Langton Capital – 2019-03-19 – PREMIUM – Gym Group, exiting leasehold sites, ‘tails’, delivery etc.:
Gym Group, exiting leasehold sites, ‘tails’, delivery etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I’m a reluctant shopper at the best of times and, if an assistant approaches me in a shoe shop or suit shop to engage me in conversation, then the situation gets considerably worse.
In fact, I’ll make a bolt for the door and I’ll take my credit cards with me because I don’t want to talk about the weather or my shoe size of what kind of suit I will look least bad in. I just want to be able to see something that looks half-way decent and that doesn’t cost the earth and then I’ll be gone.
However, as my last couple of attempts to buy shoes either on the Internet or in a supermarket have been disastrous, I think I’ll have to bite the bullet. It’s either that or accept a creeping loss of mobility brought on by ill-fitting footwear and general discomfort. Hence, whilst I draw the line at Oxford Street, a quick trip into town may be necessary. On to the news:
HOW EASY IS IT TO EXIT LEASEHOLD SITES?
• It’s almost impossible to grow without creating a tail. When there is a structural shift, for example a footfall shift away from the High Street or retail parks, a tail can emerge quickly. What’s worse, tails may emerge for several operators at the same time and there could be a crush for the exit. And that might not end well. Indeed, it may not end at all.
• This is currently a problem being faced by RTN, the administrators to the Pat Val estate & other industry leaders.
• It’s one thing to identify a problem but sometimes it’s quite another to solve it.
• Saying ‘we need to exit a number of units’ is like an individual saying ‘I want to be rich’. It’s a necessary but not sufficient step on the road to a solution.
Demand, yes, but what about supply?
• As the former Citigroup CEO said, when the music’s playing, you gotta dance. But it’s a bit crowded on the dance floor at present.
• Just whizzing through Stevenage on an LNER train at 125mph, you can see the three-storey high ad-boards telling you that Stevenage Leisure Park (Cineworld, Hollywood Bowl, David Lloyd) features at least nine sit-down restaurants & heaven knows how many other eating opportunities:
o Frankie & Benny’s, Firejacks & Chiquito (all from RTN).
o Nando’s, McDonald’s, Pizza Hut & KFC (from other global players)
o ASK & Prezzo (PE owned)
• In addition to which the leisure operators themselves offer food. The other side of the train tracks is The Westgate Shopping Centre featuring a couple of pubs (including a JDW) & at least ten other snack joints.
• Now Stevenage may be a growing town. Perhaps its inhabitants consume more calories than average. But the Leisure Park in particular is not dissimilar to dozens if not hundreds around the country where restaurants have been added in many cases to the existing stock of restaurants.
Restaurant Group wants to exit 76 sites:
• RTN was quick onto leisure parks but, with the above in mind, it is perhaps understandable that it now wants to cut its exposure.
• However, the desire to exit and the ability to exit (for RTN but also for any other operator) will be two different things.
• Whilst a company still has a relatively good covenant, landlords will be unwilling to let them off the hook.
• 15yr upward only leases can be a drag on performance. Break clauses are helpful but they may not come for a number of years and they may not come for the units that you want to exit.
• Assignment can be tricky. Operators may be a victim of their own strong covenants. Operators need to avoid having a Dominic Chappell moment. And, if the assignee goes bust, the site will likely come back to you in any case
A few thoughts on ‘bad’ or ‘tail’ sites:
• RTN reports that c30% of its estate doesn’t make any money; but what does that mean?
• In most large estates, some units may be lossmaking. It’s therefore likely that 95% of units make more than 100% of profits. That’s to some extent inescapable – but it’s more of a problem if 70% of units make more than 100% of profits.
• Even then, we have to look at what profit (usually EBITDA) means.
• Because there are some costs to come off below EBITDA, specifically I, D & A (as the T will look after itself if you’re lossmaking). A ‘break-even’ site may therefore be losing money at the PBT line.
• ‘I’ is the opportunity cost of capital tied up, ‘D’ should equate broadly to maintenance capex and ‘A’ is probably not relevant.
• But on the plus side, a ‘break-even’ site is paying its rent and rates. If you board it up, it will swing sharply below zero as the rent & rates will still be payable.
• The operator may ‘provide’ against the costs of such units – but that’s a non-cash number and money will continue to leak out of the business as long as the boarded-up site remains on the books.
