Langton Capital – 2019-07-02 – PREMIUM – Lean Startups, Pat Val, BrewDog, Five Guys etc.:
Lean Startups, Pat Val, BrewDog, Five Guys etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I can feel a trip to the tip coming on because, when the sun’s shining and you have various bits of trampoline, old bikes, broken outside plastic furniture etc to get rid of, what could be more pleasant than sitting in a line of sweltering vehicles with their engines running waiting to be told that what(ever) you have in the car isn’t suitable for this particularly pungent dump and will have to go elsewhere?
Or maybe I’m being too pessimistic. Maybe there won’t be that knowing smirk and a barred entrance this time. But that would be a first.
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BOOK REVIEWS: THE LEAN START-UP – ERIC RIES – 2011: Both a sensible manual and the penniless entrepreneur’s guide as to how they should channel other people’s money into their dream (until either the money is all gone, or the dream is actualised): 2 July 2019:
• Ideas need money and money needs ideas. Mr Ries is arguably in the ‘ideas’ camp and perhaps views the market through that lense. Nonetheless, some of the ideas are interesting.
A few truisims (with opinions sprinkled in):
• Mr Ries says most startups fail. He suggests that entrepreneurs can learn. They need to (and do) make mistakes with OPM (other people’s money) and the second, third or fourth interation may be better than the first.
• He says you should not, not, not ‘build it and they will come’. Successor bias means that the odd winner in this area crowds out in ones memory the dozens or hundreds of forgotten losers for whom this strategy did not work.
Some useful (but often trite) jargon:
• ‘Validated learning’ means one should learn from one’s mistake(s). As opposed to what, one might ask. But this is a sensible idea.
• You should ‘build, measure & learn’. Seems sensible.
• You should pivot rather than persevere. Again, sensible, though your original investors may wonder just what they have bought into.
• Don’t be seduced by a ‘plan’. It may not survive first contact with the customer. In tennis they say ‘don’t admire your last shot’. Same concept. Be flexible.
• Validated learnings. Yuck. But it’s the right thing to do. Plan it, do it, measure it, learn & move on. The ‘learning’ stage should feature a ‘pivot or perservere’ question.
• Avoid the ‘myth of perseverance’. Though some winners will doubtless emerge from amongst these dogged losers.
• Author says if you ask ‘why’ (like a toddler) five times, then you may be getting to the root of the problem.
• Other jargon (like ‘islands of freedom’) we won’t go into as it feels a little cult-like.
Minimum viable product (MVP):
• Avoid bells & whistles, get feedback as quickly as possible & iterate if appropriate. If feedback is negative, consider a pivot.
• Remember each product (in the early stages) is an experiment. Back the winners. Let the customer tell you which one that is.
• Customers may not be willing or able to describe what they want. They may be contradictory & frustrating but, at the end of the day, their money talks.
• Using ‘small batches’ accelerates the feedback cycle.
• Perhaps everything’s fair in love & war but entrepreneurs that bring an MVP to the market are experimenting with their customers.
• Not many admit to beta-testing & offer their product free or at a discounted price to real customers. Though some do.
• ‘Split testing’ offers one thing to one customer and one to another. Drug companies do this – though only in their testing phase.
Book reviews to date:
• 10 May 19 – The Crowd – Gustave Le Bon
• 14 May 19 – Manias, Panics & Crashes – Charles Kindleberger
• 31 May 19 – The Hedge Fund Mirage – Simon Lack
• 7 June 19 – The Basic Laws of Human Stupidity – Carlo Cipolla
• 1 July 19 – The Lean Startup – Eric Ries
THE STORY IN HEADLINES: It’s fair to say that successes and failures look similar for a while. They have big ambitions but little proof of product. Until, of course they do. Some never do. Here we look at various headlines relating to Pat Val. 2 July 2019:
• Patisserie Valerie perhaps needs little introduction. It went bust earlier this year after suspending its shares last October but, for a number of years, it was deemed to be a ‘star’ performer.
Optimism & the early years:
• Pat Val was known to many before chairman Luke Johnson brought it to the Stock Market in 2014. It joined Poundland, BooHoo and others in a rush to the market. Some succeeded and some, well, did not. The FT reported ‘stores are typically profitable from the first month with average weekly sales of £14,000.’
• Pat Val floated near the bottom of its price range as the co was ‘keen to have a good market reception so decided not to be too aggressive on price.’
• The FT quoted a ‘person close to the company’ as saying ‘management still own more than 50 per cent so are very focused on the future rather than the valuation on the first day.’
