Langton Capital – 2019-03-12 – Domino’s, delivery, incentives, EBITDA debunked, 888 & other:
Domino’s, delivery, incentives, EBITDA debunked, 888 & other:
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A DAY IN THE LIFE:
I think that the five second rule, often used to judge whether a piece of food is still edible after being dropped on the floor, needs to be tempered a bit.
Because you could pick up a piece of broccoli after less than a second and I wouldn’t want it but, if you’re talking about a slice of toast or a chunk of burger, then that’s a different matter.
And the floor (or other flat surface) onto which it falls should also have some bearing. There’s a difference between a newly wiped down kitchen counter and the dog’s bowl, for example, and the inside of the Bearded Dragon’s cage, with its small piles of half-digested crickets & locusts and general muck is a definite no-no.
Though for a particularly juicy slice of bacon exceptions could be made.
And, talking of the dog, if he gets to the food first, then it’s probably a goner. You might rescue said bacon or burger but you’d be more likely to lose a couple of fingers in the attempt and the line has to be drawn somewhere. On to the news:
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COMPETITON IN THE DELIVERY MARKET:
• Competition in delivery. Uber Eats has announced that Franco Manca, The Real Greek & MeatLiquor will now be available to order on its app.
• Uber Eats reports ‘we are always striving to offer the best selection of restaurants for our customers, and are excited to be working with Franco Manca, The Real Greek and Meat Liquor.’ It adds ‘the addition of this fantastic trio of much-loved restaurants is great for Uber Eats, and we’re delighted to be able to offer our customers their incredible dishes at the touch of a button.’
• It is thought that other restaurants have passed on the chance to continue working with Deliveroo & have moved exclusively to Uber.
• Continued in Premium Email: You live by the sword, you die by the sword? Deliveroo has been carving up the restaurant market for a number of years – but now competition has seriously intensified.
• Deliveroo has been charging smaller restaurant chains 30% plus for their services and, though that has helped LfL sales, it hasn’t left much profit for the operators after they’ve paid for their ingredients, labour & properties.
• Uber is thought to be charging less, in addition to which, it may be offering innovative deals in order to secure customers. Think of the products (or services) that a pub chain might ask for if it were to replace Fosters with Carlsberg as its main session lager, for example.
• Spade equals spade. Deliveroo has racked up losses of perhaps half a billion quid. It has done this against the background of nascent competition. It needs to get to profitability at some point. This may be tougher if Uber is poaching its customers.
THE POWER OF INCENTIVES:
Ad hoc issues no2 – 12 March 2019:
• Charlie Munger says, no matter how important you think incentives are, they’re more important than that
• So, they need to be carefully measured because, when combined with the adage ‘what gets measured, gets done,’ they can determine the future of a business.
• Rarely can one single measure be enough to ensure the success of a business.
Incentives in the F&B industry:
• On the ground, staff should probably be incentivised to achieve good customer scores as these are themselves something of a balanced scorecard
• But senior staff may be blinkered when it comes to their own behaviour and, too often, they may target one or two measures to the exclusion of many others
• Too often LfLs grab the headlines. That’s bad enough (see yesterday’s comments on the Coffer Peach Tracker) but then the focus may switch to margins.
• And achieving high margins and high LfL sales are, whilst not exactly mutually exclusive, at least somewhat difficult to achieve in tandem
• Witness JDW’s targeting of sales, which has been achieved somewhat at the expense of margin and RTN’s targeting of margins (under its previous management), which was associated with falling LfLs
Meanwhile, in the real world…
• The aim surely has to be to keep the whole show on the road – and here there are no quick fixes
• Delivery or discounting may boost LfL sales in the short term but, longer term, they may in the case of delivery, hurt margins and in the case of discounting, both hurt margins and provide customers who evaporate when the discounts fade away
• Longer term growth can be secured by luck or good timing but, more reliably, it’s to be had by offering the right product to the right people from the right premises at the right prices
• And by doing this authentically and, most importantly, day after day after day…
EBITDA: THE BIG LIE – ACCOUNTANCY No3 – 12 March 2019:
• In 2006, 2yrs before the credit crunch, we suggested that mixing debt and equity to give an EBITDA measure was not always a good idea.
