Restaurant capacity, debt, discounts, Saga, TCG etc.:

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A DAY IN THE LIFE:

In praise of tea.

I would posit that it’s possible to look genteel when drinking coffee but the only way to drink tea to gulp it down like a sucking drain?

Because, though it’s not a very pleasant site (or sound), when you’re thirsty and need a drink, don’t you just find that a mug of tea hits the spot in a way that coffee singularly fails to do?

And you can stack away cup after cup which, if you did it with coffee, would have you talking at 300wds per minute and climbing the walls to get away from the spiders. Horses for courses, maybe. On to the news:

RESTAURANT NUMBERS. GROWTH MONITOR SHOWS REAL CONTRACTION: Maybe it’s too little, too late but the reduction in restaurant numbers reported by the latest Market Growth Monitor from CGA and AlixPartners must help. 21 May 2019:

Executive summary:

• Perceived high multiples to book, low barriers to entry, innovative new entrants, abundant capital and a rising supply of available sites led to a c15% increase in restaurant capacity in the UK in the 5yr period to 2018. Restaurant numbers are now falling – but is it a case of too little, too late?

Current findings:

• The latest Market Growth Monitor from CGA & AlixPartners shows that the number of restaurants in Britain fell by 2.8% in the year to March 2019.

• The Monitor suggests that high streets in the south of England, excluding those in London, were especially hard hit by closures.

• The Market Monitor shows that net closures amounted to some 768 restaurants over 12mths, or around 15 per week. It says this is the fifth successive quarter of decline in the sector ‘bringing to an end a boom period that saw restaurants grow in number by more than 15% between 2013 and 2018.’ See Premium Email for more detail

Who is closing sites and where?

• The Growth Monitor says ‘the bulk of closures have been of independents, but group restaurants—managed sites from operators with more than one location—also fell in number, by 1.1%.’

• The South of England saw group operator closures reduce capacity by 2.8% whilst it fell by only 0.4% in the north. The monitor says this is ‘a sign that restaurant levels have reached saturation point in many southern towns and cities.’

• The Monitor reports high street chain restaurant numbers fell by 2.4% in the year to March whilst the number in suburban areas rose by 1.8%.

• The rate of closures across wet-led units, meanwhile, has declined from c31 per week 3yrs ago to nearer 13 per week in the last 12mths.

Interpretation:

• The CGA’s Peter Martin says ‘the gold rush is over.’ He says some groups continue to flourish ‘but for brands that have over-reached themselves or lost sight of their proposition and purpose, there are undoubtedly more tough times ahead.’

• Langton has suggested for some time that lazy, me-too and/or undifferentiated brands are likely to suffer.

• CGA says ‘rising costs and declining footfall, are adding another layer of difficulty.’

• AlixPartners says ‘ambitious and well-resourced operators now have more headroom for growth.’

• The translation here may be that bad operators are less likely to clutter up the market, drive up rents and beat good operators to sites.

Langton Comment:

• Clearing out over-extended or simply not-very-good operators is likely a positive but a lot of damage has been done on driving up costs or leases and staff and in embedding a discount culture into consumers

• And a number of babies will be thrown out with the bath water

• Nonetheless, if good sites are (more) available to professional operators at sensible prices, then there are some grounds for optimism

• However, the process of clearing out or rationalising the market is not likely to be simple, short or bloodless

• Operators who cling on may do so via discounting and may even resort to corner-cutting when it comes to paying taxes, bills etc and in their attention to regulations. This has implications for the wider market

• The free market is great but, like democracy, it can produce some sub-optimal outcomes. The F&B market has little by the way of braking mechanisms when it comes to new openings hence out-and-out crashes are not unknown.

FROM THE ARCHIVE. WRITING IN APRIL 2007, WE COMMENTED THAT IT WAS ODD THAT WE HADN’T HAD A RECESSION FOR 16 YEARS. 20 May 2019:

Executive summary:

• It’s hard to have a view on the future without at least a glance at the past. With interest rates rising (in 2007) and debt still easy, it was beginning to look as though things were too good to be true.

Setting the scene:

• In 2007, interest rates were rising, and we hadn’t had a recession for 16yrs. Today, interest rates are also rising and it’s a decade since our last period of economic decline

• In ’07, we commented ‘the FTSE is approaching all time highs and we could all (theoretically) retire off the value of our houses so what could possibly go wrong?’

• We concluded ‘a number of things’ and pointed to rising rates, high debt levels and the potential for consumers to retrench

Interest rates:

• In 2007 we believed that interest rates could rise to 5.5% or 6.0%. It’s maybe half that potential level now. And companies are better-positioned

• But cheap money is addictive. It reduces the incentive to pay down debt and, if rates do continue rising, current corporate debt levels could still be ‘too high’

Debt:

• In ’07 we pointed out that corporate debt levels were very high. We said fixing debt & selling bonds went some way to limiting liabilities but said ‘the yield on debt, which is lower than that on equity, is lower for a reason. This is principally that it is more certain, must be paid.’

A consumer recession:

• In 2007, consumers were high on a heady mix of low interest rates, easy money and rising asset prices.

