Langton Capital – 2019-03-04 – 888 Holdings, Gfinity, Patisserie Valerie, discounts, CVAs etc.:
Holdings, Gfinity, Patisserie Valerie, discounts, CVAs etc.:
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A DAY IN THE LIFE:
So, this is Brexit month.
Or is it because, if the can is kicked a bit further down the road, I’d better start rotating the hundreds of emergency bottles of beer that I’ve got stashed away alongside all those Pot Noodles, tins of sardines, candles, matches & bottles of water etc as the sell-by dates will be coming up before the end of the year and heaven knows when (or if) we’re ever going to be able to draw a line under this ongoing situation.
But it would free up a bit of cupboard space for the locusts, crickets, mealworms, spare ‘basking stones’, withered logs and extra sand that we’re having to stock for our new Bearded Dragon. The thing seems to be costing us more than an extra member of the family and it’s never even said thank you. On to the news:
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Today, we’re looking at what you’d expect to see (DISCOUNTING, CVAS, RISING VOIDS, FALLING RENTS ETC.) if we were right & there were too many restaurants out there – and waddya know…?
We’ll follow up with MORE WORK ON IFRS16 IN THE FUTURE. See foot of email for detail.
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OVERCAPACITY IN THE CASUAL DINING INDUSTRY: PUBS VS RESTAURANTS No2 – 4 March 2019:
• Cheap money + lazy, entitled, me-too concepts => overcapacity.
• Overcapacity + economic slowdown => discounting, CVAs & closures.
• Capacity is sticky. The next best use of a restaurant is as another restaurant.
• There’ll be blood on the streets but outlets selling the right product from the right units at the right price to the right customers will still do just fine.
The impact of cheap money:
• Cheap money: Cheap money has encouraged investment into casual dining. When money is expensive, decisions are weighed carefully. When it’s cheap, well, perhaps they aren’t.
• Everyone’s an expert: When we look at behavioural economics, we’ll look at familiarity bias. This posits, very reasonably, that we’re more comfortable with things, concepts etc. with which we’re familiar. We all know what restaurants are & we all think we can run one. In this, sadly, we are mistaken.
• Sites a plenty: With retail leaving the High St & cheap money encouraging new build, sites have been plentiful. Signing 25yr, upward only rental agreements probably didn’t sound too scary.
When the music stops:
• Leads & lags: New capacity coming on may have been committed 18-24mths ago. Slam on the brakes & you may slow down – but not for some time.
• Beggar thy Neighbour: At the micro level, discounting to take market share is a good idea. At the macro level, if all your competitors do the same thing, then not so much. You’re selling the same stuff to the same customers – but for less money.
• Margins fall & rising costs mean the ‘jaws’ open: If costs rise (NMW, NLW, apprenticeship levy, utility costs, employee pensions, business rates) then this situation is worsened.
• Turn to delivery? This is bad for margin & can be bad for ambience, logistics etc. You may be cannabalising your own trade. Many competitors will follow suit. See Beggar thy Neighbour above.
• CVAs to the rescue? Perhaps. It’s not cricket but CVAs do extend an advantage to some companies. Private companies are more likely to use them than are their listed peers. But it’s zero sum. Landlords will push back & competitors may follow suit. See Beggar thy Neighbour…
A rising tide floats all boats (a.k.a. make the cake bigger):
• Yes, but when? GDP’s only rising at 1% or so. And structural shifts mean that retailers are looking to vacate the High Street.
• Furthermore, with no obvious replacement for restaurants on the High Street (except charity shops, tattoo parlours etc.), landlords will be reluctant to take keys back.
Tomorrow – the story continues:
• We’ll cover property tenure tomorrow. Why freeholds are more flexible than leaseholds, why pubs have more claim to the title ‘third space’ than do restaurants etc.
• Also, see story below from Feed It Back. This is not a surprise.
GENERAL NEWS – PUBS & RESTAURANTS:
• Sacked former Pat Val CEO Steve Francis is to sue new owner Causeway Capital. Mr Francis told the FT that Causeway had made ‘baseless allegations’ regarding his conduct in the run-up to the purchase of some of the company’s assets from administrators KPMG last week. Causeway also dismissed Pat Val commercial officer Rhys Iley.
• Mr Francis told the FT that ‘it appeared to him that Mr Scaife was uncomfortable with his team’s plan to keep most of Patisserie Valerie’s 96 stores open and spend £5m on store improvements, bakery modernisation and working capital.’ Causeway has declined to comment although it has indicated that the sackings were ‘cost saving measures’. Causeway currently owns BBs Bakers & Baristas.
