Langton Capital – 2019-05-02 – PREMIUM – Restaurant Group, Paddy Power, Gfinity, existential issues etc.:
Restaurant Group, Paddy Power, Gfinity, existential issues etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Langton hasn’t necessarily got the office that it wants (endless shingle drive, fountains outside, tasteful statues of famous Hull City players, sweeping views of the Thames to Westminster etc.) but rather the office it can afford (a few hundred feet in a shared building with no view & natural light seeping in from a light-well with a view of the lavatories).
However, needs must but, to add insult to injury, the building next door has been knocked down and rebuilt apparently in the noisiest manner possible.
That was really awful but, now, they’re putting a brick & glass wall back up and have erected scaffolding to within 5cm of the window to my right elbow such that the builders can correct my spelling mistakes and watch me playing solitaire when they’re on their coffee breaks.
And there’s something deeply unsettling about being so intrusively overlooked. We’ve stuck a blanket up at the window (finishing off the homeless person shanty town, circa 1969 look nicely) but, if anyone’s got any better ideas, short of violence but not necessarily short of legal action, then please let me know. On to the news:
EXISTENTIAL WORRIES: WHAT TO LOOK OUT FOR: The definition of a shock is, well, that it’s a shock. That can make them hard to plan for. They’re much easier to describe in hindsight but that probably shouldn’t dissuade us from looking out for them. 2 May 2019 (also see comments earlier this month):
• Many companies floundered during the credit crunch, they had perhaps borrowed short and invested long. The dinosaurs were done in by a meteor, technology has ruined many an incumbent and the tax man and fraudsters have done for (a lot and a small number respectively) companies over the years. Some of these events would have been impossible to predict but others, just maybe, were foreseeable. Below, in no particular order, a few thoughts:
You don’t own the IP (or the means to carry on):
• At times, you may have the economic upper hand (think Hollywood 1920s or football clubs in the 60s and 70s) but, ultimately you don’t own the IP.
• Franchisees may face similar problems. Their license may be subject to performance criteria or it may simply be short-dated.
• You don’t own the premises from which you trade. You may be on short leases or may even be operating popups or temporary sites within somebody else’s properties.
• You can’t keep your staff. You maybe can’t even keep your staff from setting up next door and doing what you do. Only better.
Technology, legislation, regulators and / or the taxman:
• We commented on the above moves earlier in the month. Examples abound. Books shops vs Kindle. HMV vs streaming. ITV ditto. Indivior & the US Fed. AWPs, the betting shops & the government. Spread-betters & the regulators, Goals Soccer & the taxman, payday loans companies & just about everyone.
A bit more lateral thinking:
• A short-dated business model with long-dated liabilities. An extreme example would be a fad product or service that took hired staff & took on a 25yr lease. The problem is, the business wouldn’t have known or described itself as a fad.
• Moving the J curve out to the right. This probably happens more frequently than not. But it has funding implications. Loss making companies that remain loss-making longer than had been anticipated need more capital. If this is crowd-funded, then some operators could be in for trouble.
• A 400lb gorilla could destroy you without even meaning to. Google maps has done in the Sat Nav. Becoming the collateral damage referred to in some footnote is a not-insignificant risk.
• Fraud is a high profile but relatively rare problem.
What to bear in mind?
• Surprises wouldn’t be a surprise if they weren’t a surprise.
• But it may pay to turn a situation around and around. If the business didn’t exist, would you build it? And if you would, are there already too many? Are the ‘moats’ an illusion? Are you in an echo-chamber etc. etc.
FOOD INNOVATION – SHOULD YOU INTRODUCE NEW GENRES OR STICK TO YOUR KNITTING? There’s pizza, burger & chicken. And then there’s everything else. And just because something ‘should’ be a big thing, doesn’t mean that it will be. So what to do? 2 May 2019:
Where are we now?
• In the sit-down market, since pizzas arrived in the 50s or 60s, certain food types have dominated; pizza, chicken and burgers remain High Street & retail park staples
• Pies, steaks, fish & chips etc. are smaller markets
• The market for ethnic food is dominated by small players
• Flaky concepts come & go. They always have & they probably always will
So, what prompts change?
• Overcrowding, boredom & the desire for excitement spur reinvention
• But new products can be short-lived, unprofitable or both. Here evolution is less dangerous than revolution.
• Veggie burgers could work but we’re still not crying out for insect proteins
Catalysts for change?