The middle years:
• Pat Val expanded from the 80-odd units that it had at IPO. Its numbers were (optically at least) extremely stable.
• In 2017, the group was said to be considering a factory with Mr Johnson saying ‘our flexible business model has enabled us to mitigate inflationary cost pressures.’ The group (or at least the profit figure that it presented to the City) was deemed to be relatively resistant to any slowdown in the economy.
Hubris, overconfidence etc.:
• In early 2018, Pat Val was rumoured to be considering a Rights Issue to fund the purchase of another Luke Johnson owned business Bread Holdings (the owner of Gails).
• Sky reported ‘Patisserie Valerie is preparing to tap investors for tens of millions of pounds as it bakes a takeover bid for the company that owns Gail’s, the chain of artisan cafes.’
• Sky suggested ‘leading Patisserie Holdings shareholders are likely to be enthusiastic about such a fundraising, given the stock’s performance since it floated.’ They were to be less pleased a few months later
• This was all rather sudden and, to suggest that one had any revolutionary insights, would not be correct
• In early-Oct 2018, it became known that the company was facing a winding up order from HMRC
• Pat Val was then loaned money by Mr Johnson and had an emergency equity fund raising. It’s CFO was arrested and the news that some directors had sold options that had not been reported in the company’s accounts came to light.
• In January 2019, administrators were called in, 71 branches were shut, the rump was sold off at low prices as the company was ‘rescued from administration’. That’s not, perhaps, how the equity shareholders would see it
• Early June and Mr Johnson, who chaired the board during the rise & fall of the company, tells his readers at the Sunday Times that the deception left him feeling physically ill and unwilling to leave his house.
• Last month, police arrested another five people in connection with their enquiries into the company.
Any lessons to be learnt?
• Hindsight is a wonderful thing and it would be unfair to suggest that a collapse was obvious.
• Or even probably for that matter but the demise of Pat Val reinforces the view that it pays to ask questions because, if something looks too good to be true, then perhaps it is.
• However, the key to the above, perhaps, is to see it coming. And here we’re all rather reticent, blinkered or fearful of libel lawyers etc.
GENERAL NEWS – PUBS & RESTAURANTS:
• Research from Marson’s has found that beer consumption in the on-trade has reduced 36% since 2007. The report commented: ‘Within lager, classic lager will continue to decline as consumers drink less but better and further growth will come from mainstream premium brands and into world beer’.
• Still plenty of ‘cheap’ pizzas out there with Prezzo 30% off, Bella Italia 40% off and Pizza Express 25% off. Café Rouge is offering 30% off main courses.
• Clive Schlee is stepping down as CEO of the Pret A Manger after having served the company for 16 years. The company’s COO Pano Christou is set to become the replace the retiring Schlee.
• Five Guys JV Ltd has reported full year numbers to end-Dec 2018 to Companies’ House saying that it raised revenues in the year by 22.5% to £149.5m but that the loss before tax increased to £3.9m from £3.1m last year.
• Five Guys JV reports that it has now lost £33.9m since incorporation and has negative shareholders’ funds of around the same number.
• Deltic’s Late Night Index reports average spend on a night out up 18.8% over the last year to £70.46. The number of people who go out at least once a week fell slightly from 56.3% to 55.2%, rising to 73% among 18 to 30-year-olds.
• The report claims that the average length of a night out remained flat at 4 hours 30 minutes. Among 18 to 21-year-olds, 28.2% said they spend most of their late-night cash in clubs, compared to 21.4% who said pubs.
• BrewDog has reported 2018 accounts to Companies’ House saying that revenue net of duty rose to £139.7m from £93.9m but that the company lost £0.6m before tax (2017: profit £1.4m).
• After a number of equity share raises, the company has £165m in total equity inclusive of £18.1m of retained earnings.
• Coffee no1, now majority owned by Caffe Nero, has reported historic figures to 29 September 2018 to Companies’ House saying that the company raised sales by 13% to £30.8m but that profits slipped a little to £1.0m from £1.2m in the prior year.
• Fentimans launches its market report 2019 for the premium soft drinks and mixers market in the UK. The premium soft drinks and mixer category has grown 33% versus last year and is now worth £517m.
• The report suggests 29% of consumers now order a premium mixer as part of their drink, rising to 39% for gin consumers. The trend towards premiumisation seems to be continuing with the report saying ‘we’ve seen recorded value sales growth of 5.4% in the year to April 2019, far outstripping volume growth of 1.8%’.
