Langton Capital – 2019-07-11 – PREMIUM – More on JDW, experiential, Star, food prices, DART etc.:
More on JDW, experiential, Star, food prices, DART etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
It’s beginning to feel as though the dog days of August have begun in July.
Some of the schools have broken up, others are sending kids on end-of term trips to ‘learn German’ and the markets are quiet with just the rather lame Punch & Judy Show that is the Tory leadership election to keep us awake.
Still, we can only bat the ball that we’re bowled so, with little more to say on the matter, let’s move on to the news.
JD WETHERSPOON – UPDATE CONFERENCE CALL: Good LfL sales but no comment on margin. 1,800 words on Brexit etc. Outlook unchanged. 11 July 2019:
• JD Wetherspoon yesterday hosted a conference call to discuss full year trading and our comments thereon are set out below:
• Do you still need around 6% LfL growth in FY20 to maintain margins? Too early to say but wages will rise ‘probably ahead of inflation’. Differentials will need to be maintained.
• Co says ‘be careful about extrapolating sales from their current strong levels’. Nonetheless, expect a ‘reasonable’ outcome. The house broker is on £104m for FY20.
• Did 2019 benefit from capital spending? Yes, to some extent. There has been a lot going on, much behind the scenes. Capex has been ‘a little bit higher in recent years’.
• Gains on property sales? Just over £5m this year. Around £2m higher than last year. In addition, £3m of exceptional losses.
• FY19 will be a down year, why will FY20 be back up? Two reasons, 2019 had a £7m interest rate increase (swap impact & won’t be repeated) and also had pay increases 6mths apart. This will revert to annual increases.
• IFRS16. Co is working with auditors. Will have detailed disclosure in annual accounts. Can’t disclose numbers just yet.
• JDW says that ‘nothing has really changed’ re the outlook.
• Pay rises will be 4% to 5% – but it will depend on what the government does to NMW, NLW etc.
• Are some of your cost increases ‘discretionary’ – i.e. your own decision. Yes, some.
o Others (rates, utilities etc.) are without the company’s control. Food & drink price is likewise not within the company’s gift. Co does try to mitigate.
o Wages do include some ‘voluntary’ increases. Ditto repairs. There is often an improvement element here. This can be speeded up or slowed down. Think FY20 will be similar to FY19.
• Repairs & maintenance capex etc. as % of revenues? Average over 5yrs say 7% to 8%. This year is at the high end. Some capex on pizza and coffee machines.
Balance sheet, debt etc.:
• Freehold reversions, implied yield? Around 5% to 6%. Been stable so far. Co is just over 60% freehold.
• Will continue to look at buy ins. There is no particular target level. Will do more from this level. The co is ‘de-risking the future in terms of rental increases’.
• Thinking on capital allocation? Buy backs are still possible. There is ‘no set policy’.
• Disposals – any more in FY20? Press suggesting around 20. Co says there are no specific plans. The co did put some on the market & then take them off again. There could be 11-12 to go.
• JD Wetherspoon has reassured that trading remains strong – though it does caution once again that 6% plus LfL sales cannot be maintained into the longer term.
• A slowdown in sales will put pressure on margins but, at the end of the day, JDW is happy to leave brokers forecasting FY20 as an ‘up year’ after the fall in profits that is expected for the year just ending.
• An element of the company’s costs are within its gift. Ditto some capital spending (such as freehold reversions, share buybacks and an over-investment in maintenance capex).
• Hence, whilst JDW would not be immune from any slowdown, there is a degree of surety re JDW’s income and debt levels.
• There is no comment here on margins. The group reiterates that comps will become tougher for the remainder of calendar 2019.
• JDW remains a good company that knows its market. The fact that in excess of 90% of today’s statement concerned Brexit might lead some to question its focus, but the results are there.
• JDW does what it does extremely well, but it is not currently cheap and its low margins could prove to be a point of weakness if sales growth stalls against what the co has said will be tougher comps.
EXPERIENTIAL SOCIALISING – FURTHER THOUGHTS: Pubs may need to do more to attract customers. They have expanded their food and accommodation offers over recent years and here we look at various experiential offerings. 11 July 2019:
• Experiential socialising continues to grab the headlines. Pubs and other operators are making moves in this direction but, at the end of the day, is there any money in it? See also prior Premium Emails.