• Larger markets (e.g. London vs Scunthorpe). Madagascan tapas may work in the capital but struggle in a northern mill town
• Mature stage in the cycle. Overcrowding spurs innovation. Innovation brings risk. Risky operators fail first.
Is it different this time?
• Well, yes and no. Certainly overcapacity has forced a broadening of offers
• Spanish cuisine may be proclaimed the new Italian, North African dishes the new Indian, Vietnamese cuisine the new Chinese, etc.
• But cheap money has also created a treadmill characterised by more of the same. Better burgers, even more better burgers, better, better burgers…
• And we can see how that’s currently working out
GENERAL NEWS – PUBS & RESTAURANTS:
• Former HBOS CEO Andy Hornby is to be the next CEO at Restaurant Group. Mr Hornby is currently joint COO at betting company GVC Holdings.
• Restaurant Group reports it ‘is pleased to announce the appointment of Andy Hornby as CEO. We will update on Andy Hornby’s start date in due course and at the same time, will confirm the date on which Andy McCue will step down as CEO.’
• RTN Chairman Debbie Hewitt MBE comments ‘I am delighted to welcome Andy to the Company. He brings very relevant consumer, people and brand-led CEO credentials, with experience leading a multi-site retail business which is undergoing digital transformation. Andy’s extensive retail background, proven hands-on operational expertise, and experience of integrating businesses position him well to provide the leadership required to deliver the next phase of our strategy.’
• Andy Hornby comments ‘I am delighted to be joining The Restaurant Group as CEO at such an exciting time. This is a great business, with strong brands, committed colleagues and tremendous potential to grow. I recognise that this sector of the market faces considerable challenges, but The Restaurant Group has a set of casual dining and pub brands that offer significant potential. I’m excited to have the opportunity to lead the team and look forward to getting out and meeting colleagues when I join.’
• Restaurant Group confirms that it will pay Mr Hornby a base salary of £630,000 p.a. with no pension and the potential for up to a 20% salary supplement. The maximum bonus will be 1.5x salary.
• Sky reports that ‘prior to his stint at HBOS, Mr Hornby had enjoyed a meteoric rise through the ranks of corporate life, including senior roles at Asda under Archie Norman, the former Conservative MP who now chairs Marks & Spencer.’ HBOS ended badly and Sky reports that Mr Hornby has effectively been out of the public eye for the last 10yrs. Sky reports Mr Hornby has ‘won plaudits internally [at GVC] for his work running the day-to-day operations of some of the UK’s biggest gambling businesses.’
• Coca Cola HBC has reported Q1 figures showing volume sales up 3.5% and revenue increasing by 4.7%. Zoran Bogdanovic, Chief Executive Officer said: ‘We have started the year well, delivering solid growth in revenues despite the impact of this year’s late Easter. Volume growth accelerated compared to last year and our ongoing revenue growth management initiatives continue to deliver improvements in price/mix’.
• Data from NPD Group shows there were 755m delivery visits made from food & drink retailers in the year ending December 2018, an increase of 210 million or 39% since 2015. Delivery spend is reported to have risen by £1.35bn last year and could be worth £6.3bn by 2021.
• NPD says that 60% of food delivery visits occur over dinner but it suggests that there is every prospect of delivery taking share in other market segments. NPD says that delivery visits grew strongly among the 35+ age group.
• KAM Media reports the average distance someone in the UK lives from a pub/bar is 0.86 miles but a customer’s local pub isn’t always the one that’s the closest to them, with the average distance they travel to their ‘local’ being 2.12 miles.
• The report claims 57% of customers desire customisable food compared to 43% for customisable drink options. It continues, saying 71% of publicans have seen an increase in purchases of premium drinks in the last 12 months.
• KAM Media reports 84% 0f pub customers would want to see events and activities in their local, with 94% of saying they believe that visiting a pub/bar to socialise with friends is good for their mental health.
• UKHospitality Chief Executive Kate Nicholls replies to the Pubs Code and Pubs Code Adjudicator review, saying ‘The priority of the PCA should be on focusing on fast and effective arbitration decisions with clear precedents. The statutory review of the code could provide us with some much needed clarity to ensure the Code and Adjudicator can be as effective as possible, and provide timely support for tenants.’
• Greene King confirms that Rooney Anand’s resignation from the board was effective as of 30 April. Mr Anand will leave the company next week. Incoming CEO Nick Mackenzie joined the board yesterday.
• KFC has said that it should be in a position to deliver food from almost all of its restaurants in the US shortly. CEO Greg Creed said that delivery is currently available in 2,200 restaurants through Grubhub.