• Little has changed though we accept that if a co is to be completely refinanced, e.g. in the event of a takeover, mixing capital types may be acceptable.
• This is the exception rather than the rule.
Debt versus equity:
• Debt & equity have different return profiles and their providers expect to face different levels of risk.
• You can’t ‘default’ on a dividend, which is discretionary, but you certainly can on an interest payment, which isn’t
• Debt ranks above equity in the case of a winding up. The two types of capital are not fungible.
• Once leases are capitalised & we’re looking at EBITDA, we’ll be looking at equity mixed with debt mixed with a notional figure of capitalised lease finance provided by landlords.
• This will not change the business dynamics, but it will highlight the element of capital which has be serviced, regardless of the profitability (or otherwise) of the company in question.
• It should help to explode the risk that ‘low debt’ (but highly-exposed, leasehold) businesses
FROM THE ARCHIVES:
Blasts from the Past – 2006-speak:
• Remember ‘efficient balance sheets.’ They were those with loads of debt. They were also extremely fragile, dangerous etc.
• Banks had (and have) ‘work out teams.’ They’re the ones that put on the Big Squeeze. Read the ‘saddlebags’ section in A Man in Full
• Loan docs often have ‘cure-clauses.’ The may be a cure, but often only for the bank. Killing the patient may, in that context, be a part of the cure
• In 2008-09, when the tide went out, we saw who was swimming naked and all of the above became relevant.
• And one thing that was hard to miss looking through the archive was all those companies that are no longer listed.
• First came the take privates (available debt, boundless optimism) and the bids, then came the 99% club (share price drops), then the pre-pack administrations and then the busts.
• Looking at one short period in Q3 & Q4 of 2006, we had the following listed companies reporting numbers: Ladbrokes, Party Gaming, Stanley Leisure, Punch Taverns, Luminar, Ultimate Leisure, Talarius, Arena Leisure, Regent Inns, De Vere Group, Sporting Bet, Fishworks, Georgica, First Choice, My Travel & Top Ten Bingo.
GENERAL NEWS – PUBS & RESTAURANTS:
• Domino’s Pizza Group reports FY numbers saying revenue rose by 9% to £1.3bn with UK LfL sales +4.6% (excluding splits)
• DOM reports total profit down 22% at £61.9m but underlying EPS up 2.5% (excluding last year’s 53rd week) at 16.1p.
• DOM CEO David Wild says ‘2018 was a mixed year.’ He says ‘in the UK and Ireland, which account for around 90% of the business, we extended our excellent track record of growth and cash generation, responding well to the very challenging environment for the casual dining market.’
• However, the group adds: ‘internationally, we have experienced some growing pains which have hampered our overall financial performance.’ The group says ‘we expect an improved performance from International, with the business targeted to break even this year.’
• Discounts: Bella Italia 40% off food, Prezzo the same. Pizza Express 25% off food etc. etc.
• Small Batch Coffee has reported that Luke Johnson has ceased to be a director of the company.
• JD Wetherspoon has increased its prices on food and drink for the fifth time in two years, the Morning Advertiser has reported. An ultimate burger and an alcoholic drink now cost £7.75 in Oxted in Surrey.
• Diageo has reentered the cider market with the launch of Rockshore Apple Cider. Stuart Kinch, head of marketing for beer and cider at Diageo, said: ‘We have been experimenting and trialling cider recipes for several years and we believe that we have landed on something refreshingly different’.
• The Asian Catering Federation (ACF), has warned that the rise of ‘dark kitchens’ could kill off many restaurants and takeaways. Chairman of the ACF, Yawar Khan said: ‘We have already lost a vast amount of retail volume to online business – empty properties with To Let boards are everywhere. We need restaurants to drive the football, which is vital for surviving business’.
