Langton Capital – 2019-04-01 – PREMIUM – FOBTs, hot concepts, Wahaca, summer holiday bookings etc.:
FOBTs, hot concepts, Wahaca, summer holiday bookings etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
How come, when I’ve been dragged out shopping, I miraculously end up carrying everything?
I mean yesterday, when I could have been reading a book, pottering around in the garden or propping up a bar, I found myself ‘popping into town’ for a couple of hours after which I found myself carrying various bags containing jeans, pullovers, various other household knick-knacks including a sand-blasted ceramic sheep’s skull and a small box of worms.
And I hope the latter articles were for the bearded dragon as, happy though I am to experiment with my food, I draw the lines on worms on toast. Anyway, with it seeming suddenly a little darker in the morning, let’s move on to the news:
HIGH STREET HIGH ROLLERS: WHAT’S THE END GAME? THE TRIUMPH OF HOPE OVER EXPERIENCE continued: 1st April 2019:
‘Story stocks’ are great but, at the end of the day, it’s making a sustainable profit that matters. Loss-making companies need to access capital regularly, and the patience of would-be investors may be finite.
• Initial capital may come from oneself and / or from friends & family. Then perhaps from more distant friends, then Angels then, maybe the Crowd. Possibly the Crowd again and then comes the real test. The ‘growth’ companies need to either 1) get a PE house on board, 2) list on an exchange or 3) persuade an already-listed company that they should be bought. Sounds simple?
• Investors identify with a story more readily than they do, for example, with a discounted cash flow projection or a complicated formula
• Look at all those diamond & gold mines, shale oil start-ups and E&P companies
• And glamourous bars, restaurants & clubs etc often also secure funding. This will either see them through to the next round of funding, or an exit or, in less fortunate cases, collapse.
The perils of extrapolation…
• We’ve suggested before that being able to secure a ladder to your apple tree doesn’t mean that you can build one to the moon.
• Operators may have a great idea or a great single site or a great brace of sites but, if they want to value their business on the Year Five EBITDA generated by a potential hundred sites, they could be in for a rude awakening
• But Crowd Funding has perhaps extended the persuasiveness of the ‘story’ to another couple of fund-raises and, because there have been a small but visible number of crowd-funded successes,
The story’s great, but what about the valuation?
• Valuation blindness is a real thing. People value their own effort, abilities & belongings more highly than they do those of other people
• Add in a good story and the value blindness can work both ways
• But, as Warren Buffett said re Lyft, if you can’t get to a single-digit PER in 5yrs or so, you may have a problem attracting professional money
• And the assumed rate of growth between year 0 and year 5 is also critical. If you believe you can double your estate every year then there’s something amiss.
• That implies x1,000 in 10yrs and x1,000.000 in twenty. Certainly McDonald’s has 38,000 outlets but it’s taken 80yrs to get here
Book value vs earnings…
• Certainly, we’re mean Yorkshiremen, but we would suggest that book value plus brand value plus a little something for the entrepreneur isn’t a bad starting point
• Hence two coffee shops costing £60k each shouldn’t be valued at £3m. Try book value plus accumulated losses times, say, two. That would give perhaps £300k.
• When the decimal point is in the ‘wrong’ place, it’s hard to even begin a discussion.
Heuristics at work…
• Overconfidence. We’ve got one, we can have one thousand. Our abilities exceed those of our leaden-footed competitors etc
• Confirmatory bias. Our advisors say we’re great. How perceptive of them.
• Anchoring. Our competitors raised money at a £3m valuation, we’re even better.
• Incentives. Advisors’ advice might be influenced by how they are paid.
• Others. There are many more – but we’re running out of time.
A few practical considerations:
• Langton sees a mixed bag of companies looking to raise funds. Some fly but more don’t. Companies that fail in rifle-shot fund raise attempts sometimes try the blunderbuss approach of crowd funding.
• Some try both of the above and then are brought back by advisory accountants as a great opportunity. One can only imagine what fees are being charged.
• We would suggest that asking prices should bear some relation to the capital invested in the business, especially early in the life of a concept, as the successful execution of any intended roll-out remains uncertain.
• What about down rounds? Sometimes fatal, always unpleasant, sometimes unavoidable, always best avoided. And hard to explain to crowd funders.
