Langton Capital – 2019-03-11 – Feb Tracker, LfLs as a measure, valuation, discounts, Grind etc.:
Feb Tracker, LfLs as a measure, valuation, discounts, Grind etc.:
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A DAY IN THE LIFE:
It was just above freezing & snowing in York at times over the weekend.
And it was interesting to note that the weather forecast got it right when it said that there would be sun at times, when it would feel warm, but that it could snow and then it would feel a bit colder.
And they could have added that if the sun went down in the evening, it would be darker than it had been during the day etc. but we shouldn’t be too critical, they’re not wrong and at least they’re trying to keep it simple.
The less said about the Mighty Hull City this morning the better. On to the news:
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LIKE FOR LIKE SALES ARE NOT A PERFECT MEASURE OF PERFORMANCE:
Ad hoc issues no1 – 11 March 2019:
• LfL versus margin, an ongoing conundrum.
• LfL sales’ growth is a means to an end.
• It isn’t an end in itself as you can’t bank LfLs. You can’t even really bank sales as you need to pay suppliers & it’s profitability that counts.
• But protecting margin can evolve into gouging. It can embitter customers & is finite meaning that keeping sales growth & margin in balance is what really matters.
LfLs, the holy grail?
• Delivery certainly will, and discounting might, drive LfL sales.
• But both are bad for margin and restaurateurs (and it is usually restaurants) that push on this measure and this measure alone may find that they are working harder to feed more customers for less money.
• Whilst ‘protecting margin’ (or premiumisation or whatever it may be called) can morph into gouging and can alienate customers, the above doesn’t sound like too good a plan over the longer term
• We’ll write more fully on incentives at a later date.
• Suffice it to say, at this point, that we agree with Charlie Munger who has said that, no matter how important you think incentives are, they are more important than that.
• What you measure is what you get and, if a bunch of competent restaurateurs are targeted to improve LfL sales, then that is likely what they will do.
• But they may achieve this goal, if it isn’t qualified, at the expense of other measures and, over time, a ‘balanced scorecard’ is almost certainly a better way to proceed.
EBITDA: THE BIG LIE – ACCOUNTANCY No2 – 11 March 2019:
FROM THE ARCHIVES:
Langton writing on 12 July 2006, 2yrs before the crunch:
• We suggested that companies may take too much risk as 1) credit was easy and 2) they were playing with OPM (other people’s money).
• Also, see comments on incentives above.
• Langton wrote in 2006 ‘the lack of symmetry between the upside (infinite) and the downside (finite) is instrumental in persuading otherwise sensible company bosses to pay more for assets than they know is sensible.’
• Somewhat cynically, we added ‘it may be the constant whispering in their ears from their advisers but why else would they be tempted to treat the cash of shareholders to whom they own a fiduciary duty in a more cavalier fashion than they would their own, hard-earned, savings?’
More doubts about EBITDA:
• In August 2006 we wrote that EBITDA ‘ignores tax and all that nonsense’ but admitted that we had never ‘got it’ as a measure.
• We suggested that ‘it was widely used because it made things sound cheaper than did a PE ratio [and] also allowed loss-making companies to sound as though they weren’t.’
• We added that we couldn’t see why a loss making company wasn’t making a loss, saying we ‘had a serious issue with all of the letters that came after the ‘B’ because why, in anything other than the short term, should we look at earnings before anything?’
• We pointed out that, in a heavily-used facility such as a pub or a restaurant, maintenance capex wasn’t discretionary and nor was interest or tax (although we concede that interest may not be included by a potential bidder for the company who was likely to refinance it)
IFRS16 & capitalised leases:
• And, after we have to capitalise leases, many people will be looking at EBITDAR (which will be much higher than EBITDA for a leasehold business), which somehow suggests that rents may be discretionary as well
• I mean surely, either look at EPS, which is what’s left for equity shareholders after everyone else has had a dip or look at sales
VALUATION, CROWDCUBE ETC.:
• We’ll do a fuller piece on crowdfunding, which we see as something of a timebomb, at a later date.
• However, the Grind valuation (£34m for £9m of sales in a crowded coffee shop market) is a little rich.
