Langton Capital – 2019-05-07 – PREMIUM – Domino’s, provisions, delivery, CAKE, TCG, AB InBev etc.:
Domino’s, provisions, flair, CAKE, TCG, AB InBev etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I think Schrodinger’s Cat has a lot to answer for.
Because, as it suggests that knowledge of an issue affects the issue, it implies that, if you leave the stew on the cooker for longer than intended, it isn’t really burnt until you go to check whether it is or not.
Hence, yesterday, when I bunged a ton of leftovers into a pot and put it on the gas, I wasn’t willing to accept that I’d burnt it until I ambled back into the house two hours later to check on it.
And I had, of course. The dog was delighted but the pan itself is still in intensive care and we had to fall back on emergency fish & chips. Apologies to Schrodinger for mangling his theory but science, huh?
It’s a short week. The third of four in a 6wk stretch. There are few announcements this morning but let’s move on to the news nonetheless:
STRAINS ON CASHFLOW. PROVISIONS – ACCOUNTANCY No6 – Taking the ‘hit’ year one is an accountancy notion. The cash impact can last many years. 7 May March 2019:
• There’s often a temptation for an incoming CEO to ‘kitchen sink’ a situation. This involves writing down goodwill, providing for restructuring costs etc. This can have the effect of worsening the short-term P&L (but in the form or a one-off) whilst benefiting ‘profits’ going forward. The impact on cash flow is the other way around.
Setting the scene:
• There have often been a lot of discussions with an incoming CEO before he/she takes the job.
• If there haven’t been, there should have. Any failure to communicate can lead to year 2 and year 3 provisions, which is sub-optimal
• The pay package etc. needs to be agreed but so too does the measurement of targets such that the CEO can make his/her bonuses etc.
• These may rely on ‘clean-sheet’ accounting whereby the problems of the past are ring-fenced and growth from a hypothetical start point
• On the ground, this can result in write-downs, write-offs and provisions against the cost of clearing up whatever mess is being inherited
What does this mean in practise?
• Goodwill may be written down or written off. This hits the P&L year one but helps thereafter. There is no impact on cash
• Closure & redundancy costs may be provided for. This impacts the P&L immediately but protects it in the periods in which costs are incurred. The negative impact on cash is felt in subsequent periods
• Onerous leases may be provided for. This can result in several years’ worth of rent being provided for straight away – but the cash cost is incurred over the remaining term of the lease
• The latter issue means that the company’s P&L and cash flow might be out of kilter for many accounting periods and, whilst the P&L may tell one story, the cash flow statement may imply something different
A BAD BUSINESS? RUNNING A COMPANY – SOMETIMES THE BEST ADVICE IS – DON’T: You need a license to watch a TV but you need nothing to start a business. Perhaps that might be part of the reason why so many fail? 7 May March 2019:
• Amongst other things you need drive, flair and ability to start and run a business. The first two may be overrated (the Availability Heuristic, they are more obvious – and more memorable in successful people) but you won’t get far without talent. And stickability, an attention to detail etc. A failure on that part may ensure that you leave a lot of wreckage in your wake.
• Caveat. Spotting a problem is one thing. Solving it (or preferably avoiding it in the first place) is quite another. Perhaps consider the below with that in mind.
• The early rounds of Britain’s Got Talent are awash with drive and flair – but they may be lacking in ability
• Similar traits can be found in business
• Drive and flair are visible and potentially overrated. The ability to crunch a spreadsheet or to diligently execute on a business plan is less highly regarded
• Which is what it is. But, whilst most (or at least many) business success stories feature drive and flair, not every business with drive & flair becomes a business success story
A self-reinforcing problem:
• Indeed, people with drive and flair but limited ability can cause major problems both for themselves and for suppliers, shareholders etc.