• Britvic reports a packaging fault affecting the white drinking spout on a limited number of Apple & Blackcurrant Fruit Shoot bottles.
• Elliot’s acquisition of Barnes & Noble for $683m left rival hedge funds and industry bosses confused as most have avoided the troubled bookselling sector.
HOLIDAYS & LEISURE TRAVEL:
• A HVS report claims the serviced apartment portfolios of the biggest operators are set to double in size over the next three years, as growth in the sector continues to outpace that of traditional hotels. Simon Hultén, associate with HVS, said ‘In the UK and Germany they are moving into secondary and tertiary cities as sites become more difficult to secure in leading cities’.
• The report stated that serviced apartment RevPAR grew 7% across Europe for the sector last year, compared with 5% for hotels. The sector’s pipeline is set for further expansion across Europe, with 23,600 additional apartments due to be added to the inventory by 2022.
• FT reports that ‘although Betfair imposes strict compliance procedures on its UK customers, the FT’s experiment highlights a loophole that allows anonymous gamblers — sitting in countries where betting may be illegal — to avoid checks on their identities and the provenance of their money.’
FINANCE & ECONOMICS:
• The IHS Markit UK manufacturing index slipped again in June as a part of a wider European & global slowdown and amid signs of further destocking in the UK in particular.
• Markit reports a UK manufacturing PMI of 48.0 compared with 49.4 in May. This is the third fall below 50.0 on the trot and the lowest measure since mid-2013.
• Markit reports that manufacturing employment in the Uk fell for the third month in a row. It said ‘the downturn in UK manufacturing deepened during June, as the impact of firms unwinding stockpiles built before the original Brexit date continued to reverberate through the sector and exacerbate weak demand.’
• Markit saw ‘solid decreases in both production and new orders, which sank the headline PMI to its lowest in almost six-and-a-half years. Markit says ‘the stranglehold of sustained Brexit-related uncertainty and disruption also weighed heavily on business confidence and employment, as optimism ebbed to one of its lowest levels in the survey history and staff headcounts were reduced for the third straight month.’
• Factory activity also contracted in much of Europe & Asia.
• US economy now in its longest stretch of expansion since at least 1854.
• Sterling down at $1.2633 but up a little against the Euro at €1.1194. Oil down at $65.00. UK 10yr gilt yield down 1bp at 0.82%. World markets all higher yesterday with Far East up this morning.
• Brexit & politics:
o Current Chancellor of the Exchequer (and ‘adult in the room’) Philip Hammond has challenged Boris Johnson and Jeremy Hunt over their spending plans saying that the ‘fiscal firepower’ they refer to will not be there in the case of a disorderly Brexit.
o FT says ‘Jeremy Hunt has always had a reputation for flip-flopping over Brexit to court hardline MPs and activists.’
o Telegraph reports British trucks will not be able to board ships in Dover in the casae of a ‘no deal’ Brexit if they do not have the correct paperwork. At the moment, relatively few people even know what that means.
o Theresa may has said that her successor should take a firmly pro-business stance after Brexit
START THE DAY WITH A SONG:
Yesterday’s song was She’s A Star by James. Today, who sang:
They don’t mean a thing to you
They move right through you
Just like your breath
RETAIL WITH NICK BUBB:
• Sainsbury: Tomorrow’s Q1 update covers the 16 weeks to June 29th and based on Kantar data the City expects a LFL sales fall of up to 1.5%, weighed down by weakness in Clothing and General Merchandise. However, Kantar tend to underestimate Sainsbury’s supermarket LFL sales performance because of the impact of the many Argos inserts, so there may be scope for Sainsbury to beat worst fears on top-line sales, but margins are under pressure and it is not clear how the business is financing its recent own-label price cuts…At this stage of the year, management are unlikely to formally warn on profits, but the share price is telling us that the City doesn’t really believe in the profit consensus or in the sustainability of the dividend, so the downward drift in analyst’s forecasts may well continue.
• News Flow This Week: This week has started off quietly, in terms of company news, as we have moved inexorably into July/Q3, but Morrisons is holding a seminar for analysts today on IFRS 16 accounting (even though the new lease recognition policy has very little impact on the business). Tomorrow is busy, however, via the Sainsbury Q1 update, the Topps Tiles Q3, The Works’ final results, the JD Sports AGM update and the Monsoon Accessorize CVA vote. Thursday then brings the ABF (Primark) trading update and the Sainsbury AGM.