Langton Capital – 2019-04-03 – PREMIUM – CAKE administration, IPOs, EAT. Time Out, holidays & other:
CAKE administration, IPOs, EAT. Time Out, holidays & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Out of the mouths?
Our daughter (aged 13)’s comment on her brothers, all of whom have first degrees, some a second, at the weekend was ‘well they’re not very good that way, are they?’
And, of course, as she was talking about Mothers’ Day preparations, she was not wrong and it was her, between trips to spend a fortune on her bearded dragon, who organised the WhatsApp group, the flowers, the ‘have a nice day’ phone calls and the rest.
Which is great though the life-lesson that she’ll learn over time is that if you volunteer for tasks, or even put yourself forward, everyone else will take a step back, have an extra hour in bed etc and it’ll be you buying the toilet rolls and making sure that the milk doesn’t run out for your housemates for the rest of your life.
Which reminds me, I hope somebody buys some more teabags this morning. On to the news:
PAT VAL (IN ADMINISTRATION): KPMG PROPOSALS RE STONEBEACH: 3rd April 2019:
• Stonebeach was the main trading subsidiary. KPMG are looking to shut up shop on the administration. It says there will be a dividend (unspecified at this stage but not large) for creditors. There will be nothing for shareholders. This is not a shock but the progression of the bad news (mistakes, suspension, fraud, significant fraud, emergency funding, deadly silence, administration) that was revealed between Oct 2018 and Jan 2019 retains the capacity to shock.
Notes from the Administrator’s Proposals:
• See also Premium Comments from 20 and 29 March.
• KPMG has reiterated that it will not pursue Grant Thornton due to a conflict of interest. GT is the auditor for KPMG.
• It says ‘it remains for the company to consider whether there may be sufficient grounds to establish potential legal claims against a number of parties…’
• Nor will KPMG release the PwC report into culpability.
• The report runs through the various (small) disposals of assets. Pat Val, Baker & Spice and Philpotts have been sold.
• Regarding fixtures, equipment, fittings etc. in the shops that have been closed, KPMG says ‘it is likely that this equipment will be abandoned’.
• This brings home the massive gulf between Going Concern values and fire-sale values. In the company’s books, Stonebeach’s kitchen equipment was worth £8.3m, its leases £5.7m, its furniture £3.3m and its shop fittings £12.3m. That totals £29.6m. The Administrators have valued all of the above at zero.
• What a mess. KPMG points out that the company is being investigated by the SFO, the FRC, the AIM regulator, the Insolvency Service and the HMRC.
INITIAL PUBLIC OFFERINGS – FURTHER CONSIDERATIONS: 3nd April 2019:
• Warren Buffett said earlier this week (ref. Lyft) that neither he nor Charlie Munger had taken stock in an IPO since 1955. Even then, the Sage of Omaha only invested $500. Certainly, Mr Buffett has missed out on Google, Amazon etc. but, and here’s the thing, he’s amassed over $80bn along the way.
A bad example?
• Yes and no. Certainly Mr Buffett gets shown deals before the general public. So, to say that he doesn’t take part in IPOs misses the point that he doesn’t need to.
• But the fact that Buffett doesn’t need to invest in IPOs also suggests that he (or someone like him on a smaller scale) has looked at the deal pre-IPO and has not bought the company.
• Either that or the vendors believe that they can generate a higher price via an IPO.
Various types of IPOs:
• Winning IPOs. SSP, Merlin (a bit) & Fulham Shore (a bit), Just Eat, Boohoo. Features include secular growth (travel hubs, food delivery, clothing delivery). Companies which listed without issuing more shares also feature.
• Coming second in a two horse race IPOs. Secular decline is a thing. Some IPOs have found themselves on the flipside of beneficial trends. Examples include Bon Marche, Quiz, Game Group (in a couple of its incarnations).