• This because they are wrong but persuasive. If they were wrong and easy to ignore, it would be less of an issue
• They may be more likely to push on. To drive the business without a sideways glance etc. Of course, timid business leaders (who are pretty thin on the ground) may fail for other reasons
• Bold business leaders may be blinkered, they may ignore bad news. Or any news, for that matter. They are likely to blame others for failure. Even with hindsight, they did nothing wrong & they are less likely to learn from their mistakes
• They may hit the brick wall without ever tapping the brakes and, even then, their foot may need to be prised from the accelerator
GENERAL NEWS – PUBS & RESTAURANTS:
• Domino’s Pizza reports Q1 ‘robust UK performance’ but it says that ‘international remains disappointing.’
• DOM reports group system sales of £324.4m for the quarter, up 4.5% organically with UK & Ireland sales up 4.8% and international sales up 1.1% organically at £25.1m.
• DOM says it opened 11 stores in the year to date, of which 7 in the UK, taking the Group total to 1,271. The group’s Warrington supply chain centre is now serving 449 stores
• DOM says International saw a ‘weak system sales performance and Q1 operating result below last year; we no longer expect a break-even out-turn this year.’
• DOM CEO David Wild reports ‘with continued like-for-like growth, the year has started well across our core UK and Republic of Ireland markets, which account for 90% of our business. Our digital expertise remains a key driver of customer engagement, with online accounting for a record 81.7% of total sales in the UK. We remain in open and ongoing dialogue with our UK franchisees, actively exploring win-win solutions for stimulating growth and new store openings.’
• The company reports ‘internationally, performance remains disappointing and trading visibility is limited. As we outlined at the full year results, we have new management in Norway, Sweden and Switzerland, and a heightened focus on store level performance. However, given persistently weak system sales in all our International markets we no longer expect this part of our business to break-even this year. We are therefore further tightening our focus on International costs and capital deployment. We will provide a further update at our first half results.’
• MAPIC has reported that the boom in delivery, driven in large part by millennials, has brought problems in its wake as operators deal with the fees demanded by the delivery aggregators and with the logistical problems of serving seated customers and providing product for delivery drivers and cyclists.
• MAPIC quotes analyst Peter Backman as saying ‘dark kitchens have been around for a very long time but the market has evolved and they have created opportunities for operators who, for example, might want to move into a new location for less investment or where they can’t find the right restaurant property.’
• Customers want delivery but, at a time of overcapacity and squeezed margins due to rising costs, operators may struggle if they are obliged to share profits with delivery companies.
• AB InBev has reported Q1 numbers saying that ‘momentum continued from 4Q18 into 1Q19 with healthy volume growth of 1.3%, revenue growth of 5.9% and EBITDA growth of 8.2% with margin expansion of 86 bps.’
• AB InBev says it is seeing the ‘ongoing success of our premiumization strategy supporting top and bottom line growth with global brand revenue growth of 8.5% (14.0% outside of the brands’ home markets) and High End Company revenue growth of almost 20%.’
• The group is seeing ‘continued market share trend improvement in the US, with the best quarterly market share trend performance since 4Q12 led by our premiumization and innovation initiatives.’
• Patisserie Valerie’s creditors, including former chairman Luke Johnson, are reported to be close to appointing new advisors in a move that could see them launch legal action against Grant Thornton, CAKE’s auditors.
• Independent five-strong bar restaurant chain Vinoteca has reported strong sales growth in 2019 and announced that it plans its first opening outside London. The company says sales in the year to end-March grew by 5.8% to £7.6m with ‘good overall LFL sales growth in the year particularly at its Kings Cross and Bloomberg HQ venues.’ The group says that it will open in early 2020 in Leeds. MD Charlie Young reports ‘we are delighted with the performance last year, particularly at Kings Cross and Bloomberg. We are incredibly excited about our plans to open at the Paradise scheme in Birmingham. Vinoteca is increasingly the wet led tenant of choice in these prestigious developments’.
• Speaking at the Casual Dining Show, Carluccio CEO Mark Jones has said that the group is implementing Project Fresca, a £10m business transformation programme, after the group underwent a CVA last year. Mr Jones said that the group had perhaps opened too many marginal sites & added that the money could perhaps have been better spent on refurbishments.
• Into cautioned last week that rents could fall further as retailers are shutting shops at a faster rate than had been expected. Intu’s shares are down from around 280p two years ago to under a pound today. See Langton comments on borrowing short and lending long. That goes for properties as well as for cash.