• Any loss making company needs to have a plan to achieve profitability and, in a market where competitors are plentiful and deep-pocketed, this may be something of a problem.
• The company has ‘smashed’ its target raise of £1.35m with some £2.27m pledged. However, it says that £1.13m of this is coming from existing shareholders and adds that this money, which must have been pledged earlier, could be spent during the fund-raising process.
• This indicates that perhaps 80% plus of the targeted money had been raised already and that the target was rather easy to beat.
• The proof of the pudding will be in the eating. But see our comments on upward only leases, capacity & discounting etc. It could also go rather badly.
COMING ON MONDAY:
• We got sidetracked today in considering LfL sales. Tomorrow a bit more from the archives & perhaps something on the power of incentives.
FEBRUARY PUB & RESTAURANT SALES TRACKER:
• Coffer Peach Tracker for Feb shows managed pub LfL sales +1.4% with chain restaurants down 1.7%. This represents a continuation and perhaps sharpening of recent trends
• The Tracker says pub & restaurants combined ‘saw collective like-for-like sales increase just 0.3% in February against the same month last year’
• The Tracker notes ‘drink-led pubs were the strongest performers, with London also out performing the rest of Britain’
• London pub & restaurant sales were +1.0% for the month compared with just 0.1% outside the M25. Pubs in London were +3.0% but restaurants were down by 2.2%. This despite recent comments suggesting that some capacity was finally beginning to come out of the latter market.
• Feels like a month of two halves with H1 tough but H2 very good on the back of not only a non-repetition of the Beast from the East but actually very good weather allowing some almost unheard of February drinking out of doors
• CGA comments ‘the mini heatwave towards the end of the month certainly boosted pub trading, and also helped restaurant sales, as people enjoyed the unseasonal sunshine, but unfortunately it wasn’t enough to move the whole market much.’
• CGA says ‘despite a better end to the month, early February was generally poor for restaurants’. It reminds observers it was cold at the beginning of the month.
• Pubs increased drink sales by 3.5% whilst food sales, even in pubs, fell by 0.9%. With costs increasing more re the latter than the former, this won’t be helping margins.
• Coffer Corporate Leisure comments ‘there is no quick fix for the restaurant sector. Oversupply in some areas will mean that we may continue to see negative numbers for the foreseeable future, especially within the M25 where competition is fiercest.’
• RSM agrees saying ‘the expected pick up for casual dining resulting from the closure of under-performing sites compared to a year ago failed to materialise.’
• RSM says ‘the fact that sales are continuing to fall [for restaurants] is a huge challenge for the eating out sector and underlines the fierce competition for discretionary spend on the High Street, as consumers tighten their purse strings in preparation for Brexit.’
• Total sales rose by 2.7% suggesting that around two and a half percentage points continue to be added by new openings.
• LfL sales over the last 12mths to date are up 0.9% against inflation of around 2.0% and restaurant cost inflation of considerably more than that.
GENERAL NEWS – PUBS & RESTAURANTS:
• Per CGA, Brexit has had a negative effect on pubs’ business, with half of the sector’s leaders wanting to either cancel Brexit or hold a second referendum, according to CGA’s Business Leaders’ Survey.
• The survey also found 73% were concerned about the impact on food costs and 70% about the value of sterling. Regarding social and political issues, immigration controls topped the list for business leaders.
• Per Sunday Times, Jamie’s Italian tries to find a buyer following a CVA last year which saw the chain shut around a third of its sites and cut c600 jobs. HSBC may be forced to write off £17m of its £34.2m debt in the company.
• Per Telegraph, Jamie’s Italian is seeing interest from five turnaround investors, with second-round bids due in the first week of next month. The 22-site chain’s CVA last year saw Jamie Oliver put £13m of his own money in the business.
• Discounts still much in evidence. Beefeater (WTB) 33% off food, Prezzo 40% off mains, Pizza Express 25% off food etc.
• Coffee shop chain & roastery Grind has raised £2.3m from investors in its latest round of funding on Crowdcube. The company, which is valuing itself with its 11 coffee shops at £34m pre new money, says that it ‘has received £1,126,970 from 24 existing and new investors which may be spent whilst crowdfunding campaign is live.’ This is included in the £2.3m mentioned above. The group says that 777 investors have indicated that they will put money in.