• Grand old Duke of York IPOs. We mentioned Gear4music yesterday as an IPO that caught the imagination. A quid to eight quid. Not bad but we should have said that the shares marched all the way to the top of the hill and that they’re currently marching down. Patisserie Valerie falls into this category – though the downslope was somewhat steeper than the up. Goals Soccer was 100p to 500p to 60p to suspension.
• It was good while it lasted IPOs. Talking of Goals Soccer, it’s not clear how sustainable a business model some IPOs have. They may be, quite understandably, taking advantage of an opportunity (e.g. redundant space in city centres) but these may not last forever (which is what a PE ratio implies).
• Consolidation and / or roll-out IPOs. These can make sense but it’s all in the execution. Hollywood Bowl & Ten Entertainment have done OK but Pets at Home hasn’t.
• Land grab IPOs. These can work but barriers to entry can be overstated. New capital can flood in and margins come under pressure at the same time as site acquisition costs are rising.
• Poorly managed post IPO IPOs. This can always make a good situation bad or a bad situation worse. Pat Val maybe falls into this category.
• Live by the sword, die by the sword IPOs. We stitched up fuddy-duddy competition. But now we’re the incumbents & we’re on the receiving end. Deliveroo, which never did IPO, is currently facing increased competition from Uber etc.
• The glaringly obvious with the benefit of hindsight weakness in our business model IPOs. Allied Leisure came to the market offering cruises to the Middle East amongst other places. A rise in oil prices & the Arab Spring didn’t help. Pat Val had a dysfunctional management structure. Goals Soccer depended on redundant space and a certain interpretation of what level of VAT it should be paying. There are many more, often centred around poor (or no) management functionality, short-dated products, unforeseen competitors, economic or political events etc. etc.
IPO vocabulary & other:
• Providing currency for staff. This can be done via an introduction. There’s little reason for existing shareholders to sell out – other than if they really want to.
• Raising profile. Ditto.
• Providing liquidity. Perhaps just a little bit. The owners (owner really) of JDW are interestingly (and profitably) moving in the opposite direction.
• The vendors want to get out. Getting warmer.
• The above and the IPO ‘window’ is open, it’s as good as it gets and the timing feels right. Perhaps warmer still.
• Mr Buffett also said re Lyft that any company should only be 4-5yrs from a single-digit PER. And the growth rate assumed to get there should be reasonable. When being shown a plausible-looking ladder to the moon, that’s not a bad mantra to bear in mind.
RANDOM COMMENT CORNER:
1. Stating the bleeding obvious. If discounting is picking up, LfLs are sluggish or negative and costs (NMW, pensions, rates) are picking up, margins must be under downward pressure.
• More heuristics, it’s time we did a book review, comment on CVAs (are we seeing landlord push-back) & other.
GENERAL NEWS – PUBS & RESTAURANTS:
• Warren Buffett said earlier this week that he has not taken shares in an IPO since 1055. And then he bet only $500. Mr Buffett, talking about Lyft, said a company should really be on a single digit PER within 4-5yrs in order to make it suitable for the public markets. See Premium Email.
• EAT has reported 11 consecutive months of LfL sales growth on the back of its new SmartEAT format and estate rationalisation, which saw it close a number of sites in June last year.
• EAT has reported a loss after tax of £17.3m (2017: £18.9m loss). See Premium Email work on Hot one Hundred companies that have a high profile that is matched by the size of their before tax losses. EBITDA was £3.2m. The group has intimated that it should grow EBITDA by 50% in the current year. EAT says ‘against a difficult backdrop on the UK high street we have delivered a good performance that lays the groundwork for future growth.’
• The Food & Drink Federation has said of yesterday’s failure to agree on a Brexit compromise that it ‘shatters hopes of progress. Business confidence in the political leadership is in real danger of running out.’ The FDF suggests ‘the only common sense approach left is for the UK to request a sufficient extension to article 50 to allow a complete re-think and a different kind of consensus to emerge.’
• Time Out has this morning announced that it is to open and manage ‘a new Time Out Market in one of Dubai’s most visited attractions.’ This is the company’s third management agreement.