• If losses keep racking up and funding options diminish, how’s that going to end? If simply too much capital is being squeezed into mediocre F&B operations, the CVA lawyers may remain busy for some time.
• More heuristics, it’s time we did a book review, comment on CVAs (are we seeing landlord push-back) & other.
GENERAL NEWS – PUBS & RESTAURANTS:
• Oaxaca Ltd, which owns 100% of the shares of Wahaca Restaurants Ltd, has reported full year numbers to end-June 2018 to Companies’ House saying that the company saw sales rise by just under 3% to £47.9m with the loss before tax up £100k or so to £4.854m.
• Oaxaca reports an operating loss before financing expenses of £2.7m compared with a loss of £3.3m in the prior year. Oaxaca, which was hit by a norovirus in November 2016 that afflicted 160 customers and 200 staff, has lost £8m since incorporation and has negative net assets of £7.6m.
• Wahaca auditors KPMG have signed off on the accounts using the Going Concern principle. KPMG has pointed out, as is normal, that it is the directors’ responsibility to ensure that this is appropriate. The group has £33m of interest-bearing loans and borrowings. Some £23m is owing to banks and £10m is zero coupon loan stock repayable in 2022.
• Shoreditch BBQ operator Smokestak has reported accounts for the year to end-June 2018 to Companies’ House showing that retained earnings rose by £383k in the year under review.
• Hop Vietnamese has reported overdue numbers for the year to end-March 2018 to Companies’ House showing that the company increased its accumulated losses by £392k in the year under review. The company now has retained losses since incorporation of some £1.4m.
• Grind has now raised £3.8m from 988 investors on Crowdcube in its latest round of funding.
• RTN’s shares bounced a couple of pennies towards the end of last week after hitting 112p on Wednesday. The group’s shares last traded at these prices in 2009.
• UKHospitality welcomes the EU Council’s approval of new transparency laws for accommodation businesses, with CEO Kate Nicholls saying ‘Transparency and trust in online platforms is of the utmost importance, for businesses and customers. There needs to be fairness to make sure that businesses are not unfairly disadvantaged and customers are not misled. The Council’s approval of the agreed measures will help provide this.’
• Per KAM, the Plan to Plate report shows ‘56% of customers would look at the food and drinks menu before arriving at a venue and 42% told us that they knew what they wanted to have before they arrived.’ The report also said 47% of consumers could be interested in pre-ordering.
• Nielsen data shows a noticeable spike in alcohol sales in March, despite the first quarter of the year traditionally having slow sales. The WSTA’s Market Report says domestic gin sales hit a record high in 2018, reaching £2.1bn in sales.
• Santé Publique France have told the French public they should drink no more than two glasses of wine a day, and not everyday, to reduce the risk of alcohol-related diseases. Santé Publique France is advising people to drink no more than 10 glasses of wine each week, with that being the equivalent of 100ml a glass.
• Coca-Cola is launching its first energy drink in the UK this spring, called ‘Coca-Cola Energy’. Jon Woods, general manager of Coca-Cola Great Britain and Ireland, said ‘We’re launching Coca-Cola Energy with and without sugar and we’ll continue to expand and diversify our range of products to offer British consumers a wider choice of drinks.’
• Per Telegraph, Hakkasan’s board has been replaced after the restaurant and nightclub operator reported a pre-tax loss of $44m for the year to June. Aabar Investments took control of the company in September.
• Marcus Jundt, CEO of Kona Grill, is resigning from his role with investment co-founder of Bestige Holdings, Shawn Hassel, set to join the board. Hassel will oversee an evaluation of strategic alternatives.
HOLIDAYS & LEISURE TRAVEL:
• GfK reports UK summer 2019 bookings down 10% yoy for the week ending 23 March, with the prior week also down 7%. On the other hand, outbound bookings were up 18% yoy, meaning season-to-date bookings for the summer are up just 1% yoy.
• Tui warns it could lose up to 26% on its annual profits if Boeing 737 Max 8 aircraft remain grounded across the summer peak flying season. Investigations are continuing into two fatal crashes involving 737 Max 8s by airlines in Indonesia and Ethiopia in under six months.