• Some 17 million light-fingered customers are reported to have ‘stolen’ condiments, napkins and, more seriously, glasses, tableware and cutlery from restaurants. That seems like rather a large number.
• Chinese Luckin Coffee seeks to raise $586.5m through a placing of 34.5m shares. The company currently operates 2,370 coffee shops and has plans to open 2,500 more this year.
• Biglari Holdings, owner of Steak ‘n Shake, temporarily closes 44 of the brand’s sites. The company said in a regulatory filing that it is looking for a franchise partner to take over the sites.
• Rosa’s Thai Cafe will open its first restaurant in Leeds on May 4, featuring 140 covers.
• The Ivy Collection has seen turnover double to £98.4m in 2018 as the group continues its expansion out of London.
• Constellation Brands has taken a majority stake in Tennessee Bourbon distillery Nelson’s Green Brier. Constellation’s president and chief executive officer, Bill Newlands said: ‘Once integrated into our wine and spirits division and benefitting from our market reach, distributor partnerships and consumer insights, we see Nelson’s Green Brier scaling even further in the next few years’.
• The dim sum chain Ping Pong is reported to be interested in closing two of its restaurants in London shopping centres.
• Wetherspoons has asked the Society of Independent Brewers to quality check their cask beer, to ensure their cask satisfies ‘real ale’ standards.
• Ei Commercial Properties has agreed a 20-year commercial free-of-tie lease for its Dorset pub, The Galleon, to The White Brasserie Company. Jeremy Brown, Property Director at The White Brasserie Company said: ‘We have worked with Ei Commercial Properties since 2014 and we’ve always found them to be really helpful and a pleasure to work with’.
• Shake Shack has seen revenue grow 33.8% to $132.6m in Q1 2019, with same store sales increasing 3.6%. CEO of the group Garutti commented: ‘Based on our first quarter results, we are raising both our overall revenue and same-Shack Sales expectations for the year. We are on track to open 36 to 40 new company-operated Shacks, marking our largest class yet’.
• Wahlburgers, the US burger chain is set to open its first European site in Covent Garden later this month.
• Malhotra Group PLC has completed the first stage of its £6.2m development of the Three Mile Inn, Gosforth.
• A CGA and Harrison study reveals UK stadiums are falling short of customer expectations. Of the 12.1 million British adults who have visited a major sports arena in the last 12 months, as many as 70% are male and nearly 60% are white-collar workers. 42% of consumers cited expensive food and drink as their biggest frustration when visiting stadia, with 38% citing lengthy queues as a common annoyance.
• Heinz is to restate figures for 2016, 2017 and part of 2018 after a review into buying and accounting procedures found ‘misconduct’ by employees.
HOLIDAYS & LEISURE TRAVEL:
• Responding to press comment, Thomas Cook reported on Friday that it ‘kept a healthy level of liquidity headroom through the last winter cash low period, maintaining a minimum liquidity buffer within our targeted range of £150 million to £200 million.’ It says ‘since that update, the business has moved into its key summer booking period where the Group’s liquidity position continues to strengthen.’
• TCG says ‘looking ahead to Winter 2019/20, we have taken the proactive step of engaging in discussions with our lending banks now to ensure we have both the financial flexibility necessary to maintain an appropriate liquidity buffer through the winter, and also the ability to continue to invest in our strategy of growth.’
• TCG CEO Peter Fankhauser comments ‘we have taken a number of prudent early steps to de-risk our business by taking out capacity in a challenging consumer environment. We have also taken the proactive step to approach our financing partners and are engaged in constructive discussions to ensure we have the flexibility and resources to continue investing behind our plans over the long-term.’
• Sky News reports that TCG ‘is racing to secure a cushion of up to £400m from its lenders as it prepares to report results that will underline the challenges facing the package tour industry.’ It says the group ‘is in advanced negotiations with its syndicate of banks about providing the new debt funding amid growing pressure on the company to shore up its balance sheet.’
• The borrowings would reportedly come on top of the group’s existing £875m facility. Bidders have until today to express any interest they may have in buying TCG’s airline.