• The travails or otherwise of the rump of Patisserie Holdings is of perhaps only academic interest to those shareholders who paid 50p for shares in October last year (or 429p in September) as they have lost all their money already.
• That said, the company retains a High Street presence and its behaviour will impact its competitors. The company may either invest in its sites and attempt to grow once more (seemingly the plan of the ousted management) or it may retrench further, close more sites & run itself for cash. This now seems to be the favoured outcome though Causeway, with some reason, is not giving any clues in this regard.
• Research from Feed It Back has found that monthly social media reviews for pubs and bars across Facebook, TripAdvisor and Google during February was 4.3, outperforming the restaurant sub-sector, which recorded a score of 4.1. Carlo Platia, CEO of Feed It Back said: ‘Following a challenging January, February brought cause for optimism across the hospitality industry. The figures clearly reveal that both pubs and bars, and restaurants, seized the opportunity to deliver a great customer experience and subsequently experienced increases to their average review scores’.
• Discounts still available. More so in restaurants than pubs (see above). Having said that, Harvester is offering kids for a quid, Prezzo; 40% off food, Pizza Express; 25% off food. Anyone would have thought there was too much capacity out there.
• Carluccio’s CEO, Mark Jones has stated that the chain would have entered administration had it not completed a Company Voluntary Agreement last year. Mark Jones said the group was driven to conduct a CVA for several reasons: ‘We were opening too many marginal sites. That was using all our cash and we weren’t spending enough on refurbishment, training and keeping the brand fresh’.
• Alistair Pritchard, Deloitte’s lead partner for travel, has stated that families are ‘less sensitive’ to cost when looking for holidays to mark landmark occasions. Pritchard has urged cruise-selling agents to target this demographic, saying: ‘For a cruise holiday, the price point can be a bit higher than some land-based holiday options, but if you focus on occasions, like birthdays or anniversaries, people are much less sensitive to price’.
• Habit Burger has reported a return to revenue growth by the end of 2018, following rocky start to the year.
• UKHospitality has called for the Government to spend the money raised by the new Digital Services Tax to offset the challenges of business rate bills. Chief Executive of UKHosipality, Kate Nicholls stated that the Government should: ‘use revenues raised by the new tax to slash extortionately high costs of business rates on the high street with this new tax rather than let it disappear into Treasury coffers.’
• UKHospitality continues saying ‘businesses have been crippled by rates and the Government must act to ensure there is some fairness in the way businesses are taxed. If the tax burden is to be fair and proportionate, then action must be taken to alleviate unfair burdens on high streets’.
• The MCA has reported that the managing director of the Alchemist, Simon Potts has announced that the chain is working towards a 2021 sale, with a value of £70m targeted.
• The Hull-based vegan snack brand Mummy Megaz is aiming to increase its exports to more than 50% of its turnover in 2019.
HOLIDAYS & LEISURE TRAVEL:
• A YouGov survey has found that almost half of travellers are using package holidays to get ‘locked in’ pricing regarding concerns over exchange rates post-Brexit. The survey was commissioned by Super Break, LateRooms.com and Malvern Travel Technology owner Malvern Group.
• SeaWorld Entertainment reports Q4 net loss of $11.1m down from a loss of $20.4m a year earlier. Total revenue rose 5.5% to $280m, topping forecasts.
• The World Tourism and Travel Council (WTTC) reports global travel and tourism grew at 3.9% last year, faster than the rate of world GDP growth at 3.2%. The WTTC reported the sector generated 10.4% of global economic activity and one in ten jobs worldwide.
• Lyft filed for an IPO on Friday, expecting to be valued at $25bn and beating rival Uber to the punch for a public listing. Lyft now has nearly 40 percent of the US ride-sharing market.
• 888 has announced that it has acquired BetBright’s sports betting platform for £15m. The company says ‘the acquisition strengthens 888’s product and technology capabilities and will support the long-term development strategy for 888Sport.’
• 888’s CEO Itai Pazner comments ‘this acquisition of a high-quality and scalable sportsbook is an exciting milestone for 888. It gives the Group the missing piece in our proprietary product and technology portfolio and will enable 888 to own proprietary, end-to-end solutions across the four major online gaming verticals.’ Mr Pazner adds ‘this is the third acquisition that the Group has made in recent months and demonstrates the Group’s commitment to its strategy: to be a global leader in the online gaming market by driving organic growth across regulated markets, supported by value-accretive M&A.’