• Looking at the US market, NPD reports that coffee, whilst still dominating the morning market, is growing its afternoon sales.
• Online staffing website Catapult, whose mission is ‘to build the best part-time job by letting people take control over when and where they work’, has reported full year numbers to end July 2018 to Companies’ House saying that retained losses increased by £3.2m on the year. Accumulated losses now stand at £6.0m.
• Catapult, which had raised £5.4m in equity up to July last year and which has raised more since then, had negative shareholders’ funds in July of £617k. The company allotted further shares in January this year. Catapult says ‘through our app, our awesome candidates have access to 1000s of shifts with leading retail and hospitality employers.’ It says ‘our platform helps businesses extend their workforce in a flexible and profitable way, removing costs and risks related to constant re-recruitment of part-time staff.’
• The company yesterday announced that it had raised more equity capital.
• Liquidator to restaurant company Delaziz Ltd, Mark Reynolds of Valentine & Co, has reported that the company has assets of around £300 only with unsecured creditors of around £909k.
• YUM Brands has reported Q1 numbers saying that worldwide sales grew 8% in constant currency terms with 7%. LfL growth was some 4%.
• YUM Brands CEO Greg Creed reports ‘first-quarter results were a solid start to the year, reflecting particular strength at the KFC division and Taco Bell U.S. With this quarter, we have a healthy foundation to help us achieve our 2019 guidance.’ Mr Creed continues ‘we remain confident in our enviable business model and our commitment to lasting growth that maximizes shareholder value.’
• YUM reports ‘we opened 310 net units in the quarter. On a year-over-year basis…net new unit growth was 7%.’ YUM reports that its KFC subsidiary increased sales in the UK by 19% over Q1 last year. The US, in contrast, was up by only 2%. Only India (at 26%) amongst the company’s larger geographies, grew more rapidly.
• Kona Grill has filed for bankruptcy protection following the closures of several more of its stores. The US-based casual dining group cited assets of $53.6m and debts of $74m.
• The US domiciled Denny’s has said its refranchising efforts are keeping on track to meet expected goals. John Miller CEO of the group commented on delivery sales: ‘Delivery continues to drive the expansion of our off-premise business. These transactions continue to be incremental’.
• Llanerch vineyard in South Wales has opened a 26-bed hotel, as the group looks to copy the success of oentourism models found in New Zealand and Australia.
• Australian wine exports have increased by 5% in value in the last year to $2.78bn.
• Facebook is combating Amazon after the social media giant announced its intention to introduce new shopping features on WhatApp, Instagram and its own online Marketplace.
• The failed Sainsbury-Asda merger has set Sainsbury’s back £46m, the supermarket has confessed.
• Nielsen’s premium product survey has found that Chinese customers are most likely to buy premium on personal electronics, with 56% saying they would. The next four highest product groups were apparel (48%), cosmetics (46%), cars (43%) and jewelry (42%).
• Meat Liquor is offering 50% off food for the Tuesdays after the next two Bank Holidays (both in May). Café Rouge & Bella Italia 30% off, Prezzo 25% off food.
• Pret a Manger has said it will fully label all ingredients in its soups, salads and other products.
• Beyond Meat has raised $240.6m via an IPO to value the company at $1.5bn reports the FT.
HOLIDAYS & LEISURE TRAVEL:
• The Canadian owner of Air Transat is the target of multiple takeover bids. Tui has a 49% stake in the company and is believed to among several potential suitors.
• Councillors in Edinburgh have voted in favour to introduce a Transient Visitor Levy, which would be the first of its kind in the UK. Avison Young has reported that the levy will be used to fund public services improvements, and is expected to raise between £11.6 and £14.6m annually.
• Heathrow has seen pre-tax profits increase 72% to £57m in Q1 2019. A spokesperson for Heathrow commented: ‘Our robust financial health enables us to access competitively priced funding which ultimately results in lower passenger charge’.
• Masabi which brings SaaS ticketing and payments to public transport has announced a $20m growth funding round. The investment round has been led by Smedvig Capital, with Jonathan Lerner, MD at Smedvig stating: ‘With over 85 million journeys enabled by the Justride platform in 2018 and partnerships with some of the biggest names in mobility, Masabi is a category leader and the opportunities for global growth are significant’.
• Royal Caribbean has reported Q1 numbers saying that it achieved adjusted earnings of 131c per share, which was ‘beating the previous guidance mainly due to better revenue.’