• The Hotel Market Tracker reports that UK provincial hotels saw their first RevPAR decline in seven years in Q1 this year.
• HVS, AlixPartners & STR report that UK REVPAR fell 2.8% in Q1 this year. London, on the other hand, saw LfL REVPAR rise by 3.6%. This accords with comments made by Whitbread last week. The tracker comments ‘outside London hotel performance was adversely affected by supply growth causing hotels to discount more aggressively in many locations. Ultimately this new supply should be absorbed but the effects of Brexit are also to blame for this.’
• EasyJet has corrected an earlier pre-close trading update saying that trading was actually a shade better than it had first reported. EZH reports that total system sales in its H1 to end-March rose by 25% to £20.2m with revenue up 53% to £7.3m. Owned hotels’ LfL REVPAR was up by 10.1%.
• Elliott Advisors is putting pressure on Whitbread to sell off more of its freeholds. Elliott would reportedly like to see WTB sell 10% to 15% of its properties and to leave the rest under review.
• Advisory firm Glass Lewis has suggested that shareholders vote against the reappointment of Kwek Leng Peck to the board of Millennium & Copthorne hotels as it believes that he has too many other jobs.
• Harris Interactive reports consumers are concerned about the impact of Brexit on the price of flights and holidays. Forty six per cent of consumers believe the UK’s departure from the European Union will have a negative impact on their personal finances.
• Hoseasons reports May bank holiday bookings up 49% yoy, driven by Brexit uncertainty. Breaks booked by the trade for June, July and August are already 17% up yoy.
• STR reports US hotel RevPAR up 0.6% in March, ADR up 0.6% and occupancy flat.
• Marriott International President and CEO Arne Sorenson has been diagnosed with stage two pancreatic cancer. Sorenson will continue his role until surgery at the end of the year.
• Last Friday’s song was Together in Electric Dreams by Philip Oakey & Giorgio Moroder. Today, who sang:
• ABTA claims more than 5,000 people were the victims of holiday booking fraud last year, with £7m in total losses suffered. Victims lost £1,380 each on average.
• British Airways offers ‘huge discounts’ in May, with return flights to New York starting at £278. More than 120 destinations are on offer in the sale, with flights from Heathrow Gatwick and London City airport.
• Moody’s has reported that The Walt Disney Company’s decision to sell 21 of the company’s 22 owned regional sports networks to Sinclair Broadcasting Group for approximately $10.6 billion in enterprise value, or approximately $9 billion in cash to Disney after transaction adjustments is credit positive.
• Facebook claims the future of shopping will depend on content ‘creators’, with creators soon being able to sell products directly to their followers.
FINANCE & ECONOMICS:
• The UK’s Services PMI rose to 50.4 in April from 48.9 in March. IHS Markit reports ‘survey respondents continued to report that Brexit uncertainty and concerns about the UK economic outlook had encouraged clients to postpone spending decisions.’
• Unemployment in the US is at a 49yr low.
• Sterling up at $1.3122 and €1.1704. Oil up at $71.29. UK 10yr gilt yield up 3bps at 1.22%. World markets mixed. UK set to open down a short 30pts.
• Brexit, politics etc.:
o Feeling that Labour is being hurried into a deal as some reporting an agreement is ‘99% done’ and that it could be announced this week.
o Agreement to a customs union would see reality setting in but further would be promises broken and the deal would look nothing like what anyone voted for in June 2016.
o UK government has signed a further £160m of contracts with advisers over Brexit.
START THE DAY WITH A SONG:
Just when you think you’ve caught her,
She glides across the water
She calls for you tonight
To share this moonlight
RETAIL NEWS WITH NICK BUBB:
• Saturday Press and News (1): The profit warning from the embattled shopping centre giant Intu Properties on Friday, on the back of the worrying surge in CVA’s, got plenty of coverage in in the Saturday papers, with articles in the FT, the Guardian and the Times, inter alia, and Lex column in the FT thundered that “for landlords like Intu the pain from CVA’s will rise in line with their growing use”. On a related subject, the Guardian highlighted that Arcadia’s landlords are demanding more cash investment from the beleaguered Philip Green, although Intu is keeping its distance from the main landlord grouping, in the belief that it has less to lose than its rivals.
