. The weather is also likely to be better as Easter falls a lot later’.
• Thomas Cook has announced that it will appoint Will Waggott as Chief of Tour Operating. CEO of the Group Peter Fankhauser said: ‘Will Waggott brings substantial experience in operating and transforming leisure travel businesses. This expanded role will deliver a more streamlined and consistent approach across our tour operating business, while at the same time giving renewed focus to the UK market’.
• Marriott International missed Q4 estimates yesterday, blaming weaker demand in North America, its largest market. It calls its results ‘solid’.
• Marriott reports REVPAR growth of 1.3% in Q4 against estimates of +2.0%. CEO Arne M. Sorenson says ‘our team delivered solid results in 2018 even as we worked to complete the integration of Starwood Hotels & Resorts. Our rooms grew by nearly 5 percent, net; worldwide revenue per available room, or RevPAR, increased nearly 3 percent.’
• Mr Sorenson continues ‘we are pleased that, just over two years since the acquisition, the integration of Starwood is nearly complete.’
• Research from Enterprise, Rent-A-Car and National Car Rental has found that UK employees make fewer business trips than their European counterparts and are least likely to consider travel as a perk of their job.
• The number of long-haul outbound flights from China has fallen in Q4 2018, research from the German-based China Outbound Tourism Research Institute has found.
• European hotel transaction volumes reached €18.6bn in 2018 a decrease of 14% on the previous year, research from European Hotel Transactions has found.
• STR has reported that the US hotel industry saw a decrease in occupancy of 1.7% to 64.7% during the week ending 17-23 February, with ADR rising 1.7% to $129.05 and RevPAR flat at $83.43.
• Uber is believed to be in advanced discussions to acquire its Dubi-based rival Careem Networks FZ, the UAE company has previously been valued at $3bn.
• Uber and Lyft are reportedly planning to give their drivers access to shares in their IPO.
• Wm Hill full year revenues up 2% at £1.6bn. Group declares a loss before tax of £687.9m (after exceptionals). Dividend of 12p (down 9%).
• Wm Hill CEO Philip Bowcock says ‘2018 was a busy and decisive year for us.’ He continues ‘we delivered a good underlying performance in Online, strong growth in the US Existing business and a resilient Retail outturn in the face of difficult high street conditions.’
• Mr Bowcock concludes ‘we know the next few years will require careful navigating and investment, but with a clear strategy and diverse, experienced leadership teams in place we are ready to capitalise on the opportunities available to us.’
• Labour’s Tom Watson has stated that the regulations governing online casinos and bookmakers are inept, leading to ‘gross excesses, abuse and vulnerable problem-gamblers being let down’. ‘Tom Watson said: Whereas gambling in the offline world is highly regulated, the lack of controls on online gambling is leading to vulnerable consumers suffering huge losses. Online gambling companies have a responsibility to protect their customers from placing bets that they cannot afford’.
• Spotify is to launch in India, with its premium offering to valued at 119 rupees ($1.67).
FINANCE & ECONOMICS:
• The Nationwide has reported that house prices fell by 0.1% in February to leave them up by 0.4% on the year. Well below inflation, Nationwide says ‘after almost grinding to a complete halt in January, annual house price growth remained subdued in February.’
• Nationwide reports ‘measures of consumer confidence weakened around the turn of the year and surveyors reported a further fall in new buyer enquiries over the same period.’ Yesterday GfK reported that consumer confidence was slightly less bad in February than it had been in January.
• US economic growth slowed to an annualised 2.6% in Q4 last year.
• Sterling down a bit at $1.3256 & €1.1656. Oil up at $66.93. UK 10yr gilt yield up 2bps at 1.29%. World markets mixed. UK & US down with Europe higher. Far East up in Friday trade.
• Brexit etc.:
o Telegraph reports UK companies should still be able to bid for foreign government contractus under a no-deal Brexit. Foreign companies will be able to bid for work in the UK reportsthe WTO.
o Is the ERG enfeebled? Is it looking for a ladder to facilitate a climbdown? If Mrs May gets the font changed on the agreement, will that be enough? The thinking is, potentially yes. Keeping the DUP on board could be somewhat more taxing.
o The PLP is likely to formally table an amendment calling for a People’s Vote on or around 12 March.
PRIOR DAY LATER TWEETS:
• Later tweets: GfK has reported that UK consumer confidence ‘improved’ by 1bp to minus 13 in Feb from minus 14 in Jan.
• Consumers have consistently shown themselves to be more robust (or less aware) than business when it comes confidence
• Harvester & Toby (both M&B) are still offering kids a meal for a quid. Prezzo is 40% off mains etc. GNK offer to feed family of 4 for £17.49
• MERL is seeing ‘a continued recovery in London trading.’ This bodes well for the capital’s hotel and innkeepers.
• Voters’ Choice? Financial incompetence in short term (Lab) or political incompetence in long term (Con). Corn Laws, wilderness beckons etc.
• UK car production at 5yr low on slack China demand. Nationwide says house prices down 0.1% in Jan giving +0.4% in year. Well below CPI
START THE DAY WITH A SONG:
Yesterday’s song was Unforgettable by Nat King Cole, today who sang:
He has always been so strange,
I’d often thought he was deranged
Pretending not to see his gun
I said let’s go out and have some fun
RETAIL NEWS WITH NICK BUBB:
• Nick is taking a long weekend. Stories below relate to yesterday’s trends.
