Langton Capital – 2019-03-15 – PREMIUM – JD Wetherspoon, Restaurant Group, EIG, tariffs, costs etc.:
JD Wetherspoon, Restaurant Group, EIG, tariffs, costs etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I’ve been reading a bit of Dostoyevsky recently, which has provided proof to me, if proof be needed, that this Hull comprehensive schoolboy is not really a member of the Liberal Elite.
Because I struggle with the prose.
I hesitate to say they’re turgid; they’re almost certainly wonderful but I’m finding them a bit difficult as I’ve been struck with a case of something-lexia in that I’m understanding all the individual words but not really absorbing the meaning.
Anyway, it was Votaire last week. Much easier. It was in English, mind, but I’m told that Goethe in the original German is a must. I might make a page a day – but that’s only if there’s plenty of dialogue involving cats sitting on mats. A busy day for a Friday so let’s move on to the news.
JD WETHERSPOON – H1 NUMBERS:
JD Wetherspoon has this morning reported first half year numbers for the 26wk period to 27 January and our comments thereon are set out below:
JDW has reported H1 revenues up by 7.1% at £889.6m with LfL sales +6.3%. PBT is £50.3m (last year £62.0m) and EPS is down 18.2% at 37.4p (2018: 45.7p). The H1 dividend is held at 4.0p. Chairman Tim Martin says the group opened two new pubs & closed six in the period.
Mr Martin points out that pubs pay more tax than supermarkets, that Brexit is a good thing & says ‘in the six weeks to 10 March 2019, like-for-like sales increased by 9.6%, helped by excellent weather this year and snow last year, and total sales increased by 10.9%.’
Mr Martin says ‘as previously indicated, costs in the second half of the year will be higher than those of the same period last year. The company anticipates an unchanged trading outcome for the current financial year.’
• JDW reports sales up 7.1% in H1 with PBT down and EPS some 18.2% lower at 37.4p.
• The H1 dividend has been held at 4.0p.
• The group updated on H1 on 23 Jan at which time it confirmed that LfLs for the 6mths were up by some 7.2% with two pubs opened and 6 sold.
• The group announced that sales growth had been ‘strong’ but confirmed that costs had been ‘considerably higher than the previous year, especially labour.’
• The group pre-announced that H1 profits would be below those of last year.
• Recent sales trends are shown below:
Tab.1. Recent Sales Trends (rubbish formatting alert)
Financial Period LfL Sales
Full year 2008/09 +1.2
Full year 2009/10 +0.1
Full year 2010/11 +2.1
Full year 2011/12 +3.2
Full year 2012/13 +5.3
Full year 2013/14 +5.5
Full year 2014/15 +3.3
Full year 2015/16 +3.4
Full year 2016/17 +4.0
Q1 2017/18 +4.1
H1 2017/18 +6.1
Q3 2017/18 +3.5
FY 2017/18 +5.0
First 13wks 18/19 +5.5
12wks of Q2, 18/19 +7.2
H1 2018/19 +7.2
6wks of H2 +9.6
Source: Company Reports
More on trading.:
• JDW reports food sales were +7.1% with drink sales +5.9%.
• LfL hotel room sales increased by 0.3% (2018: 3.1%).
• Bar sales were 60.5% of total sales, food 35.9%, fruit/slot machines 2.5% and rooms 1.1%.
• JDW reports that ‘net interest was covered 4.0 times by profit before interest, tax and exceptional items (2018: 5.5 times), as a result of higher interest charges and lower profits.’
• JDW says ‘pubs and restaurants pay proportionally far higher levels of UK tax than do supermarkets. The main disparity relates to VAT.’
Balance sheet, debt etc.:
• JDW reports ‘total capital investment was £95.5m in the period (2018: £61.4m). £55.7m was spent on freehold reversions of properties where Wetherspoon was the tenant (2018: £7.5m), £24.9m on existing pubs (2018: £35.1m) and £14.8m on new pub openings and extensions (2018: £18.8m).’
• The group reports that it had net debt at the H1 end of £724.0m, a decrease of £2.2m, compared with that of the previous year end (2018: £726.2m).
• The net-debt-to-EBITDA ratio was 3.47 times at the period end (29 July 2018: 3.39 times).