TOMORROW IN THE PREMIUM EMAIL:
• Got sidetracked today on leases & didn’t stick to the schedule. Must try harder. Tomorrow, more from the Archives, thoughts on over-confidence, arrogance & how bullying bosses can be the ‘ideal’ fraud victim plus perhaps a book review.
• Later in the week. Archives, reviews & whether the Pat Val debacle could change the behaviour of auditors, non-executive directors etc.
GENERAL NEWS – PUBS & RESTAURANTS:
• Better-performing restaurant companies appear to be taking a long, hard look at the delivery companies, trying to assess who really adds the value. MeatLiquor, whose Dead Hippie Burger was at one time Deliveroo’s single most requested-product, has now moved from Deliveroo to Uber Eats. Other, less strong restaurant companies have less choice in the matter. They appear to feel compelled to use any delivery company that can help boost (or prevent falling) their LfL sales.
• The internationally acclaimed, West Yorkshire-based Saltaire Brewery, is to support other breweries with a range of new services including contract brewing and packaging into cask, keg and bottles. The company says ‘following an investment of over £1 million and 18 months of construction and development, its new 8,000 square foot packaging plant is home to a state of the art Moravek botting line capable of bottling over 100,000 units per week. This new investment complements its 40-barrel brewhouse and enables it to now offer a full end to end service to other breweries from recipe matching and product development through to end packaged product, ready for distribution, as well as any individual service in that process.’
• Saltaire CEO Ewen Gordon says ‘these last 18 – 24 months have been huge for the business. We’ve invested in a new 40 barrel brewhouse, refreshed our brand, launched a new range of products, won an export contract with Sovereign Beverage Company and now opened our very own packaging plant after 18 months of meticulous planning and hard work from all involved.’
• The latest Deltic Night Index has found that the average spend, frequency and duration of late nights out has increased over the Q1 2019. The index found that the average spend per night rose 15.5% to £68.68.
• UKHospitality has voiced its concerns on food advertising restrictions that could undermine hospitality businesses already battling against restrictive legislation and rising costs. Chief Executive of the organisation, Kate Nicholls said: ‘ The sector has worked proactively with local authorities and Westminster to help tackle obesity. Many of our members have spent time and money reformulating menus, diversifying their offer and providing nutritional transparency’.
• Burger King is offering a coffee subscription in the US, with consumers paying $5 a month for one coffee a day.
• Total volumes of Champagne shipments have fallen 1.8% in 2018 to 301.9m bottles, however, turnover for the industry has increased by 0.3% to €4.9bn.
• Analysts at Jefferies International have said that the rumour Pernod Ricard sale of its wine division was ‘unlikey’ to be true. Analyst Edward Mundy said: ‘While we do not altogether rule out a wine disposal, we do not necessarily see [Pernod Ricard] reacting in a kneejerk fashion to external pressure’.
• Punch Taverns has reopened its historic Kendal pub, Ye Olde Fleece, after a £600k renovation.
• Punch Taverns has also relaunched The Exeter Inn pub in Tiverton following a £650k investment into the site.
• The E-commerce business, TheFoodMarket.com has raised £400k in growth capital from private investors including MoneySupermarket.com and Fell Unique.
• The fit food & juice bar chain, Crussh has opened its first site opening in partnership with Sodexo at the University of London. Shane Kavanagh, CEO of Crussh said: ‘We are delighted to open our first university outlet at City. We know the university well, and it’s really exciting to be able to introduce healthy, nutritious food to campus’.
• The Edinburgh-based 19 strong pub group, Bruce Group has issued a £2m bond to fund growth over the next few years. Kevan Fullerton, director of the Bruce Group, commented: ‘We believe that the pub market currently offers excellent potential for growth and profitability and we have the scale, expertise, and knowledge of the market to expand substantially in a relatively short timescale’.
• Starbucks has opened its 30,000th store in Shenzhen China. Kevin Johnson, president and CEO at Starbucks, said: ‘Starbucks now serves more than 100 million customer occasions across 78 markets around the world. It all started with our first store in Seattle, Washington, and today we celebrate the 30,000th store that just opened in Shenzhen, China’.
• The restaurant chain, Leon has teamed up with recycling specialist Veolia to offer reverse vending machines that will accept used plastic bottles and aluminium cans.