• Grind, which was founded in Shoreditch in 2011, reports that it ‘has spread across London and evolved into an award-winning group of 11 central London locations serving coffee, food and cocktails to a killer soundtrack.’ It is ‘one of London’s fastest growing and most exciting hospitality brands.’
• Grind is valuing itself at 3.5x historic sales or 21x historic site EBITDA. The last accounts lodged with Companies House (to April 2018) show a retained loss for the year of £1.35m with cumulative losses since incorporation of some £4m). The company is planning 3 company owned and 3 franchised openings in the next 18mths. The co reports that it achieved 19% LfL sales growth in FY18.
• Britvic has announced the appointment of Joanne Wilson to the Board as Chief Financial Officer. Ms Wilson will join from dunnhumby.
• KAM Media reports that two fifths of 18-24 year olds describe themselves as teetotal. This is more than twice the number of UK adults in general.
• KAM suggests there is some evidence that there are both more teetotal Gen Z consumers and more who may be heavy drinkers.
• Lynx Purchasing has recommended that operators look beyond Brexit and focus on the opportunities that a sustainable approach to business offer: ‘In the current market, it can feel like a challenge to try and focus past the potential for supply chain disruption over the coming months, and onto the long term. But that’s exactly what we’re encouraging hospitality businesses to do’.
• The Polpo restaurant group has agreed a CVA, after 98% of creditors approved terms.
• Meal kit sales in the US have continued to grow in 2018 up 36%. Meal kit customers were found to be younger than typical shoppers, and from households with incomes of $100,000 or more.
• Albion & East, the London based bar group, has announced it will open Serata Hall in Islington next month.
HOLIDAYS & LEISURE TRAVEL:
• Abta has welcomed the government’s confirmation that it will reciprocate the European Union’s arrangements for air travel in the event of a no-deal Brexit. Aviation minister Liz Sugg said: ‘Measures put forward by the UK and the EU will ensure that flights can continue in any scenario; deal or no deal’.
• The BVA-BDRC Holiday Trends report will show a three-point rise year on year to 71% in the proportion of UK adults who anticipate taking an overseas holiday this year. Prospective holidaymakers appear undeterred by Brexit despite a ‘significant’ increase in concerns about the impact of Britain leaving the EU.
• Post Office Travel Money research shows prices for UK tourists have fallen in the majority of 44 European cities surveyed. The biggest falls included Venice, where prices dropped more than 23%, and Amsterdam.
• Airbnb signs a deal to acquire HotelTonight for an undisclosed sum. A 2017 fundraising round valued HotelTonight at around $460m. Airbnb CEO Brian Chesky said ‘A big part of building an end-to-end travel platform is serving every guest, whether they plan their trip a year or a day in advance’.
• Airbnb announces it has ’no plans’ to launch an airline. The statement comes after speculation resulting from the recruitment of Fred Reid, former chief executive of Virgin America and ex-Delta Air Lines president.
• HotStats reports January European hotel profit per room down 9.1% yoy, driven by rising costs and a fall in revenue. Occupancy was down 0.9%, RevPAR down 0.2% to €81.19 but ADR rose 1.5% to €141.04.
FINANCE & ECONOMICS:
• US economy added only 20k new jobs in February, the lowest number in a year and a half. The betting is now swinging away from an interest rate rise later this year.
• Sterling lower at $1.2981 and €1.1554. Oil up a shade at $66.03. UK 10yr gilt yield unchanged at 1.18%. World markets lower Friday but Far East up in Monday trade.