Expanding the market:
• Companies involved here, bowling alleys excepted, tended to be founded in the early-mid 2010s. It is a very fragmented sector, with lots of companies owning a very small number of sites each. Larger experiential companies include Escape Hunt, Bounce, Puttshack, Boxpark and Flightclub, with activities such as escape games, darts, crazy golf and axe throwing.
• Operators in the F&B market are arguably largely aimed at attracting millenials and Generation Z with the idea that experiences can’t be priced. Escape games (and bowling) may appeal to families.
A few operators:
• Whistle Punks increased its shareholders’ funds in 2017 but this may have been due to share issuance. Swingers made a loss of £1.19 million in 2018 and London Union, which is experientialising food markets, made losses, of £1.51 million in 2017 and £1.44 million in 2018. Puttshack’s shareholders’ funds decreased by 13% to £5.2 million in 2017.
• Boxpark, which describes itself as “the world’s first pop-up mall” and mixes food and drink with games, increased shareholders’ funds by 25% to £749k in 2018 but again, it is not clear without further enquiry whether this was retained profits or share issuance.
• Bounce is in growth but, again, this is via share issuance. It is still said to be growing ‘organically’. Time Out is making material losses with the promise, which may or may not be fulfilled, of profits tomorrow. Ditto Gfinity, which is socialising computer gaming.
• Escape Hunt is making losses but it just raised further funds and intends to double in size in the coming months. It currently has 8 units.
• Locked in a Room is increasing in scale and there is perhaps some potential for escape rooms to expand considerably further with Merlin and Centre Parcs recently installing escape rooms at some of their locations (e.g. Centre Parcs, Village Square). This may raise the profile of escape room in general. The corporate market remains attractive.
How will this play out?
• From a macro point of view, with the great number of companies around in this new experiential socialising sector, it is unlikely that all will survive, especially with many still failing to make a profit after 7+ years of existence. Some, however, will undoubtedly prosper.
• Regarding investment decisions, most operators (ex-bowling) are unlisted and, with the others, it may be a numbers game. Investing in one operator is akin to putting all one’s eggs in one basket but a portfolio approach may succeed.
• Management is key. Flair is perhaps overrated and the ability to execute consistently is perhaps underappreciated.
• Pubs are well-positioned to make use of spare space. Dominos and skittles are as old as the hills but, in the future, more pubs are likely to enter the above market(s) and, as the income should be incremental, it should help bottom lines.
GENERAL NEWS – PUBS & RESTAURANTS:
• Heineken’s pubs and bars division, Star Pubs, is being investigated over whether it imposes unfair terms on publicans who try to cut the ‘beer tie’. The pub code adjudicator will look at the 2,700 unit strong Star Pubs in order to determine if the group has been placing unfair terms on tenants when they seek a ‘market rent only’ option.
• Code adjudicator Paul Newby says that he has ‘reasonable grounds’ to suspect that Star Pubs had gone beyond the rules in the UK pubs code regarding how much of its beer pubs had to stock. Star says ‘while the principle of the brewers stocking requirement is clear, this part of the new legislation is complex and not clearly defined in the pubs code. We therefore hope that this investigation will provide . . . certainty and clarity.’
• The CGA Prestige Foodservice Price Index has hit a new record high as the measure reveals month-on-month price rises across the board in May 2019 ‘but signs of some respite in year-on-year inflation.’
• CGA reports ‘month-on-month price rises in nine out of ten categories in May, triggering a rise in the overall measure to its highest point to date.’ It adds, however, that ‘year-on-year inflation is slowly easing and has fallen below 6% for the first time this year.’
• The hot and dry spring weather of last year has been replaced with more unsettled fare in 2019. This has led to sharp movements in the prices of fruit and vegetable, particularly when measured against the same prices last year. Overseas, torrential hailstorms in Italy destroyed large quantities of soft fruits.
• CGA reports that fish prices have also risen but ‘there is a more positive outlook in the Sugar (Jams, Syrups and Confectionery) category of the Foodservice Price Index. Yields from past harvesting and crushing delays caused by undesirable weather in Brazil earlier in the year finally reached the market and caused prices to fall.’