• The group says ‘on 22 January, the company entered into a new five-year banking agreement which extends its total facilities, excluding finance leases, from £860m to £895m.’
• JDW adds ‘as previously stated, it is intended that the company’s net-debt-to-EBITDA ratio will be around 3.5 times for the foreseeable future.’
• During the period, JDW opened two new pubs and closed six, bringing the number open at the period end to 879. JDW says ‘following a review of our estate, in recent years, we placed around 100 pubs on the market, most of which have now been sold.’
• Some 60% of the group’s pubs are now freehold.
Conclusion, current trading etc.:
• JDW reports in the six weeks to 10 March 2019, like-for-like sales increased by 9.6%, helped by excellent weather this year and snow last year, and total sales increased by 10.9%.’
• The company says ‘as previously indicated, costs in the second half of the year will be higher than those of the same period last year. The company anticipates an unchanged trading outcome for the current financial year.’
• JD Wetherspoon has reported that trading – at least in terms of LfL sales – has picked up since the year end but its comments re costs suggest that margins could remain under pressure.
• Comps are tough.
• Chairman Tim Martin has once again used the occasion to make his views on Brexit clear. We have suggested in the past that this may be a distraction.
• JDW remains a good company. It does what it does extremely well but it is not currently cheap and its low margins could prove to be a point of weakness if sales growth stalls.
RESTAURANT GROUP – FULL YEAR NUMBERS:
The Restaurant Group has this morning reported FY numbers to 30 Dec and our comments are set out below:
The Restaurant Group reports FY sales down 2.0% LfL with growth since the World Cup. The company says Wagamama ‘has continued to outperform the sector’ and says ‘concessions…opened 21 new units and entered four new airports’ with pubs also doing well.
There has been a sequential improvement in leisure business and the ‘enlarged group [is] now strongly orientated towards growth’. Total sales are +1.0%. Adjusted PBT is £53.2m, EPS is 14.7p (2017: 16.7p) and a final dividend of 1.47p is to be paid.
• Restaurant Group has reported full year numbers to 30 Dec saying that LfLs fell by 2.0% in the year
• It says Wagamama ‘has continued to outperform the sector’ and says ‘concessions…opened 21 new units and entered four new airports’ with pubs also doing well.
• There has been a sequential improvement in leisure business and the ‘enlarged group [is] now strongly orientated towards growth’. Total sales are +1.0%. Adjusted PBT is £53.2m, EPS is 14.7p (2017: 16.7p) and a final dividend of 1.47p is to be paid.
• Debt is £291.1m at the year end.
• The group reported on 24 Jan that LfL sales for the year under review were down 2.0%, but it said that it had been in LfL growth since the World Cup
• It confirmed at that time that pubs & concessions were performing strongly. RTN said at the time that it expected to announce a full year result in line with expectations
• The group now derives 70% of its EBITDA from ‘high-growth’ segments (Wagamama, Concessions & Pubs)
• There is no update at this stage on the new CEO
• Recent sales trends are shown below:
Tab.1. Restaurant Group Recent LfL Sales’ Trends:
Period LfL (rubbish formatting alert)
H1 – 2010 -0.5
FY – 2010 -1.0
H1 – 2011 +3.0
FY – 2011 +3.3
H1 – 2012 +3.3
FY – 2012 +4.5
H1 – 2013 +5.0
FY – 2013 +3.5
H1 – 2014 +2.5
FY – 2014 +2.8
H1 – 2015 +2.5
FY – 2015 +1.5
H1 – 2016 (27w) -3.9
FY – 2016 (53w) -3.9
H1 – 2017 -2.2
FY – 2017 -3.0
First 20wks -4.3
H1 – 2018 -3.7
FY – 2018 -2.0
10wks – 2019 +2.8
Source: Company Reports
• RTN reports ‘current trading is in line with our expectations with like-for-like sales up 2.8% for the ten weeks to 10 March 2019.’
• Outgoing CEO Andy McCue says ‘we have made significant progress in 2018, acquiring a differentiated, high growth business in Wagamama, opening a record number of new sites in both our Pubs and Concessions businesses, and driving improved like-for-like sales momentum in the Leisure business throughout 2018.’