• Time Out CEO Julio Bruno says ‘we are pleased to have entered into our third management agreement, partnering with Emaar Malls to open Time Out Market Dubai. This enables us to scale this successful format globally and drive growth. Time Out Market Dubai will be the first site to open outside of Europe and North America – where we have a pipeline of new sites – demonstrating the strength of our brand and its appeal for the world’s leading real estate companies.’
• Time Out reports ‘Emaar Malls’ properties include some of the most iconic malls, entertainment and community integrated retail centres in the Middle East, including The Dubai Mall, its flagship asset, which has been the most visited shopping and entertainment mall worldwide in each of the last five years.’
• Kantar has reported that ASDA has overtaken Sainsbury’s to become the UK’s second-largest supermarket by sales.
• EeBria Trade’s Craft Beer Trends report shows a 381% increase in low and no-alcohol beer sales since 2017. According to the report, nearly 3% of beers bought in 2019 have been 2.8% ABV or below.
• Boston Tea Party, a 21-strong independent coffee chain, claims sales have fallen by £250,000 since it banned single use cups in summer 2018. Rebecca Burgess, CEO of plastic pollution campaign group City to Sea, praised BTP’s ‘bravery’.
• Zonal launches a complete hotel and restaurant reservation system, integrating its High Level Software and liveRES.
• Arc Inspirations opens Banyan Bar & Restaurant in Newcastle after completing a £1.5m refurbishment.
• March 2019 sales in the pub sector saw sales up 3.7%, according to data from companies using S4Labour software. Food-led LFL sales were up 5.4% and wet-led increased 2.4% yoy.
• The Gourmet Burger Kitchen in York will shut its doors today. The company closed 24 restaurants as part of its CVA in December.
• Diageo will offer fully paid 26-week parental leave for both men and women, regardless of sexual orientation or whether they become parents biologically, via surrogacy or adoption.
• The BRC reports food price inflation up 2.5% in March, with overall shop price inflation up 0.9%. BRC chief executive Helen Dickinson warned there would be no let-up in food price rises if Britain leaves the EU without a trade deal.
• US-based The Halal Guys secure a second London site in Earl’s Court. The company opened its first European site in Leicester Square last week.
• UK retail billionaire Philip Day has bid for Bonmarché, valuing the chain at £5.7m and putting jobs and shops under threat.
HOLIDAYS & LEISURE TRAVEL:
• The Federal Aviation Administration have warned the Boeing 737 Max aircraft may be grounded longer than first expected after saying ‘additional work’ is needed to fix a software issue.
• HotStats reports ‘the UK hotel industry is off to a rough 2019. At least on the profitability spectrum.’ It says ‘a slight increase in RevPAR in February was not enough to push hotels into the black, as the UK suffered a second consecutive month of profit decline.’
• HotStats says ‘the most major increase in overheads was in utility costs, which increased by 8.7 percent YOY to £5.98 per available room, equivalent to 4.8 percent of total revenue. This was closely followed by an 8.2-percent YOY increase in Sales & Marketing expenses.’
• Lyft shares fell 4.2% to $66.10 on Tuesday after receiving its first negative review from Seaport Global, which gave the stock a $42 price target. Analyst Michael Ward called the stock’s current valuation a ‘leap of faith’.
• Ukie reports the UK gaming market is now worth a record £5.7bn, driven by PlayerUnkown’s Battlegrounds and Fortnite. Consoles continue to sell well despite no new systems being released in 2018, but VR sales were down 20% yoy.
• A Guardian investigation has found high-stakes roulette-style games being launched on the same day FOBT maximum bet restrictions were imposed. The Gambling Commission has said it is investigating the new games.
• BBC Studios has acquired a majority stake in UKTV, owner of Dave and Gold, for around £180m. The deal could help the BBC plug a £745m funding gap.
FINANCE & ECONOMICS:
• The BCC reports growth in the UK economy has ‘nearly ground to a halt’ due to Brexit uncertainty, a reduction in investment and a slowdown in global growth.