• Brexit, politics etc.:
o Meaningful vote Tuesday, Spring statement Wednesday.
o Mrs May could be heading for defeat as there would appear to be no changes to the terms first offered to the UK last year.
o Blame game has begun as Mrs May tells Grimsby ‘the decisions that the European Union makes over the next few days will have a big impact on the outcome of the vote.’ PM says we need ‘one more push’ to get Brexit deal through. Dutch PM Mark Rutte says he does not know what that means.
o Mrs May has cautioned that Brexit may not happen if MPs reject her unchanged deal. Jeremy Hunt echoing her words on Sunday.
o Tory party chairman says HMG cannot accept a deal that threatens the unity of the United Kingdom by treating Northern Ireland differently.
o Telegraph says: ‘more than half of the UK’s 161 international agreements with non-EU countries – covering everything from aviation to trade – are still in jeopardy with less than a month to go until Brexit.’ Trade Secretary Liam Fox insisting progress is being made
o Reuters suggests there is no majority in the House of Commons in favour of holding a second Brexit referendum
PRIOR DAY LATER TWEETS:
• Later tweets: Deliver. See Premium email. Likely to buy bricks & mortar at some point. Look at Amazon, GVC etc. to see how dotcoms progress
• Capacity. There’s no braking mechanism when it comes to restaurant & coffee shop capacity, but quite an effective crashing mechanism
• CVAs (like pre-pack administrations before them) are interfering with the market – and not always in a good way
• See Premium email for From the Archives on EBITDA (the big lie). Are depreciation, tax, interest discretionary? Thought not.
• Pat Val’s new owner says it has the money & skill to rebuild the co (despite sacking the café chain’s top management)
• Outbound sales for summer 2019 were up 12% yoy last week in a ‘sign of positivity’ says GfK
• Goals Soccer scores hattrick. Profit warning, breaches bank covenants and finds ‘accounting errors.’ Shares down a third.
• Restaurant group shares back at 10yr lows. Got a lot to prove. IFRS16 will change its numbers, including debt, materially
START THE DAY WITH A SONG:
Last Friday’s song was Ode to Billie Joe by Bobbie Gentry. Today, who sang:
Well he looked down at my silver chain,
He said I’ll give you one dollar
I said You’ve got to be jokin’ man
It was a present from me Mother
TOPICS FOR CONSIDERATION IN PREMIUM EMAIL:
• Thematic pieces including Pubs vs Restaurants, Delivery, Experiential Leisure, Crowd Funding, CVAs, Employemnt levels (& costs) etc.
• Occasional ‘deep dives’ into stocks (Pat Val, RTN etc.), trends etc.
• Book reviews. Black Swans, The Honest Truth about Dishonesty, Dark Pools, Lean Start Up, 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
• Behavioural economics. Over-confidence, Hofstadter’s Law, confirmatory bias etc.
• Other. Guest contributions, From the Archive etc.
RETAIL NEWS WITH NICK BUBB:
• Saturday Press and News (1): The battle between Sports Direct and the struggling Debenhamsgot plenty of coverage in the Saturday papers, with the Daily Mail (“Debenhams coup sparks fears for Sports Direct”) quoting our view that Sports Direct shareholders will be alarmed by this “massive distraction for the business”. And Lex column in the FT also waded in to the situation, thundering that “Mad” Mike Ashley should be “minding his own business”, given the poor performance of the Sports Direct share price. The Telegraph, as well as the Times, highlighted that #MadMike’s attempted coup at Debenhams followed meetings with Debenhams’ bondholders that rebuffed his crazy idea of installing himself as CEO and that he is taking on the might of Wall Street hedge funds. And the FT had a big feature article on the battle, along with a slightly odd graphic about Sport Direct’s random spread of High
• Saturday Press and News (2): In terms of other Retail stories, but continuing with the #MadMike theme, the collapse in the share price of Goals Soccer Centres, after Friday’s profit warning about accounting errors, was flagged up in the Times, whilst it was also the lead story in the Daily Mail stockmarket report (which highlighted that it had cost Sports Direct £2.6m, given its 19% stake). The Daily Mail also noted that Greggs is to launch a home delivery service and CEO Roger Whiteside was the Daily Mail’s “Hero of the Week” (its “Zero of the Week” was Debenhams CEO, Sergio Bucher).
• Saturday Press and News (3): The Guardian flagged that Liam Gallagher’s loss-making menswear brand Pretty Green has called in restructuring advisers and the FT had a big feature on the collapse of LK Bennett fashion chain, noting that its high prices had deterred shoppers, despite the return of the founding force Linda Bennett. Finally, both the Times and the Telegraph highlighted a survey by HSBC showing that nearly a quarter of Ocado customers will move their business when it replaces Waitrose with M&S.