• Richard Hochfeld, one of the UK’s largest fruit importers, and the distiller, Foxhole Spirits, have teamed up in a bid to tackle food waste. The pair have produced a new gin called Hyke that will be made from some of the 1.4m punnets of table grapes thrown away each year.
• Wasabi is in talks to sell a stake in its business for the first time in its history. Companies House recently gave the company two months to get its affairs in order or face being ‘dissolved’ after it missed last year’s deadline to file its accounts.
• PwC has been hired to help Wasabi raise finance, which will be used to refurbish sites and fund expansion in America. Eight months ago, Wasabi secured a £30m credit facility from HSBC and negotiated with landlords to pay rent monthly instead of quarterly.
• Boxpark signs a deal to open a restaurant site in Shoreham beach, its first outside of London. The project will see Boxpark is team up with Dan Stockland of Hove’s Big Beach Café.
• Alibaba acquires nearly 15% of STO Express for $693m, its fourth investment in a domestic delivery company.
• In the US, Simon Property Group is looking to alternative solutions to the threat from online to retailers. Last year, the company announced plans to open at least five Marriott International hotels in its malls, with ambitions to have as many as 7,000 homes and 3,000 hotel rooms in a dozen on its properties.
• Springboard reports February footfall down 2% yoy, despite being Britain’s warmest-ever, and marking the 15th consecutive monthly decline.
HOLIDAYS & LEISURE TRAVEL:
• The BVA-BDRC Holiday Trends report finds more UK consumers ‘will take an overseas holiday in 2019 than in the last five years’. Prospective holidaymakers appear undeterred by Brexit despite a ‘significant’ increase in concerns about the impact of Britain leaving the EU.
• Brittany Ferries announces it carried 2.6m passengers in 2018, up 1.4%, with total turnover of €442m and profit of €8m. The company also urged the French government to take urgent steps to ensure British holidaymakers and freight move freely.
• Luton airport reports passenger numbers up 13% yoy in February to nearly 1.2m.
• 888 Holdings has reported FY numbers saying it has seen ‘continued strategic progress and resilient financial performance resulting in record EBITDA.’
• 888 reports revenue down 2% at $529.9m with adj. EBITDA +6% at $107.1m. EPS is 20.2c versus 20.1c last year. CEO Itai Pazner says ‘despite headwinds in some areas of the business, the financial performance in 2018 was resilient and we achieved a record EBITDA outcome for the year. The Group achieved continued growth across several regulated markets, primarily in Continental Europe, underpinned by good momentum in Casino and Sport.’
• 888 concludes ‘the Group continues to base its success on its unique technology-edge, fantastic team and diversification across products and markets.’ It says ‘we look forward to another exciting year of progress in 2019.’
FINANCE & ECONOMICS:
• The Turkish economy slipped into recession last year with a 2.4% contraction in Q4 on the back of a 1.6% drop in Q3.
• Sterling up sharply on Brexit news to $1.3213 and €1.1738. Oil up to $66.63. Sterling 10yr gilt yield unchanged at 1.18%. Global markets all up yesterday with Far East up in Tuesday trade.
• Brexit, politics etc.:
o Mrs May has flown back from Europe waving a piece of paper & claiming victory. Meaningful vote to go ahead this evening.
o But Sky (and others) report that this may not be enough to stave off defeat tonight. Sky says ‘Theresa May is facing the threat of another humiliating Commons defeat on Brexit despite an 11th-hour dash to Strasbourg in a bid to win an improved deal.’ The Express quotes the DUP as saying ‘it’s not over yet’.
o Mrs May said ‘today we have secured legal changes.’ She says that the backstop cannot be indefinite & adds that this is ‘legally binding.’
o Ramping up the tension (and the star-status of any deal). Downing Street had yesterday said talks were ‘deadlocked’. Mrs May flew to Strasbourg for more talks.
o The Chartered Institute of Procurement and Supply has conducted a survey that suggests UK firms are being warned that EU companies plan to make them pay for any delays or costs if Brexit is messy.
o Some £900bn of financial assets have been moved out of the UK per think tank New Financial
PRIOR DAY LATER TWEETS:
• LfL sales versus margin, an ongoing conundrum. LfL sales’ growth is a means to an end. Be careful how you incentivise?