• RCL reports net income of $249.7m under US GAAP saying ‘net revenue yields in the first quarter beat our previous guidance and are expected to do so for the rest of the year as well. Overall, the company’s booked position remains at a record level in both rate and volume.’
• Thomas Cook has set the deadline of the 7th May for expressions of interest for its airline business, with Indigo Partners and Lufthansa among the favourites.
• An English couple who died suddenly while on a Thomas Cook holiday in Egypt may have been exposed to toxic chemicals, a pre-inquest review has found.
• Paddy Power has seen Q1 revenue increased 17% to £478m, despite unfavourable sports results in the UK and Ireland. Chief Executive of the group Peter Jackson commented: ‘Q1 was a good quarter for the Group with revenues up 17%, notwithstanding customer friendly sports results in the UK. Underlying momentum remains good for Paddy Power with 22% growth in average daily actives’. Jackson also spoke about the company’s outlook: ‘Trading in April has been in line with our expectations. In the US, FanDuel remains well positioned to generate good returns on ongoing sports betting investment and for rest of the Group we remain on track to meet our full year profit expectations despite the adverse sports results in Q1. We remain excited about the growth opportunities that lie ahead for the Group’.
• Gfinity reports that it has been selected as strategic partner for inaugural esports world cup. It says ‘it has entered into a partnership with TRUXTUN Capital, to be the primary consulting and programme management partner for the inaugural Esports Wega World Cup.’
• Gfinity chairman Garry Cook says ‘to have been chosen as the global strategic partner and a consultant to help deliver this bold and ambitious project is another big step forward for Gfinity.’ He says ‘as the project progresses, we are well placed to expand our mandate to provide additional services in the lead up to 2022.’
• Gambling revenues in Macau fell at the fastest rate in c3yrs in April, driven down by slower Chinese economic growth.
FINANCE & ECONOMICS:
• IHS Markit reported yesterday that UK manufacturing remained in growth at 53.1 in April, down from 55.1 in March. It says ‘April saw the recent growth fillip at UK manufacturers show signs of petering out’.
• Markit says that stockpiling is winding down and could go into reverse. Markit’s Rob Dobson says ‘the upturn in the UK manufacturing sector eased at the start of the second quarter. Growth of output and new orders slowed, leading to job cuts for the third time in the past four months. The trend in new export business was especially weak, as high stock holdings at clients and slower global economic growth led to reduced demand from key markets such as the European Union, the USA and China.’
• Nationwide yesterday reported that UK house price growth was sluggish in April with annual house price inflation standing at 0.9%.
• Sterling rose yesterday to $1.3056 and €1.1647. Oil up at $72.01. UK 10yr gilt yield down 2bps at 1.15%. World markets mixed with UK down yesterday and Far East mixed in Thursday trade. UK market likely to open down around 33pts.
• Brexit & politics:
o The Dept for Transport is to cancel contracts for extra ferry services after Brexit.
START THE DAY WITH A SONG:
Yesterday’s song was ‘There She Goes’ by The La’s today who sang:
From the highest mountain, valley low,
We’ll all join together with hearts of gold
Now the children of the world can see
There’s a better place for us to be
RETAIL NEWS WITH NICK BUBB:
Ocado: After the AGM which was held at 10am yesterday morning, it took until 5.39pm for Ocado to reveal the scale of the shareholder revolt against Director’s pay (c24%/25%), but we hadn’t realised that “Where 20% or more of the votes have been cast against a Board recommendation for a resolution the UK Corporate Governance Code 2018 states that a company should explain, when announcing voting results, what actions it intends to take to consult shareholders in order to understand the reasons behind the result”. So it took a while for the Chairman Andy Harrison to drum a few words together, to say that the Board had consulted shareholders about its controversial Value Creation Plan for CEO Tim Steiner and still thought it was in the right…
N Brown: Under its previous CEO, Angela Spindler (who has just pitched up as a non-exec at ScS, incidentally), the Online fashion group N Brown had rushed off opening a business in the US and opening stores in the UK, but under new management it’s “back to basics” and the message with today’s finals is that, inter alia, “We will focus on the UK“ and “We will simplify the business to improve the customer experience”.
Howden: The trading update today from the trade-focused kitchen joinery business Howden is brief, but encouraging, with LFL revenue growth having strengthened from 3.5% after the first 2 months of the year to 3.9% cumulatively after 4 months of the year, despite strong comps. And although the company remains “watchful” about market conditions it says it is on track with its plans for the year as a whole.
News Flow This Week: Tomorrow brings the Intu Properties AGM update.