• Prestige says ‘although inflation has been slowing over the past six months, we are still observing food prices rising due to factors which are affecting almost all categories including exchange rates, supply market challenges, variable weather conditions and continued Brexit uncertainties. In a rising market it is essential that operators are well informed and manage supplier pricing with rigour.’
• CGA adds that there is some good news saying ‘there is a distinct contrast in the latest edition of the Foodservice Price Index, between month-on-month price pressures and a welcome slowing of inflation year-on-year.’
• Fourth, the ‘provider of the only integrated hospitality workforce management and cost-control operations platform and HotSchedules, provider of the leading workforce and inventory management solutions for the restaurant industry’, yesterday announced they merged business operations in an agreement backed by Marlin Equity Partners and Insight Venture Partners.
• The merged company represents ‘the world’s largest and only provider of end-to-end restaurant and hospitality management solutions for customers across the globe and of all sizes—from a single location or franchisee restaurant to a global restaurant or hotel chain.’ Co-founder of Fourth Ben Hood says ‘the merger of Fourth and HotSchedules presents a huge opportunity for growth and innovation.’
• Oakman Inns has reported LfL sales up 4.8% for the 13 weeks to June 30th 2019, with total sales up 28.8% to £10.8m. CEO of the group, Peter Borg-Neal commented: ‘We are extremely pleased with this performance, in a period where we have been rolling over some tough comparables. Our moving annual sales total has now passed through the £40m mark, and we are in good shape, going into our new financial year’.
• The Texas-based Brinker International plans to buy 116 Chili’s Grill & Bar restaurants from franchisee ERJ Dining. Joe Taylor, Brinker’s CEO stated: ‘This acquisition is a compelling opportunity to further invest in our brand, broaden our scale and create growth in earnings and cash flow. We appreciate the relationship we developed with ERJ over the years and view these well-established restaurants as a solid foundation for further growth in these markets’.
• The new owner of Patisserie Valerie, Causeway Capital Partners has announced it will close a further 14 sites. Causeway commented: ‘The difficult decision was reached following a detailed review of the size, trading performance and location of each store over the past five months. These difficult measures will enable [the company] to better focus its investment programme on improving the quality of its patisseries over the coming months’.
• BigDish Plc has announced that Brighton has gone live on the BigDish platform. CEO Sanj Naha says ‘the addition of Brighton to the BigDish platform is incredibly exciting. We expect the location to be a major hub of BigDish activity and are looking forward to seeing more and more restaurants added.’
• Sambrook’s has announced it will relocate its brewing production to the Ram Quarter in Wandsworth.
• Chief Executive of Remy Cointreau, Valerie Chapoulaud-Floquet is to step down from his position later this year. The company expressed its ‘deep gratitude for her commitment and contribution to the quality of the Group’s results and successful strategy’.
• Richard Caring, the owner of The Ivy, has bought Jamie Oliver’s former restaurant Barbecoa at One New Change in St. Paul’s London.
• Beverage Business World has reported that Lavazza and PepsiCo are to launch a range of coffee ready-to-drink products in the UK next year.
• Per Nielsen, marijuana use is affecting the US snacking industry, presenting big opportunities for the American food and beverage market. Within the U.S., Nielsen data shows that sales of salty snacks reached $29.9bn over the last 52 weeks, with sweet snacks hitting sales of $6.5 billion. By January 2020 marijuana will be legal in 11 states and Washington DC.
HOLIDAYS & LEISURE TRAVEL:
• Dart Group has announced revenues up 32% in the year ended 31 March to £3,143m, while profit before tax increased 36% to £177.5m. Commenting on the group’s trading outlook, Chairman Philip Meeson said: ‘Both our Leisure Travel and Distribution & Logistics businesses have made satisfactory starts to the new financial year. Though overall demand for our leisure travel products has continued to strengthen since the start of the new financial year, it is clear from our forward booking trends that generally, less confident consumers are booking later than last year and therefore pricing for both our flight-only and package holiday products has to be continually enticing’.
• As the summer holidays start, the pound yesterday slumped to a six-month low against the euro at just above €1.11.
• Pilots union Balpa has warned that British Airways pilots could strike as soon as August 5, with the strike ballot set to close by July 22.