• According to research from Gambleaware operators are heavily reliant upon a small percentage who gamble more than £1000 a month. HSBC has estimated that this high-spending minority accounts for more than half of overall revenue for many in the industry.
• Gfinity, the London based esport solutions provider, has reported revenue up 143% to £4.4m for the six month period ending 31 December 2018, while adjusted EBITDA loss was £4.4m, a 39% reduction on H1 2018. Chairman for the group, Garry Cook said: ‘The global esports economy is predicted to break the $1billion barrier during the year. We believe we are at the cusp of the inflection point in capturing the opportunity ahead of us. The Company sees the opportunity for greater commercial responsibility and wider attribution of value creation. This is expected to lead to significant commercial upside, driven by multi-year strategic partnerships and revenue sharing models’.
• Commenting on the outlook for trade, Gfinity commented that it aims to reach breakeven by 2021, with gross margins between 30-40%. The board said H2 2018 results are in line with its expectations to achieve these goals.
• Per PE Hub, KKR and Tencent Music Entertainment Group are exploring rival bids for up to half of Vivendi’s iconic Universal Music division, said to be worth up to $23bn.
FINANCE & ECONOMICS:
• HIS Markit’s latest UK manufacturing PMI came in at 52.0 for February, in line with estimates, but down on the 52.6 recorded in January. Any number over 50.0 indicates growth.
• Market reports that manufacturers have been stockpiling raw materials. New order inflow is ‘near-stagnation, amid signs of a slowing domestic market and a further drop in new export orders.’ Markit says ‘the current elevated degree of uncertainty is also having knock-on effects for business confidence and employment’. The Construction PMI is today with the much larger Services number due out tomorrow.
• Germany’s car industry is to invest c€60bn over the next 3yrs on electric and driverless cars.
• Sterling down a bit at $1.3229 & €1.164. Oil down at $65.29. UK 10yr gilt yield up 1bps at 1.30%. World markets all up Friday with Far East up in Monday trade.
• Brexit, politics etc.:
o ERG & hardliners beginning to cave in as they take Mrs May’s ‘no-Brexit’ threat seriously. Meaningful vote due next week. Brinkmanship in the extreme as we are 975 days (or 97.5%) through a 1,000-day process.
o HMG giving £33m of taxpayers’ money to Eurotunnel to settle allegations that it mishandled deals with ferry companies to provide services in the event of a no-deal Brexit. Calls for ‘failing Chris Grayling’ to resign.
o Former adviser to Mrs May Nick Timothy (sacked in the wake of the election fiasco in 2017) has said that the PM has always viewed Brexit as a ‘damage limitation exercise’.
o UK says it will not lower food standards to pander to the US. US ambassador James Johnson says the UK shouldn’t stick to the EU’s ‘Museum of Agriculture’ approach to standards & costs.
o Six UK trade deals have been signed out of a targeted 40 including deals with The Faroe Islands and The Palestinian Authority.
o Mrs May is being accused of bribing MPs having launched a £1.6bn fund to help pro-Brexit towns with Labour members of parliament.
PRIOR DAY LATER TWEETS:
• Later tweets: Revolution Bars. Down 7.3% LfL in H2 trading to date. A number of one-off factors, yes, but minus seven is not a good look…
• New team brought in to turn Pat Val round told to sling their hooks (after 2wks). Couldn’t organise a scoff up in a cake shop?
• Langton’s super-wonderful & cheap as chips Premium Email now gone live. Stories on Pubs vs Rests & other. See daily for details.
• Over 2/3 of F&B business leaders ‘feeling optimistic’ per CGA. The maths doesn’t work. Optimism bias etc.
• Easter holiday prices down 24% says TravelSupermarket. That’s gotta hurt. Could bounce if Brexit can kicked down the road
START THE DAY WITH A SONG:
Last Friday’s song was Perfect Kiss by New Order, today who sang:
I’ll tip my hat to the new constitution,
Take a bow for the new revolution
Smile and grin at the change all around
RETAIL NEWS WITH NICK BUBB:
Nick is taking a well-earned break. Back tomorrow.
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 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.
o The menace of models – i.e. how to avoid being precise(ly wrong).
• Occasional ‘deep dives’ into stocks, trends etc.
o If it walks like a duck…If companies are throwing money at customers, landlords etc., why should we be surprised when our research reveals that the High Street’s ‘hot one hundred’ are losing their shareholders a fortune.
o RTN & Wagamama. Patisserie Holdings. People with firmly held views & a 50:50 chance of being right etc. 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’ and share buybacks & take-privates of 2007-09? Also, the 99% (share price drop) club?