• Things are a little different now. But not that much.

• It’s worth remembering that ‘leisure companies’ customers are impacted by higher interest rates’ in that higher interest payments remove cash that could have been spent on leisure products

• We said ‘if rates peak higher [than 5.5%], house prices come under pressure and the consumer is squeezed more meaningfully, then the outlook is less bright.

Share prices in 2007:

• Things are a little different now but in 2007 we said ‘with the FTSE at these levels and many leisure stocks having pretty much doubled over the last 12 months, there’s not much room in there for disappointment.’

• We concluded ‘booking some profits where investors are fortunate enough to be overweight may not be a bad idea.’

• It may feel as though there are fewer profits to book this time around but that’s not to say that there aren’t risks on the downside.

GENERAL NEWS – PUBS & RESTAURANTS: 

• The latest Market Growth Monitor from CGA & AlixPartners shows that the number of restaurants in Britain fell by 2.8% in the year to March 2019.

• The Monitor suggests that high streets in the south of England, excluding those in London, were especially hard hit by closures.

• The Market Monitor shows that net closures amounted to some 768 restaurants over 12mths, or around 15 per week. It says this is the fifth successive quarter of decline in the sector ‘bringing to an end a boom period that saw restaurants grow in number by more than 15% between 2013 and 2018.’ See Premium Email for more detail

• Kids’ half term next week & still quite a lot of discounts still out there. Beefeater 33% off mains, Bar & Block 2-4-1 (both Whitbread) Bella Italia 30% off food, Café Rouge 25% off (both CDG), Prezzo 25% off food (trying to row back from 40% off), Frankie & Benny’s (RTN) 50% off click & collect, 25% off for students, Harvester (M&B) £5 off £20 sales when signing up for App, Strada £5 pizzas on Mondays etc.

• Upcoming results. M&B (half year) and Young & Co (full year) report numbers on Thursday. Britvic (H1) is tomorrow.

• Loungers still sitting at a decent, 10% plus, premium to its IPO price.

• Beaujolais wine exports to the UK have continued to increase by 35% in volume during H1 2019. Anthony Collet, marketing and communication director for InterBeaujolais, said: ‘We are delighted to see continued growth in Beaujolais exports to the UK. With an increased effort on trade activities regionally and looking ahead to our annual tasting next month, we feel confident for the future of this very important market for Beaujolais’.

• The Harrogate Tipple has opened a retail shop at its newly acquired distillery in Ripley.

• Canadian and Mexican retaliatory tariffs on American Whiskey will be repealed as an agreement is reached, a move welcomed by the USA’s Distilled Spirits Council.

HOLIDAYS & LEISURE TRAVEL:

• Thomas Cook shares down another 13% yesterday at 10.5p. Were in single figures at one stage. Saga down 4%, Merlin off 7% at 350p.

• Saga shares remain weak, down another 4% or so yesterday after a similar 4% drop on Friday. The shares IPO’d at 185p in 2014. They went to a discount almost immediately before recovering to spend most of 2017 at or around 200p. The shares then went on to lose 75% of their value over the last 18mths or so.

• An unfortunate coincidence of events (highly priced & ambitious IPO price, tougher market in holidays given Brexit and potential regulation re financial products) has perhaps conspired to deprive IPO supporters of three quarters of their money.

• Thomas Cook has been reassuring customers that holiday trips will go ahead, the firm said ‘We have the support of our lending banks and major shareholders, and just this week we agreed additional funding for our coming winter cash low period.’ Shares in the company dropped a further 16% to 10p on Monday.

• STR reports US hotel occupancy up 0.3% to 68%, ADR up 0.9% to $131.85 and RevPAR up 1.2% to $89.67 in April 2019.

• STR’s HOST Almanac show 2018 US hotel industry wide profit of $80bn from revenues of $218bn. Labour costs grew by 3.2% for the year, higher than revenue growth for the second straight year.  

• Gleneagles Hotel reports revenues up by £4m to £55.3m, with operating profit up 40% to £3.5m. However, the luxury hotel reported pre-tax profits down to £55,000, compared to £505,000 the year prior.

• Goldman Sachs is in discussions to acquire B&B Hotels for €2bn, according to Bloomberg. The deal is set to close in H2 2019.

• Eurostar offered vegetarian menus for the first time from 13-19 May. 

• Fortune reports some popular European destinations are actively trying to encourage tourists to visit elsewhere. Places such as Amsterdam, Venice and Barcelona fear that over tourism will affect city livability.

• A leaked European Commission report suggests a jet fuel tax would cut emissions by 11% with no impact on jobs or the economy.

OTHER LEISURE:

• Arsenal MD Vinai Venkatesham told the FT’s Business of Football summit that ‘the Premier League is the thing that really draws the commercial partners in. Of course, all our commercial partners want us to be in the Champions League as well, but I think that the Premier League piece is just as, if not more, important than that.’

• Financial advisors Duff & Phelps claim Premier League football teams are missing out on millions of pounds in stadium naming rights. Only 30% of top flight teams have a stadium sponsor, compared with more than 80% in American football’s NFL.