• The International Air Transport Association warns the erosion of UK air transport competitiveness could put up to 120,000 jobs at risk. Conversely, the Association claims up to 200,000 jobs could be created if the UK invests in a cost-effective runway expansion, abolishes or reduces Air Passenger Duty and improves visa processes.
• Flights have resumed at Gatwick following a air traffic control issue which saw flights diverted to other airports.
• EasyHotel has formally opened its EasyHotel in Milton Keynes.
• HVS reports that Amsterdam hotel revenues per available room rose 4% in 2018. It says ‘this strong year-on-year growth has been largely driven by a substantial uplift in average daily rates fuelled by the ban on new hotel developments imposed in the city centre, as well as an increase in demand.’
• The White House announces it will ease sanctions on Huawei following positive trade talks between the US and China at the recent G20 Osaka summit.
• Investors are returning to Macau’s casinos as trade war fears recede and visitor numbers increase. Share prices in casino operators listed on the Hong Kong exchange have risen nearly 20% since early June.
FINANCE & ECONOMICS:
• The ONS has reported that the UK economy grew by 0.3% m-o-m in May after shrinking in April. Observers still say that June’s figures will need to be strong to avoid contraction over Q2 as a whole.
• The NIESR says ‘the UK economy is on course to contract by 0.1% in the second quarter of 2019. Two quarters of contraction would mean that the economy is in a technical recession, but the initial outlook for the third quarter of 2019 is for growth of 0.2%.’
• NIESR says its estimate ‘implies that the economy will narrowly avoid a technical recession in the middle quarters of this year.’ It concludes ‘the near-term outlook for the UK economy continues to depend on the outcome of the Brexit negotiations.’
• Fed Reserve Chairman Jerome Powell yesterday set the stage for the first U.S. interest rate cut in a decade later this month. Mr Powell brushed off criticism from Donald Trump, saying he would not step down if the US president asked him to.
• Sterling a shade lower at $1.2532 and €1.1113. Oil $67.18. UK 10yr gilt yield up 5bps at 0.77%. World markets heading higher on buoyant Wall St. Far East up in Thursday trade.
• Politics & Brexit.
o FT says ‘Boris Johnson fears a grisly political fate awaits him if he becomes Britain’s prime minister and breaks his promise to take the country out of the EU on October 31.’
o Tim Martin yesterday endorsed Boris Johnson as a ‘winner’ for Britain as he ‘led the campaign to leave during the referendum.’
o Sir Richard Branson has said that Sterling would go to parity with the dollar in the case of a no-deal Brexit. Such a move implies around 88 Euro cents to the pound
o FT reports ‘the return of political rhetoric around a no-deal Brexit has hurt the pound just when accumulating signs of a flagging economy took away support for the currency as investors started to price in rate cuts from the Bank of England.’
o A report produced for Stormont has said that a no-deal Brexit in Ulster could cost the province 40,000 jobs.
o Opponents suggest no-deal Brexit would raise the price of food & hit the poorest in society hardest.
o Brexit supporter Sir James Dyson has purchased what is thought to be Singapore’s biggest and most expensive penthouse flat. The company has moved its HQ from the UK to Singapore. It manufactures most of its products in the Far East.
o JDW’s chairmanTim Martin, who yesterday met with Boris Johnson in one of his pubs, says a no-deal is actually a multi-deal and not a mono-deal. He says a multi-deal would involve dozens or hundreds of agreements with other territories, implying that that is a good thing.
START THE DAY WITH A SONG:
Yesterday’s song was Rip It Up by Orange Juice. Today who sang:
You are the sun,
You are the only one
My heart is blue
My heart is blue for you
RETAIL WITH NICK BUBB:
DFS: We weren’t expecting a trading update from DFS today, but with a June year end it’s not unusual for DFS to announce how things are going at this time of year and, given the helpful weather in recent months (a la Dunelm), the news is fine, despite the “big ticket” spending uncertainties. Helped by acquisitions (and weak comps), gross sales were 14% up in the year, but DFS also claim to have achieved LFL sales growth and underlying PBT is expected to be just above £50m, in line with expectations.
News Flow This Week: The Pets at Home AGM is being held today at 11am in sunny Wilmslow and the Game Digital/Sports Direct formal offer acceptance deadline is 1pm today (although the bid has already gone unconditional).