• Ebitda, the big lie. See From the Archives in Premium email. More risks taken with OPM (other people’s money) – see Premium
• Feb Tracker LfLs +0.3% with Pubs > Restaurants & London > Provinces. Restaurants discounting & using delivery & still LfLs fall
• Jamie’s Italian tries to find a buyer following a CVA last year. Press suggests HSBC could lose out on its loans
• 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. PNM valuation £34m
START THE DAY WITH A SONG:
Yesterday’s song was Dreadlock Holiday by 10cc. Today, who sang:
Jesus freaks out in the street,
Handing tickets out for God
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:
French Connection: It has all gone a bit quiet since the struggling French Connection (another of #MadMike’s strategic investments) announced last October that it had put itself up for sale and there is still no news with today’s finals for y/e Jan, although discussions are continuing with several parties and the company expects to wrap things up “during the first half of 2019”. In the meantime, the business has limped back into a modest underlying operating profit of £0.1m, thanks to its Wholesale arm and the veteran boss, Stephen Marks, says “Although we are only early into the new financial year, I believe we are in a very good place and will make further significant progress”.
News Flow This Week: For horse racing fans this week is all about Cheltenham (see “Honest Nick” and his Tips below), but for politicians it is all about Brexit, with the key vote scheduled for this evening, just before the Spring Budget statement tomorrow lunchtime…In retailing, however, there is plenty going on, including the prestigious “Retail Week Awards” on Thursday evening. Otherwise, tomorrow brings 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.
Waitrose Store Closure Watch: The profit recovery at Waitrose saved the bacon of the JLP Bonus last week, as it were, but on Thursday Waitrose also announced that 5 underperforming stores are to be sold in the next few months. The biggest store to be sold off is the 26,000 sq ft unit in Barry, in the Vale of Glamorgan. The next two biggest stores are located in Teignmouth and Torquay in Devon, followed by Ashbourne in Derbyshire and Blaby in Leicestershire. Now, we can’t claim to have visited any of these stores, but our eyebrows were raised by the Torquay store closure news, not least because it is the store that services the Waitrose.com delivery operation in our beloved South Devon/South Hams…The store is in a downmarket part of Torquay and appears destined to become a Lidl in the future, but it is unclear how Waitrose.com will service Online Grocery customers in the area, unless the
Weather Watch: It has turned wet and windy recently, but memories about “the weather” are always notoriously short-term and often too London-centric…so we turned to the Retail weather consultants Planalytics for their regular monthly overview of how last month’s weather “should” have affected trading on the High Street across Great Britain…And their overview for the calendar month of February was headlined “Turning the Switch to ‘Heat’”, flagging that “Warmer Temperatures Prompt A Look Ahead to Spring”. Despite a cool spell at the beginning of the month, February was much warmer than last year, as the overall GB temperature for February of 5.3C was 1.4C more than last year (and 1.1C more than “normal”). Overall, across the country, in terms of sales of key seasonal products, Planalytics estimate that the impact of “weather driven demand” for last month was -12% for Soup and as much as
TIPS Watch (1): The great 4-day Cheltenham Festival jumps racing starts today and our alter ego, “Honest Nick”, will be bringing you his each-way Tips each day. Now, the unusually wet and windy weather could cause some upsets, but it should suit the Irish horses, although the Irish surely won’t win every race…In the first race, at 1.30pm, we were keen on Al Dancer before the rain fell, but the Willie Mullins trained Klassical Dream is one of any number of live contenders, so we’re going to pass on this race as being just too difficult to read. In the second race, at 2.10pm, the Irish horse Hardline is respected, but we’re going for Glen Forsa. In the third race, at 2.50pm, Mister Whitaker is respected, but we’re going for the Irish horse Up for Review. In the big race at 3.30pm, the Champion Hurdle, the Irish favourite Apple’s Jade should prevail at short odds and in the fifth race at