• Wednesday’s Press and News: There is plenty of more press coverage today of the jv deal between M&S/Ocado mostly focusing on the very high price paid by M&S to get into Online Grocery and the Guardian quotes our view that it is a “very puzzling” move by M&S and “a huge leap in the dark”, whilst the Telegraph has a big consumer feature article on “The Big shopping debate: Are you weeping or whooping as Ocado ditches Waitrose for M&S?”. The editorial comment is pretty mixed: the Evening Standard last night said “Has M&S bitten off more that it can chew with this deal?” and the Telegraph says “M&S pays huge price for being late to Online party”, but the Daily Mail trumpets “Norman’s Online conquest” and Lombard column in the FT praises M&S for being bold. In other news, the Ted Baker profit warning also gets plenty of focus, given the fashion model photo
• Capital & Counties: We didn’t have time to flag that, although shopping centre valuations are dropping steadily, the value of CapCo’s flagship Covent Garden estate is still edging up, to no less than £2.6bn, as revealed in yesterday’s final results. Although Covent Garden is “a world-class retail and dining destination”, we hadn’t realised that, including offices and apartments, in aggregate the estate has as much as c1.2m square feet of lettable space.
• News Flow Next Week: Back in the good old UK, next week is a bit quieter, after a busy spell, kicking off first thing on Tuesday with the BRC-KPMG Retail Sales for February (with another positive LFL sales outcome expected), closely followed by the latest monthly Kantar/Nielsen grocery sales figures. Thursday then brings the Greggs finals and the much-awaited John Lewis Partnership finals and Bonus announcement (the prospects for which have not been helped by the weak start to the new year at John Lewis and by the loss of the Ocado contract at Waitrose).
• Trade Press (1): The front cover of Retail Week magazine tomorrow will be a photo of a happy looking Mike Coupe of Sainsbury and Judith McKenna and Roger Burnley of Walmart/Asda. with an imaginary tear down the middle…to flag up the main feature on the fallout for Sainsbury’s-Asda after the damning CMA review (“Grocery’s new goliath felled?”). The Editor also looks at the subject of the doomed Sainsbury’s/Asda deal and thunders “Don’t bank on a private equity swoop on Asda”. RW also have features on the MPs inquiry into the fashion industry, the Body Shop UK boss Linda Campbell and the hike in West End Business Rates for flagship stores.
• Trade Press (2): Drapers magazine tomorrow will focus on London Fashion Week and a celebration of the UK fashion industry. In terms of News stories, Drapers highlight that fashion retailers/suppliers have warned that price rises are inevitable if there is a no-deal Brexit, Clarks has appointed the former Geox boss Giorgio Presca as its new CEO, Primark has boosted footfall in stores through its social media and influencer collaborations and Laura Ashley has defended its fashion offer despite poor profits. In terms of features, Drapers look at how the Chanel, Fendi and Karl Lagerfeld brands will fill the void left by their legendary designer and also look at the US sportswear brand Champion (which celebrates its 100th anniversary this year).
• BDO High Street Sales Tracker: We flagged yesterday that sales at John Lewis were poor again last week and the BDO High Street Sales Tracker for medium-sized Non-Food chains for last week, w/e Sunday Feb 24th, is also a bit weak, despite the helpful weather, although BDO Fashion Store sales were up by 1.3% LFL (up 0.9% LFL including Online). Total BDO LFL sales (including Homewares and Lifestyle sales) were down by 1.0% last week, however (down 0.7% in Store sales and only up by a dire 0.3% Online…).
TOPICS FOR CONSIDERATION:
• Thematic pieces:
o Experiential leisure: the future or a fad? Crowd-funding (meets iceberg, iceberg wins). CVA phenomenon & over-renting etc. What to do with ‘busted’ models.
o The menace of models – i.e. how to avoid being precise(ly wrong).
o Employment, unemployment & the interplay of confidence & consumption. Big ticket versus small ticket etc.
o Why one man’s ‘single-minded leader’ is another’s ‘blinkered bigot’
o Pubs vs Restaurants. Are pubs recovering or just in remission? The efficacy of promotions. No road back.
• Occasional ‘deep dives’ into stocks, trends etc.
o If it walks like a duck…Why we shouldn’t be surprised that the High Street’s ‘hot one hundred’ are losing their shareholders a fortune.
o RTN & Wagamama. Patisserie Holdings. The few pros and many cons of operating within bubbles.
• Book reviews:
o We’ve read 100s & will pick the odd one from Black Swans, The Honest Truth about Dishonesty, Dark Pools, Lean Start Up, history of the 60s, horror of the 70s, Grinding it Out, Sapiens, Smartest Guys in the Room, Client Nine, Black Edge, The Billionaire’s Apprentice, Thinking Fast & Slow, Wizard of Lies & many others.
• Accountancy, Audit & other, thrill-a-minute topics:
o IFRS16, Balance Sheets – folly of the snap-shot. Going concerns, audit reports, the impact of Pat Val etc.
• Behavioural economics:
o Over-confidence, Hofstadter’s Law, confirmatory bias etc. etc. Power of incentives. Occam’s Razor. The Power of Patterns. The influence of ‘social proof’ i.e. following the herd.
• Other: Including guest contributions ^ From the Archive: 2009 and all that, all we learn from history is that we don’t learn from history etc. Remember ‘efficient balance sheets’? Also the 99% (share price drop) club?