• Mr McCue concludes ‘we now have a business that is orientated strongly towards growth and we continue to focus on delivering shareholder value.’
Restaurant Group – A Tumultuous Few Years:
Restaurant Group has warned on profits four times, had three CEOs (soon to be four), three CFOs and two chairmen in less than five years. It has announced the largest acquisition in its history and has cut its dividend.
• Aug 2014 – CEO departs – Andrew Page retires
• Aug 2014 – CEO appointed – Danny Breithaupt
• Jan 2016 – Profit warning
• Mar 2016 – Profit warning
• Apr 2016 – Profit warning
• Apr 2016 – CFO departs, Stephen Critoph steps down
• May 2016 – Chairman departs, Alan Jackson retires
• May 2016 – Chairman appointed, Debbie Hewitt joins the group
• Jun 2016 – CFO appointed – Barry Nightingale
• Aug 2016 – CEO departs – Danny Breithaupt leaves
• Aug 2016 – CEO appointed – Andy McCue joins
• Jan 2017 – Profit warning
• Apr 2017 – CFO departs – Barry Nightingale leaves
• May 2017 – Trading update re ‘transitional year’
• Aug 2017 – CFO appointed – Kirk Davis
• Oct 2018 – Acquisition of Wagamama, Rights Issue & dividend cut
• Dec 2018 – Rights Issue completed
• Feb 2019 – CEO departs – Andy McCue resigns
• The Restaurant Group has had an eventful few years since Andrew Page hung up his boots in August 2014.
• Perhaps the group had over-expanded. Perhaps it had put too much faith in Frankie & Benny’s, had failed to evolve, had pushed price too hard and had found itself with many sites (including the strongly-performing airports) where footfall was driven by factors other than the desire to eat.
• The Wagamama acquisition, enacted against significant shareholder opposition, topped off what RTN described as a ‘pivotal’ year. The group said that the purchase would be transformational and that it would provide the company with a ‘multi-pronged’ growth strategy.
• But CEO Andy McCue is to leave the company and the transformational, multi-pronged growth promised will have to be delivered by someone else.
• This is perhaps sub-optimal and, with the shares languishing at 10yr lows, the Stock Market seems to be somewhat sceptical as to execution.
• And, with Wagamama heavily exposed to delivery and with labour and occupancy costs on the rise, there are some grounds for concern.
• As regards Frankie & Benny’s – and indeed for the company as a whole – it remains a long road back. At one stage RTN’s market cap exceeded that of JD Wetherspoon.
• IFRS 16 comes into effect for accounting periods beginning after 1 January and RTN will be required to capitalise its leases and treat them as debt. This will provide easier comparison with freehold (and debt) heavier companies such as JD Wetherspoon, Marston’s and Greene King.
• Short term, RTN needs to source a CEO. He / she must then execute on a strategy put in place by their predecessors. That could put off some candidates.
• Certainly, comps are becoming easier but, as mentioned above, price cuts will hit LfL sales, competitors are continuing to discount and cost increases will impact margins.
• Prima facie, with group is relatively cheap as it is yielding over 5% even on a cut dividend. But execution is key & the competition will not stand idly by whilst RTN integrates Wagamama & gets its existing business back in order.
GENERAL NEWS – PUBS & RESTAURANTS:
• EI Group has completed on the disposal of its commercial pubs. CEO Simon Townsend says ‘today’s announcement is a significant milestone for the business and evidence of our ability to unlock value across our estate and realise attractive cash proceeds for shareholders.’
• Mr Townsend continues ‘this disposal will allow us to focus on driving growth across our core Publican Partnerships, Managed Operations and Managed Investments businesses, while also reducing our debt and delivering further shareholder value. With that in mind, we are pleased to announce a further £35 million share buyback programme, in addition to the £20 million programme we completed in January.”
• Fallons plans to develop a £250m food and leisure attraction near Harrogate called Future Park. The scheme will create 1,000 jobs and attract an estimated 3.5m customers a year.
• Craft Union Pub Co celebrates the contribution of its operators at its annual operator awards show in Blackpool, bringing over 600 people together.