• Shake Shack is to begin a four-day workweek trial to help recruit and retain qualified store-level supervisors.
HOLIDAYS & LEISURE TRAVEL:
• IHS Markit has said that consumers are holding back on big-ticket purchases such as cars and holidays as a result of Brexit uncertainty. Markit says ‘a sharp drop in UK households’ appetite for major purchases was the main signal that Brexit uncertainty had some impact on consumer spending. This index was close to a five-year low, which may reflect a wait-and-see approach to holiday bookings and other big-ticket spending commitments during the latest survey period.’Brexit & politics:
• Club Med has reported on trading saying ‘Club Med performance in 2018 was very encouraging with the highest growth in business volume for 6 years (+8% vs 2017).’ The group says ‘all geographical areas saw growth’ with customers number also up ‘significantly (+6.6 %).’
• Club Med concludes it ‘delivered a very encouraging performance in 2018 after a good previous year and expects to continue to grow profitably in 2019. Thanks to the support of our shareholder Fosun and the implementation of the “upscale, global and Happy Digital” strategy, Club Med is the worldwide leader of premium resort allinclusive holidays for families and active couples’.
• World’s most expensive cities named. Paris top with Geneva & Zurich in the top five. London is out of the top ten.
• Abta will launch an advertising campaign reassuring the public it can book holidays with confidence despite Brexit.
• Travelodge reports FY revenue up 8.8% to £693.3m and adjusted EBITDA up £9.6m to £122.0m. The hotel company stated occupancy was up 2.5pts yo 78.5%, RevPAR up 3.2% to £41.69 and ADR flat at £53.09. Travelodge opened 17 hotels during the year and launched its first ‘budget chic’ Travelodge Plus hotels.
• Peter Gowers, Travelodge CEO, said ‘The long-term growth opportunities for the budget sector remain strong and we expect to open 100 new hotels over the next five years, creating approximately 3,000 jobs.’ However, the company’s statement also said ‘The UK economic situation remains uncertain and there are well documented cost pressures facing the wider sector, which together lead us to maintain a cautious short-term outlook.’
• The four London hotels Queensgate Investments acquired from Grange Hotels, in a deal valued at c£1bn, are set to be rebranded as Leonardo properties.
• Marriott International is set to outline its three-year growth plan, adding between 275,000 and 295,000 rooms by 2021, supported by its record 478,000-room pipeline, including c214,000 rooms already under construction. New room openings during this period could contribute $400m in fee revenue in 2021 and $700m annually when stabilised.
• Ethiopia’s transport minister has signalled ‘Clear similarities’ between the recent Ethiopian Airlines Boeing Max 8 crash and the crash of a similar aircraft off Indonesia last October. In both cases, flight tracking data showed the aircraft’s altitude had fluctuated sharply, as they seemed to experience erratic climbs and descents.
• Gym Group reports FY numbers, says is seeing ‘continued rapid growth in membership, revenue and profit’
• Gym Group reports revenues up 35.6% at £123.9m with adjusted EBITDA up 31.6% to £36.8m. PBT is up 19.4% at £14.4m. The full year dividend is 1.3p vs 1.2p last year.
• Gym Group opened 17 new gyms last year & acquired 13 from easyGym. The group says ‘the new financial year has started well and current trading is in line with the Board’s expectations with 793,000 members at the end of February, an increase of 9.5% since the year end.’
• Gym Group CEO Richard Darwin says ‘during 2018 we accelerated our growth to reach 158 gyms, delivering rapid increases in revenue and profits as well as important projects to support a business of scale in the longer term.’ Mr Darwin says ‘January and February are peak months for new memberships. We have had a successful start to the year and our brand now serves over 800,000 members with 10 million visits already so far this year. We plan on opening 15-20 gyms in 2019 as we extend access to affordable fitness nationwide.’
• JPJ (Jackpot Joy) has reported FY numbers to end-Dec saying revenues rose 10% to £319.6m with EPS of 120p (vs 95p last year). Executive Chairman Neil Goulden reports ‘I am pleased with the progress we have made in 2018 as JPJ Group plc continued to deliver on its strategy.’
• Mr Goulden continues ‘returning excess cash to shareholders is a key priority for the Group, once we can do so on a progressive and sustainable basis.’ He adds ‘trading over the first two months of the financial year has been strong with double digit growth in revenues to the end of February and the Group is trading in line with management’s expectations for FY 2019. Overall, we look forward to continued progress in our international operations and to taking advantage of growth opportunities in the UK market during the second half of 2019, as we pass the anniversary of the introduction of enhanced responsible gambling measures.’