• Tui Group said ‘Assuming 737 Max flight resumption latest by mid-July, the group currently expects to see a one-off impact on underlying EBITA [earnings] of approximately €200 million in connection with the 737 Max grounding’.
• HotStats reports UK hotels’ operating profit per room fell 4.4% yoy to £35.44 in February, despite a 0.5% increase in RevPAR. The biggest cost increase proved to be utilities, which rose 8.7% yoy to £5.98 per available room, followed by an 8.2% rise in sales and marketing expenses.
• The expedition cruise sector is expected to grow by 30% over the next four years as 28 ships come into the market.
• Eurostar had to suspend all trains in and out of Britain on Saturday as a man with an English flag camped out on the roof of the station. British Transport Police have since arrested the man but Eurostar has warned that passengers who could change their travel plans should do so.
• Lyft’s shares closed nearly 9% higher in its first day of trading, rising from $72 to $78.29 and valuing the company at $19.5bn.
• The Gambling Commission writes to bookmakers ahead of the £2 maximum FOBT stake, set to go live today. The commission reminded bookmakers of their responsibilities in ensuring customers are protected.
• The £2 FOBT max stake could lead to the closure of up to 8,500 high street betting shops, according to industry figures. The latest Gambling Commission statistics, from December 2018, showed an average of 3.9 FOBTs per shop. The machines reportedly generated a gross gambling yield of £1.7bn in 2018.
• Mark Zuckerberg has called for new laws in the areas of ‘Harmful content, election integrity, privacy and data portability’ saying the responsibility to monitor harmful content is too great for firms alone.
FINANCE & ECONOMICS:
• Nationwide reports annual house price inflation of 0.7% in the year to March. It says that prices have fallen in London and the South East.
• The latest Caixin / Markit survey for Chinese manufacturing shows that it returned to growth in March after government moves to boost the economy. The survey rose to 50.9 in March from 49.9 in February.
• Sterling down a fraction at $1.3038 and €1.1602. Oil little changed at $68.15. UK 10yr gilt yield 1.00%, up 1bp. World markets stronger on Friday with Far East up today.
• Brexit, politics etc.:
o Obvious April Fool alert. Brexit’s been fixed and everyone’s happy.
o Back in the real world, MV3 was defeated on Friday. Beleaguered Mrs May said to be considering MV4 over the next few days. Plan B is stick to Plan A.
o Business groups including the CBI & the Institute of Directors said to be ‘devastated’ and ‘sick’ of being stuck in a ‘spirit-sapping limbo’. CBI says ‘the UK’s reputation, people’s jobs and livelihoods are at stake.’
o Reuters reports PM is being pushed by Brexiteers to pull out of the EU ‘in the next few months’ even if it means a no-deal exit.
o Sunday Times reports PM is being threatened by resignations from both Brexiteers & Remainers in her Cabinet. May turn to a General Election to find a way out.
o Reuters says ‘Britain’s exit from the European Union was in disarray after the implosion of Prime Minister Theresa May’s Brexit strategy.’
PRIOR DAY LATER TWEETS:
• The High St. Even sexiest of chains ultimately need to make profits. That’s often when the dream comes to an end. See Premium e/m
• Fulham Shore – trading in line, good end to year, openings to be stepped up, dividend now possible, group believes will ‘continue to thrive’.
• Time Out FY. Sales up but EBITDA loss of £8.1m (vs a loss of £14.2m last year). It says this is ‘in line with expectations.’
• Mr Kalanick’s City Storage Systems has acquired FoodStars, which runs over 100 commercial kitchens across London.
• Synergy Grill manufacturer Active Food Systems awarded ‘Accredited Supplier’ status the Carbon Trust. First chargrill maker to do so.
• Nationwide: House prices +0.4% in year to end-Feb. Adds ‘measures of consumer confidence weakened around the turn of the year.’