• Tariff information may have come too late to be much use to the food & drink industry. FDF CEO Ian Wright has said that the government ‘announcement on tariffs underlines why the UK is not ready to exit the EU on 29 March. Business cannot adapt to this new regime in just two weeks. It is disgraceful; that we are, only now, getting to see these. There must be proper consultation with business before a change of this magnitude is introduced.’
• The FDF says ‘in a world where it is costly and complex to export finished goods to the EU, and costly and complex to import key ingredients, many food and drink manufacturers who trade with the EU will surely question whether the UK is the right place for them to be.’
• GBK has seen LfL sales increase 4% in the 16 weeks to 24 February 2019, after it entered into a CVA last year. The CVA is believed to have cost the company £18.3m due to redundancy payments, professional fees, compensation fund costs and store strip-out charges.
• Gary Usher, the owner of Elite Bistros restaurant group has set a new record on Kickstarter after raising £100k in just 11 hours. The money will be used to fund a new restaurant opening on King Street in Manchester.
• Heineken has opened its first brewery in Mozambique. Heineken has invested $100m into the site which will oversee the production of 0.8m hectolitres of beer a year.
• Pernod Ricard is mulling over a potential $500m sale of its wine divisions, which include Campo Viejo and Jacob’s Creek.
• Good Things Brewing Co has been awarded SIBA’s Brewery Business of the Year 2019. Neil Walker, SIBA Business Awards Judges Chair said: ‘Good Things Brewing Co impressed judges with their unique approach to all aspects of their business and how their core beliefs as brewers shone through not only in their branding but in their actions as an independent craft brewer’.
• Papa John’s International has partnered with DoorDash in the US, as the pizza delivery group explores third-party delivery to 1,400 restaurants across America. Anne Fischer, senior vice president of customer experience at Papa John’s said: ‘This partnership extends our continued commitment to meet customers wherever they are and provide simple, easy ordering for guests in addition to our own world-class Papa John’s mobile app’.
HOLIDAYS & LEISURE TRAVEL:
• Visitors to the UK from the US, Canada, New Zealand, Australia, Japan, Singapore and South Korea will be permitted to use e-gates at UK airports and Eurostar terminals starting in June. The change will benefit an estimated 6.5m travellers.
• MMGY Global research shows nearly 60% of millennials used a traditional travel agency to book a domestic break in the last year.
• The Greek tourism sector, which represents c20% of the countries GDP, grew by 6.9% in 2018 while the economy as a whole grew by just 2%. One quarter of all employment in Greece is based in tourism – equivalent to nearly one million jobs.
• The CAA’s Atol crisis management team is dealing with the fallout from Val-Ski, which ceased trading yesterday.
• Best Western will launch four brands in the UK on 11 April – Sadie, Aiden, Executive Residency and Gle. Gle, Sadie and Aiden will focus on the boutique hotel market while Executive Residency is Best Western’s extended stay brand.
• Boeing has grounded its 737 Max aircraft – totalling 371 airplanes – citing an ‘abundance of caution’ after the Ethiopian Airlines crash on Sunday.
• Uber’s autonomous vehicl0065s division seeks $1bn of investment from investors such as the SoftBank Vision Fund. The investment would value the business at between $5-10bn.
• For the week ending 9 March, STR reports US hotel occupancy down 2.4% to 66.8%, ADR up 0.8% to $132.01 and RevPAR down 1.7% to $88.15.
• Reuters reports Uber will IPO in April, the company will seek a valuation as high as $120bn.
• Facebook has restored service to Instagram after it suffered major outage for around 24 hours.
• SJM and MGM China’s gaming concessions have been extended for two years to mid-2022, in line with Galaxy Entertainment, Sands China, Wynn Macau and Melco.
FINANCE & ECONOMICS:
• Sterling little changed on the votes yesterday at $1.3238 and €1.1695. Oil down at $67.27 and UK 10yr gilt yield up 3bps at 1.23%. World markets higher with Far East up in Friday trade.