• Sunday Press and News (1): Scoops were a bit thin on the ground in the Sunday papers, although the Sunday Times flagged that the beleaguered Philip Green has sold the former BHS HQ on the Marylebone Road for a cut-price £44m, to shore up his crumbling Arcadia empire, whilst the Mail on Sunday highlighted that the High Street Minister Jake Berry appeared to tell MPs last week that the Government is considering a 2% Online sales tax. And the Sunday Times had an interesting feature article about the corporate governance row at Boohoo (“Boohoo’s tears in the boardroom”) between the retiring Chairman Peter Williams and the co-founder Mahmud Kamani, noting the loyal support for his move to be Executive Chairman from Richard Buxton of the biggest external shareholder, the fund manager Merian Global Investors, and highlighting that “the Kamanis are a family of traders who share a ferocious
• Sunday Press and News (2): The battle between Sports Direct and Debenhams also filled more column inches in the Sunday papers, with the Mail on Sunday and the Sunday Times both flagging that Debenhams is close to securing a refinancing deal on another big chunk of its debt. The Sunday Times also noted that the leading hedge fund manager Crispin Odey thinks that #MadMike should be concentrating on moving Sports Direct upmarket, whilst the Sunday Telegraph, and others, highlighted that investors have “derided” his plans to become boss of the Debenhams. The Business Leader column in the Observer, however, thundered that “Ashley probably starts as favourite to succeed in his attempted coup”, although investors should be sceptical: “what helps Ashley may not benefit them”. The Business editorial in the Sunday Telegraph also touched on the subject of Debenhams in a general piece headlined
• Sunday Press and News (3): The Mail on Sunday noted that the struggling stationery chain Office Outlet has called in restructuring advisers, whilst the Sunday Times flagged that a European private equity real estate firm called Orion Capital Managers has built up a 4.1% stake in the embattled shopping centre company Intu Properties. Finally, the Sunday Times noted that the final results from Morrisons on Wednesday will highlight its links with the struggling convenience store chain McColl’s (whose share price has rallied strongly of late).
• Superdry: The struggling Superdry had until the end of this month to formally respond to the recent requisition by the founder Julian Dunkerton for a shareholder meeting, but it has come out fighting today, with notification of a meeting as soon as April 2nd. It has no doubt been encouraged by the fact that “Institutional shareholders have voiced strong support for the current strategy and management team; none of them has indicated to the Board any support for Mr Dunkerton’s return to the company”, perhaps because “Mr Dunkerton had prime responsibility for the Autumn/Winter 2018 range”. In passing, it seems highly ironic that the Boohoo Chairman, Peter Williams, fresh from his corporate governance row with the entrepreneurial founder of that business (as detailed in the Sunday Times yesterday) has thrown in his lot in this battle with the aforementioned entrepreneurial founder of the
• Debenhams: The beleaguered Debenhams also has until around the end of this month to formally respond to the recent requisition by Mike Ashley for a shareholder meeting, but in this case the chances of it prevailing are less good, so an early response is unlikely, particularly given the delicate and complex state of negotiations over the debt refinancing. The company has, however, been able to confirm this morning the weekend press reports that it is in advanced negotiations with its current lenders about additional facilities of c£150m (£40m of these facilities will refinance the £40m bridge facility announced on 12 February).
• News Flow This Week: For horse racing fans this week is all about Cheltenham (and “Honest Nick” will be bringing you his Tips every day, starting tomorrow), but for politicians it is all about Brexit, with the key vote scheduled for tomorrow evening, just before the Spring Budget statement on Wednesday lunchtime…In retailing, however, there is plenty going on, including the prestigious “Retail Week Awards” on Thursday evening. Otherwise, tomorrow brings the French Connection finals and the Pendragon finals. On Wednesday we get the Morrisons finals, the Lookers finals and the Dignity finals. Thursday brings the DFS interims and the Signet Q4 (in the US) and on Friday John Lyttle takes over as CEO of Boohoo.