• The March UK construction PMI remained in contraction at 49.7 though the rate of shrinkage had slowed slightly from February’s 49.5. HIS says ‘Brexit-related uncertainty continued to generate indecisiveness, ultimately hitting order book volumes.’
• The volume of world trade is reported to have declined by 0.3% in Q4 last year. US / China trade is only about 3% of the world total. Automobiles are another 8%.
• Sterling up at $1/3139 and €1.1703. Oil at 2019 highs of $69.74. UK 10yr gilt yield down 4bps at 1.01%. World markets up yesterday (with US mixed) and Far East up today.
• Brexit & politics:
o Mrs May is expected to meet with Labour leader Jeremy Corbyn in order to push through her Brexit deal. Labour may propose changes.
o Seven-hour Cabinet meeting agreed to more meetings. Short extension sought. Mrs May still trying to avoid May EU elections.
o French president Emmanuel Macron has said the EU will not be hostage to a ‘political crisis’ in the UK. Not clear yet whether the EU will grant the UK an extension.
o BBC reports the government did not speak to French ports when deciding how and where to schedule traffic if the Tunnel bungs up. The Dept of Transport says ‘we have not engaged with French port operators or the ferry companies sailing to these ports so these assumptions [that were made by looking at satellite images] are untested.’
o CBI says on Twitter ‘business confidence slumping, growth stalled and UK reputation in tatters’ as Carolyn Fairbairn calls upon HMG to do something definitive.
o The UK’s highest-ranking civil servant, Mark Sedwill, has said that leaving the EU without a deal would be negative for policing and for the security services and would lead to the return of direct rule in Northern Ireland.
o Mr Sedwill reports that food prices would rise by 10%. He says the government would come under ‘enormous pressure to bail out companies on the brink’.
o UK boss of Siemens Jurgen Maier says Britain is at risk of ‘trashing its fabulous relationship’ with the rest of Europe because of its failure to secure a Brexit deal.
o BBC reports on ‘suggestions that Britain’s government has been told it will not be allowed to bring Prime Minister Theresa May’s Brexit deal back for a fourth vote.’
PRIOR DAY LATER TWEETS:
• Why do many IPOs perform poorly? An imbalance of information, greed, heuristics such as over-optimism? See Premium email.
• Sam Smith’s memo has been circulated saying ‘the brewery’s policy is not to allow customers to use mobile phones, laptops or similar inside our pubs.’
• Discounts back now that Mothers’ Day is behind us. Toby (M&B) offering 50% off mains. Café Rouge 25% off mains, Prezzo is 2-4-1
• Numbers from DP Eurasia, Hostelworld, Gear4Music. See email. Latter cautioning on continued lower margins.
• Costs up this week. Minimum wage, business rates, pension contributions. Discounting continuing so margin taking the hit
• easyJet warned yesterday on Brexit uncertainty – and why wouldn’t it? Current farce can’t be helping bookings
START THE DAY WITH A SONG:
Yesterday’s song was Killer Queen by Queen. Today, who sang:
And if you feel there’s no passion,
No quality sensation
Seize the young determination
Show the fakers you ain’t foolin’
TOPICS FOR CONSIDERATION IN PREMIUM EMAIL:
• Thematic pieces including Pubs vs Restaurants, Delivery, Experiential Leisure, Crowd Funding, CVAs, Employment 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:
• Superdry: Ahead of the shareholder vote yesterday on the return of Julian Dunkerton to the business, we noted that a few weeks ago the Board had seemed likely to brush aside the challenge quite easily, but that after the defection of some big institutional shareholders to the Dunkerton camp the vote was going to be very close, with much depending on the size of the turnout…Well, the turnout of c83% wasn’t bad, but the Dunkerton camp prevailed narrowly, by 51%/49%…Peter Bamford, the long serving Chairman of Superdry, said: “Whilst the Board was unanimous in its view that the resolutions should be rejected and 74% of shareholders other than Julian Dunkerton and James Holder voted against, there was a narrow overall majority in favour and we accept that outcome”. In response, the Chairman, the CEO Euan Sutherland and the CFO Ed Barker resigned immediately and the former Boohoo Chairman