• Brexit, politics etc.:
o Business has given a cautious welcome to the House of Commons decision to ask the EU to allow the UK to delay Brexit. The time period is currently unknown. The BCC said ‘while most businesses will support an extension to Article 50 to avert the prospect of a messy and disorderly exit on 29 March, with just two weeks to go this vote leaves firms with no real clarity on the future.’
o PM’s deal to come back to the Commons a third time. Strong & stable Mrs May watching too much South Park, telling MPs to respect her authoritaaay.
o Still all to play for. ERG may be bounced into agreeing the PM’s deal for fear of a lengthy extension to Article 50. However, the facts re the backstop are unlikely to have changed.
o FT says it is ‘difficult to exaggerate the sheer irritation in Brussels, and in some national capitals, at the incompetence, arrogance and ignorance with which Mrs May’s government has handled the Brexit negotiations.’
PRIOR DAY LATER TWEETS:
• Management actions should be ‘problem appropriate’. Little point in making a strategic move to ‘solve’ an operational problem. See Premium e/m
• Crowdfunding – who is the idiot in the room? See premium email. Valuations are high, regulation is low. How will that end??
• The latest CGA Prestige Purchasing study into food costs has concluded that fish, dairy & soft drink prices are still rising.
• Warehouse companies are said to be doing well out of stock-piling. Morrison’s said that it is running low on toilet paper. Really, it did.
• GfK reports Summer 2019 bookings up 1% yoy in the week to March 9, driven by an 8% rise in all-inclusive bookings.
• Nasty Party vs Incompetent Party Brexit drama continues as they battle to destroy least value. More coming soon
START THE DAY WITH A SONG:
Yesterday’s song was The Sun Always Shines On Tv by A-Ha. Today, who sang:
I’ve waited hours for this,
I’ve made myself so sick
I wish I’d stayed asleep today
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:
• Boohoo: John Lyttle takes over as CEO of Boohoo today, with Mahmud Kamani taking over as Chairman from Peter Williams and co-founder and Joint CEO Carol Kane stepping back to be an Executive Director: all as announced back on Sept 17th. Six months on it is a bit surprising that Boohoo has not been able to announce the 2 promised new non-execs, but the search is said to be “progressing well” and no doubt there should be some news by April 24th, when the final results are announced. After 8 years as COO at Primark, John Lyttle is an expert on distribution/logistics, so it will be interesting to hear what he says on April 24th about Boohoo’s plans on this front.
• News Flow Next Week: Next week will bring yet another key Brexit vote in the House of Commons, but there is plenty going on in retailing to keep us busy, beginning on Tuesday with the Ocado Q1, the Applegreen finals, the ScS interims and the ASOS update. Wednesday then brings the Kingfisher finals (and a decision about the future of the CEO, Veronique Laury). Then Thursday brings the much-awaited Next finals, as well as the Ted Baker finals, the Game Digital interims and the ONS Retail Sales figures for February.
• Trade Press: Retail Week magazine today went to print back on Tuesday, but it goes big, inevitably, on last night’s annual Retail Week Awards (see below). In Drapers magazine the Editor looks at the demise of LK Bennett in her column and thunders that “Lack of long-term leader left LK Bennett lost”. In terms of News stories, Drapers highlight that LK Bennett creditors have been left ‘in the dark’ after the chain fell into administration, the power struggle between the Board of Debenhams and Mike Ashley has reached boiling point and Primark is moving its product teams from Reading to Dublin. In terms of features, Drapers look, inter alia, at the new Berlin HQ of the fashion website Zalando.
• BDO High Street Sales Tracker: We flagged on Wednesday that sales at John Lewis slumped last week, thanks to the calendar shift of Mother’s Day, and the BDO High Street Sales Tracker for medium-sized Non-Food chains for last week, w/e Sunday March 10th, is mixed. BDO Fashion Store sales were actually up by 2.4% LFL (including Online), but Total BDO LFL sales (including Homewares and Lifestyle sales) were down by 4.0% last week (down by 9.6% in Store sales and up by 8.3% Online), versus +10.2% a year ago.
• “Retail Week Awards” Watch: Last night’s annual Retail Week Awards at the Grosvenor House Hotel in the West End were hosted by the comedienne Sue Perkins, after a speech by the former politician Ed Balls. Julian Richer won the award for “Outstanding Contribution to Retail” and, as we expected, the hotly contested award for “Best New Store of the Year” went to John Lewis Westfield. The prestigious award for “Retail Leader of the Year” went to Paul Marchant of Primark (which was also the “Best Retailer over £250m”) and the fast-growing The Entertainer toy chain won the “Best Retailer under £250m” award.