START THE DAY WITH A SONG:
Last Friday’s song was (I Can’t Get No) Satisfaction by The Rolling Stones. Today, who sang:
We sailed from sense, brought all our young,
We sailed from where we once begun
While we wait, while we wait
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:
• Recent News Flow: Last week brought more Brexit drama in the House of Commons ahead of the March 29th scheduled EU departure date…and we escaped the madness by fleeing to the US on holiday (see below). In Retailing we didn’t miss too much in terms of scheduled news, apart from disappointing Moss Bros finals and MySale interims on Tuesday, but the week began with a badly received announcement from Majestic Wine about a Transformation Plan, to accelerate the focus on the Online Naked Wines business. After that there seemed to be daily announcements from Debenhams and Sports Direct about their battle for control, with #MadMike even saying he could bid 5p for the whole business to try and preserve shareholder value. Friday morning brought the widely followed monthly GFK Consumer Confidence survey, with the overall index holding at -13, although polling was completed by March 14th. Finally,
• Saturday Press and News: The news that the hapless Theresa May lost her third vote on her Brexit deal on Friday (despite offering to step down as Prime Minister if the deal was approved) filled the front pages of the Saturday papers, but the big Retail story was the continuing battle between Debenhams and Sports Direct, with the FT flagging (“Debenhams throws down gauntlet to Sports Direct”) that Debenhams has presented Sports Direct with a put-up-or-shut-up ultimatum, as it told its biggest shareholder to finance a formal rescue for the department store chain or face being wiped out. This came after #MadMike had said that Debenhams’ advisers deserved to be sent to prison (!), in the wake of the approval of the bondholders for the £200m refinancing plan…
• Sunday Press and News (1): The continuing battle between Debenhams and Sports Direct filled plenty of column inches in the Sunday papers, but the Philip Green/Arcadia CVA story got top billing in the Sunday Times, via the extraordinary scoop that the beleaguered Philip Green is offering landlords an equity stake of up to 20% in the struggling Arcadia if they agree to a CVA (“Arcadia boss Philip Green mulls ‘shares for rent cuts’”). Oliver Shah, the scourge of Philip Green, also thundered in his Sunday Times column that private equity companies played a big part in Debenhams’ downfall, by hollowing out the chain.
• Sunday Press and News (2): As for the battle between Debenhams and Sports Direct, the Sunday Times had a feature on “Why Debenhams cries – anything but Mike Ashley!”, flagging that “the tracksuit tycoon” has been creating havoc in his dogged pursuit of the failing Debenhams, but that Debenhams may just have evaded his grasp. On a different tack, the Mail on Sunday revealed that Mike Ashley has been secretly firing off a raft of ‘bullying’ legal threats to Debenhams directors in his bid to seize power, whilst the Sunday Telegraph focused on the news that “Mike Ashley has blown more than half a billion pounds on a botched High Street shopping spree, raising fresh questions about the tycoon’s stewardship of Sports Direct”…
• Sunday Press and News (3): In other news, the Sunday Times flagged that the Philip Day group has made a late approach for the bankrupt LK Bennett fashion chain, the embattled Intu Properties shopping centre business is thinking of appointing the former Travis Perkins executive Tony Buffin as its new CEO and the fashion chain Joules has started to look for a new CEO after Colin Porter signalled a wish to step back from a full-time executive role, whilst its management columnist Patience Wheatcroft looked at the recent Majestic Wine news (“When the wine tide goes out, the inauthentic are left Naked”).
• Today’s Press and News: The split in the Tory party over Brexit dominates today’s papers, with the FT leading its front page with “May battles to contain Tory feud as aides push poll idea”, whilst the Times goes with ”Soft Brexit will shatter Tory party, May warned”. In terms of Retail news, the FT highlights that Mike Ashley’s Sports Direct, the footwear specialist Dune and the franchisee Rebecca Feng are leading the race for the collapsed upmarket fashion chain LK Bennett and that the retail entrepreneur Philip Day has withdrawn his interest. The Telegraph also flags that Philip Day has pulled out of the LK Bennett bidding. FT also has a feature on the problems of wine retailers, in the light of last week’s news from Majestic Wine (“Wine sellers squeezed on all sides”).
• News Flow This Week: As April gets underway, the Brexit crisis continues in the House of Commons (with more key indicative votes coming today), but we get the latest monthly Kantar/Nielsen grocery sales figures tomorrow morning, along with the Superdry/Julian Dunkerton EGM. The Topps Tiles pre-close and the Signet Q4 (in the US) are on Wednesday. And there could be an AO World Q4 at the end of the week.
• Mr Bubb is in the US for a couple of weeks.