• Bonmarche: By way of background, the Bonmarché fashion chain was acquired by the private equity business Sun European in January 2012 from the fashion chain Peacocks and when it was floated on the stockmarket in November 2013, Sun European kept a majority 52% stake, through a vehicle with the name BM Holdings S.A.R.L. After a string of profit warnings, Sun European clearly decided that enough was enough and rather than lose everything they decided to sell out at just 11.5p yesterday to the retail scavenger Philip Day (via his Dubai-based vehicle, Sceptre Holdings), valuing the loss-making business at just £6m. We were amused by the response on Twitter of Paul McGowan, of the retail scavenger fund Hilco, to the news: “A poor business with poor product and a falling demographic hurriedly thrown at a City market hungry to lap it up. Inevitable outcome and now reunited with its former
• Grocery Market Share Watch: The latest Nielsen grocery sales figures yesterday morning (for the 4 weeks to March 23rd) showed that overall supermarket industry sales value growth slowed to 1.2%, given the later fall of Mothering Sunday/Easter, but the rival Kantar survey reported a rather worse outcome of only +0.4% for a similar 4 week period (to March 24th), on a “Till Roll” basis, well below the 1.5% food price inflation rate. However, on a pure “Grocery” basis (ex-Non Food) overall sales fell by 0.5%, according to Kantar, despite Aldi/Lidl growth of 10.1% combined. Tesco was the least worst of the “Big 4” on this basis, with gross sales down by 2.1%, whilst Morrisons was down by 3.0% gross, Asda was down by 2.3% gross and Sainsbury was down by 4.9% gross. M&S Food was down by as much as 5.0%, given its Easter sales bias.
• Waitrose Watch: Trading at Waitrose was messed up again last week by the later fall of Easter this year and yesterday morning’s JLP weekly overview reported a 9.9% slump in gross ex-petrol sales (c10% down “LFL”) in w/e March 30th. The first 9 weeks of H1 are now running down c2% LFL (down 2.1% gross). The calendar shift is that as Easter is later this year (Easter Day is April 21st, compared to April 1st last year), Mothering Sunday was also later (on March 31st, compared to March 11th last year), so the distortions will continue for several more weeks…
• John Lewis Trading Watch: Trading at John Lewis also looked weak last week, as w/e March 30th was 13.7% down gross (over 15% down on a “LFL” basis, excluding new stores like Westfield), thanks to the later fall of Easter this year. In terms of sales mix, Fashion/Beauty sales were up by 3.9% gross last week, but Home sales were down 19.7% gross and Electricals were 25.4% down gross. John Lewis LFL sales are running well over 6% down over the first 9 weeks of H1 (down 4.8% gross).
• Today’s Press and News: The news that the embattled Prime Minister has faced down the “no deal Brexit” maniacs in her Cabinet by offering to work with the Labour Party on a solution dominates most of the front pages: the FT leads with the headline “May inflames Tory civil war by opening door to softer Brexit”, whilst the Times goes with “May invites Corbyn to break Brexit deadlock”. City AM, however, runs with the sensational news that Julian Dunkerton has been voted back onto the Superdry Board (“Slam Dunkerton”) and there is plenty of coverage of this news elsewhere: the FT flags that Chas Howes, the CFO of Superdry until 2012 and still a shareholder, accused the Board at the EGM of a failure to understand the brand and an “appalling” financial performance (he said that the staff had “gone stale” and that Superdry’s “talented young designers lacked leadership and direction”). And
• News Flow This Week: The Topps Tiles pre-close update and the Signet Q4 (in the US) are out today. And there could be an AO World Q4 at the end of the week.
• Quote of the Day: With the reputation of most members of the House of Commons in tatters, here’s a helpful insight from the English writer Samuel Richardson (1689-1761), which we dedicate to our current bête noire, the notoriously stupid ERG MP, Mark Francois: “People of little understanding are most apt to be angry when their sense is called into question”.