• Saturday Press and News (2): Sainsbury remained in the spotlight, as it staged a PR fightback against the recent criticism of CEO Mike Coupe, with the Times profiling and interviewing the new Chairman, Martin Scicluna (who revealed, in passing, that his partner is the headhunter Carol Leonard), who strongly defended Mike Coupe): “Sainsbury’s Chairman refuses to shop around for new chief after Asda failure”. Mike Coupe himself was also the subject of a positive profile in the FT: “A steady supermarket boss licks his wounds”. However, the veteran City commentator, Neil Collins, raged in his FT column about the huge exceptional costs taken below the line by Sainsbury in its final results and the massive £46m fees paid to City advisers to the ill-fated Asda merger, thundering that “Big financial operators reap the rewards of Sainsbury’s failure”.
• Saturday Press and News (3): In other news, Simon Wolfson of Next was the Daily Mail’s “Hero of the Week”, whilst the lead story in the stockmarket reports in both the Daily Mail and the Times was the report from Peel Hunt lambasting the quality of the robot technology in Amazon’s Tilbury warehouse relative to Ocado’s warehouse technology (“Ocado’s fast robots help it to scoot ahead of Amazon in analyst’s eyes” was the Times headline). And the FT flagged that the veteran US investor Warren Buffett has at last started to build a stake in Amazon. The FT also had an interesting front page scoop: that M&S is in dispute with HMRC over whether the “free” bottle of wine in its “meal deals” should be taxed…Finally, the Guardian had a profile of Umar Kamani, the boss of PrettyLittleThing (“Boohoo offspring that outshone its mother company”), noting that Umar and his team’s 34% minority
• Sunday Press and News (1): Sainsbury remained in focus in the Sunday papers, with the Sunday Times highlighting that the former Asda boss Paul Mason had got backing from the private equity giant Apax to buy up to 140 surplus Sainsbury/Asda stores, if the merger had gone ahead. And the Mail on Sunday interviewed the new Sainsbury Chairman, Martin Scicluna, who again strongly defended CEO Mike Coupe: “Merger flop wasn’t a cock-up…we MUST grind down prices”.
• Sunday Press and News (2): The Sunday Times also highlighted that the planned Debenhams CVA will hit small landlords and local councils more than the big property companies, noting that the CVA documentation reveals how the American hedge fund Silver Point gained control of the business through its debt ownership and that the embattled Arcadia is also a big creditor, because of its concessions in Debenhams. And the CVA plans of the embattled Arcadia itself were the subject of a scathing article in the Observer (“Green needs a deal to stop Top Shop group falling like a house of cards”). Although the Observer missed the chance to speculate on how bad the as yet undeclared results for the business were in y/e Aug 2018, it flagged that the beleaguered Philip Green has not been seen in the UK since October and noted the view of a veteran consultant that he had left it far too late to
• Bank Holiday Monday Press and News: Relatively thin pickings today, but the Telegraph has a detailed profile of (and interview with) the football-loving boss of the Watches of Switzerland chain, Brian Duffy, ahead of the planned IPO for the private equity owned business. And the Daily Mail flags that Walmart is actively weighing up an IPO for Asda (20 years after it was last listed), although some observers are counselling a reverse takeover of B&M by Asda instead. The “Small Talk” investment column in the FT is devoted to the subject of how retailers are starting to use CVA’s to cut their Business Rates bills, noting that if the Government starts to notice the loss of tax revenue it may be driven to reform the Business Rates regime at last. Finally, the Times highlights that the Sweat! gym business, which opened a store inside the Debenhams in Sutton last summer to much fanfare,
• News Flow This Week: Things kick off quietly this week, after the Bank Holiday yesterday, but tomorrow brings the BRC-KPMG Retail Sales survey for April (with at least 2% LFL growth likely, given the late Easter and fine weather) and the Travis Perkins Q1 update. Then on Thursday we get the Morrisons Q1 update, the Superdry pre-close update and the Debenhams CVA creditor’s vote