• MySpace apologises after a server migration caused a huge loss of data, with ‘any photos, videos and audio files’ uploaded more than three years ago potentially no longer available.
• British MPs have told the public not to sell or buy tickets for events through the resale site Viagogo, which they have accused of ‘flouting consumer law’.
FINANCE & ECONOMICS:
• Sterling down a fraction at $1.3269 & €1.1696. Oil up a little at $67.57. UK 10yr gilt yield down 2bps at 1.20%. World markets mixed. London up but Europe lower. US higher but Far East down in Tuesday trade.
• Brexit & politics:
o It never rains. Mrs May’s alarm doesn’t go off, her phone dies and her laptop goes on the blink after another bad day at the office.
o Speaker throws a spanner in the works. Commons Speaker John Bercow has ruled that the government may not bring its Brexit deal back to the Commons for a third time unless there are ‘fundamental’ changes. Bercow has said that, in all likelihood, changes to the deal would be needed.
o No10 has said that it was not briefed that Speaker Bercow was going to make the above ruling. Government lawyers may be studying precedent to see if there is any technical way around the decision.
o The position of the DUP & ERG on Mrs May’s deal remains unclear. The Bercow Ruling may make shifting views moot, unless HMG can find a way around the Speaker’s decision.
o The FT says ‘MPs must give short shrift to any move by Theresa May to bring her withdrawal agreement before parliament again. Her flawed deal has already been defeated twice by historic margins. If it ever passes, it will only be after months of rancour and strong-arming. This is not the way to enact Britain’s most momentous constitutional legislation in 45 years.’
PRIOR DAY LATER TWEETS:
• Later tweets: KPMG, administrator to CAKE, finds black hole is as much as £94m, well over double the previous estimate of £40m.
• Enlarged black hole in middle of CAKE raises prospect that Co has never made a profit. Retained earnings to last year only £63m
• RTN says 70% of EBITDA now comes from ‘growth areas’ (only 45% of sites). Says something about both ends of the estate
• Departing CEO Andy McCue says successor must 1) deliver on Wagamama, 2) grow concessions & pubs & 3) turn around leisure business. OK….
• Around 30% of RTN leisure sites contribute no EBITDA. c76 sites earmarked for disposal. Executing on that is tough enough…
• Discountsville Arizona. Café Rouge 25% off food, Bella Italia 40% off mains, Prezzo 40% off mains…
• Big quarterly rent payments due next week. Could be a struggle for some chronic loss-makers (the wannabe Hot One Hundred) on the High St
START THE DAY WITH A SONG:
Yesterday’s song was Pearl Jam with Alive, today who sang:
Baby I got your number and I know that you got mine,
But you know that I called you, I called too many times
You can call me baby, you can call me anytime
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:
Ocado: The Q1 update today from Ocado covers the 13 weeks to March 3rd and as the big Andover warehouse fire was on Feb 5th, the main focus is on the impact of this on the business. Total sales growth slipped to 11.2%, but Andover only knocked things by 1.2% and management say that “our initial assessment of the reasons for the fire gives us confidence that, going forward, there are no significant implications for the risk profile of the assets or the viability of our model”. There is a conference call for analysts at 7.30am
ASOS: Today’s Q2 update from ASOS covers the 13 weeks to Feb 28th and the key outcome is probably that the company has maintained its guidance for the full year, to y/e Aug, but the City may dwell on the fact that although the UK was up by 14%, overall sales growth was only 11% in the period (on a constant currency basis), with the US down by 3%. The hiccup in the US is attributed to problems in fulfilling orders after the Atlanta warehouse opening and this will reverse in Q3, whilst ASOS also promise more price and marketing investment in the struggling markets of France and Germany in H2 to drive better sales. ASOS also have a conference call for analysts at 7.30am
ScS: The sofa retailer ScS has reported with today’s interims (for the 26 weeks to Jan 26th) that, despite the uncertain background for big-ticket retailers, the last 7 weeks have seen improved trading, so that cumulative LFL sales orders are running up by a useful 2.9% over the first 33 weeks of the financial year, after 1.5% growth in H1, which is in line with the company’s expectations.