• Huawei has been granted a temporary US general licence enabling it to maintain its networks and provide software updates to existing handsets. The license is for 90dys only.

FINANCE & ECONOMICS:

• Sterling is at 4mth lows vs both the US dollar and the Euro. This is not helpful for the overseas tour operators who often have to price beds in Euros and flight costs in dollars.

• Morgan Stanley has opined that a collapse of Sino-US trade talks and tit-for-tat rise in tariffs on goods traded between the two countries would push the world economy towards recession.

• Jaguar Land Rover has reported a record annual loss of £3.6bn on the back of a £3.1bn Q1 shortfall.

• Ford is to cut 7,000 jobs globally with up to 550 positions going in the UK.

• Sterling down a shade at $1.2723 and €1.14. Oil down at $72.23. UK 10yr gilt yield up 2bps at 1.06%. World markets down yesterday with Far East mixed in Tuesday trade.

• Brexit, politics etc.:

o A ‘new and improved’ offer on Brexit is to be forthcoming from the PM insists no10. Only 35mths after the Brexit vote and 26mths after Article 50 was invoked, Mrs May is to solicit other people’s views.

o Former Brexit minister David Davis told the Today Programme yesterday that Mrs May’s proposals were doomed to failure.

o Lord Heseltine has lost the Tory whip in the House of Lords as a result of saying that he would rather vote Lib Dem than Tory in the upcoming EU elections.

o Chancellor Philip Hammond will tell the CBI today that no prospective Conservative leadership contender should ‘hijack’ Brexit & while ‘knowingly inflicting’ damage on the UK via a no-deal exit from the EU. Mr Hammond, known as ‘spreadsheet Phil’ and for his dour presentation, may not survive any post-leadership change reshuffle.

o The ‘One Nation’ group of Tory MPs met yesterday evening to attempt to block any leadership candidates pushing a ‘no-deal’ Brexit.

o Bank of England deputy governor Ben Broadbent said yesterday that British companies are likely to cancel investment projects that they have put on hold because of Brexit uncertainty in the case of a Hard Brexit.

START THE DAY WITH A SONG:

Yesterday’s song was Pretender by Foo Fighters. Today, who sang:

When I was just a baby

My Mama told me, “Son

Always be a good boy

Don’t ever play with guns”

RETAIL NEWS WITH NICK BUBB:

Sports Direct: If, like us, you were wondering why the share price of the Australian-based website MySale collapsed last week to little more than 6p (capitalising the struggling group at only £10m), the answer came at 4.55pm yesterday afternoon, when Sports Direct announced that it had dumped its entire 4.8% stake, for reasons unknown. It surely can’t need the money…so the assumption must be that it has lost faith with the business model, despite having a joint venture with MySale to clear seasonal stock “down under”. On that basis, no doubt the beleaguered Philip Green would like to be out of his ill-fated MySale shareholding as well, but he clearly has much bigger problems on his mind, as he fights to avoid the collapse of his Arcadia fashion empire…

Ocado: If you’re wondering whether Ocado shareholders approved the lucrative M&S deal at yesterday’s EGM, the answer is, of course they did. The turnout was as high as 76% and basically 100% of the votes were in favour of the deal. It remains to be seen whether M&S shareholders will be asked to approve the deal to pay £750m for half the business, but the more pressing issue is that M&S will have to say after tomorrow’s finals how they intend to pursue the planned rights issue to finance the hefty purchase price, with £563m cash to be paid upfront (c13% of M&S’s market cap). 

WH Smith: As WH Smith is so linked with the previous CEO Kate Swann, it is a bit of a shock to see that the current CEO Stephen Clarke has been in charge for six years now. It is even more of a shock to find out that he is stepping down on Oct 31st, in an announcement on the back of today’s scheduled trading update. Fortunately, it looks like a planned move, as his No 2, Carl Cowling, the current MD of the High Street Division, is being promoted to the top role, with the veteran FD Robert Moorhead continuing to provide his support. So life goes on and the trading update is fine, ahead of the key summer season in Travel, with LFL sales over the last 11 weeks up 1% (up 3% in Travel and down 1% in the High Street). Given the usual exemplary gross margin and operating cost management, Stephen Clarke says “We remain confident in the outcome for the full year” (the year-end is
August).     

Halfords: Today’s finals from Halfords for y/e March makes less happy reading, with underlying PBT of £59m down 18% and multiple references to the adverse impact of the “extremely mild winter” on Motoring sales. However, the outcome is said to have been in line with guidance and although profits are still expected to be broadly flat in the new-year, long-suffering shareholders will be pleased to see that the dividend has been edged up.

News Flow This Week:  The Greggs AGM is being held today at 11.30am in sunny Newcastle, but the trading update was brought forward to last week. Tomorrow brings the much-awaited Marks & Spencer finals, the Pets at Home finals, the French Connection AGM and the publication of the Watches of Switzerland IPO prospectus. Then Thursday brings the B&M finals, the Mothercare finals, the Inchcape Q1/AGM, the Hotel Chocolat Capital Markets Day and…the EU Elections. The ONS Retail Sales figures for April have been delayed until Friday (the same day as the CBI Distributive Trades survey for “May”).