Langton Capital – 2019-07-12 – PREMIUM – Thomas Cook, capacity, fatbergs, pub numbers etc.:
Thomas Cook, capacity, fatbergs, pub numbers etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I think our lawn is fast becoming my White Whale.
Because it sits there with the grass on it just growing and growing and, whilst I wouldn’t want to suggest that the thought of cutting it is gnawing away at my soul, Ishmael-like, I’d rather be down the pub or sparking up the barbie than sitting on a mower, that’s for sure.
But I think if I went down the local and then spent an hour or two harpooning the grass I’d be dragged away by the men in white coats.
And quite possibly rightly, too but anyway, we’ve inched our way to the end of the week.
Thomas Cook’s advisors have been up all night writing press releases as a result of Sky scooping their debt-for-equity swap and it’s time to move on to the news:
PRIVATE COMPANY RESULTS: Brewhouse & Kitchen has reported full year results to 29 Sept 2018 with Companies’ House. 12 July 2018:
• Brewhouse & Kitchen has 24 brewpubs, a number of which are operated by franchisees.
• The Company reports the year under review was ‘another strong year of growth for the business with the acquisition of two new sites at Bedford & Southsea along with the refurbishment of the Cardiff site in January 2019’.
• The group nonetheless says ‘the operating loss for the period is £560,654’
• Brewhouse & Kitchen adds ‘the Brexit uncertainty and cost headwinds around wages, input costs and business rates continue to make the trading conditions difficult throughout the hospitality sector’.
• The company has also added cost at head office in anticipation of growth. It says this ‘has had an impact on the performance and profitability of the company within the year’.
• The group adds ‘a substantial level of exceptional costs were incurred in relation to the unsuccessful attempt of bringing in-house the accounting systems and function’.
• The company nonetheless says ‘with new company initiatives and further planned expansion, the directors are of the view this will improve the results going forward’.
• Brewhouse &% Kitchen says ‘we are continuing to evaluate sites for acquisition where they fit our key criteria’. It says ‘we are actively continuing to develop the franchise model, which increases our revenue mix, reduces our capital at risk while increasing revenue and leverages the growth of our estate’.
• Brewhouse & Kitchen reports revenues rose by 21.5% to £14.1m. Gross profit was £10.7m and the GP% was little changed at 75.3% (2017: 75.5%).
• Administrative expenses were up sharply at £10.9m (up 33.6% compared to revenues up 21.5%). The company says costs rose in the anticipation of growth to come.
• The trading loss was £561k compared with a profit of £624k in the prior year.
• Interest costs rose sharply and the loss before tax was £761k versus a profit of £575 in FY17.
• Retained losses increased as a result of the loss for the year to £3.3m. The group has positive shareholders’ funds of £17.4m as a result of share issuance.
• Brewhouse is fortunate in that its fixed assets comprise largely freehold properties and land.
• The group has net debt of £3.2m compared with debts of £4.9m at the end of the last financial year.
Interpretation & other comment:
• These accounts are technically a little overdue. They are pretty historic & information as to what has happened between last September and now is not available.
• Brewhouse is making losses but, courtesy of its freehold sites, it is not squeezed by rents or by interest charges in the way that some companies may be
• Nonetheless, the company will surely wish to return to profit as rapidly as possible. Against the tougher backdrop in the remainder of 2018 and into 2019, that could be quite a challenge
SHOP CLOSURES AND THE F&B INDUSTRY. DO THEY MATTER? We would suggest that they do as some F&B operators depend on the footfall driven by retailers for their business. Think coffee, grab and go, retail parks in general etc. 12 July 2019:
• Business rates have increased more rapidly than sales over the last decade and other costs have risen. The internet has taken an increased proportion of sales and this, amongst other factors, has resulted in shop closures.
• This is a problem for the F&B industry as some restaurants are destinations but others, grab and go, coffee shops and some bars, are dependent on the footfall driven by other retailers.
Closures in context:
• These are visible (think Maplin, Poundworld, Toys R Us etc.) but, for every operator that has closed down, there have been a greater number that have reduced the number of stores that they operate.
• CVAs have also put downward pressure on store numbers.
• In addition to the reduced footfall resulting from the above, costs, oversupply and a fickle consumer have obliged restaurateurs such as Byron, GBK, Carluccio’s and Jaime’s Italian to either close stores, undertake CVAs or simply cease operations altogether.
• The number of stores on the high street generally is decreasing; whilst 3,372 stores opened in 2018, 5,833 closed
• Entire books will be written but, keeping it brief, there are many factors behind these closures including average wage increases lower than inflation at times (2017 and early 2018) & rising overheads (increases in National Minimum Wage each yr, increasing business rates).
• In addition, overcapacity (due to overexpansion in the ‘90s and early ‘00s – see below), expensive debt, and a growing preference for online shopping (internet sales currently account for 19% of total retail sales, up from just 5% 10 yrs ago) have also weighed on performance
• Add in a sluggish economy and an uncertain outlook and sales are likely to be hard to come by.
A word on overcapacity => discounting => lower margins etc.:
• A report by NatWest and Retail Economics says that there is still over 20% retail overcapacity; this is caused by events in the 1990s, when many large retailers expanded their number of stores due to cheap debt.
• These overcapacity problems combined with less people visiting the high street have led to heavy high street discounting; this helped sales in January’s sales this year grow 1% from December, well above economists’ forecasts, albeit with a short-term strategy
• However the growth hasn’t lasted; in June, high street retail sales fell by 0.8% in spite of continued discounts, after 8 months of rising sales
• The Retail Economics report also predicted that 53% of retail sales in the UK will be online by 2028
• In a survey in the report, 1 in 10 people said that they planned to shop more online in the year ahead. Virtually nobody expects to shop online less
• Retail Think Tank suggests that physical stores will remain even with similar numbers of stores in the future, but that the nature and function of the stores will change, to become much more experiential; customers may not actually buy anything in the stores, they may simply order it afterwards
• Altus Group, a real estate adviser, predicted 23,000 job losses from retail in 2019, largely an effect of the 14 shops being lost from the UK high street every day
• This is simply a continuation of the trend of the last half century; in 195 there were 600,000 stores on the high street, down to 400,000 by 1971 due to supermarkets, and 290,000 in 2012
• By some predictions only 130,000 stores will survive by 2030
• In the event of a no-deal Brexit, it’s possible that online shoppers will have less protections and be liable to pay higher taxes on their shopping from abroad
• There isn’t really a conclusion as this is an ongoing process.
• However, problems, like other things, roll downhill. The retailer pressures the landlord, who is himself geared.
• Landlords pressure banks, banks pressure government and the government may have to raise taxes to pay to clean up prior problems
• There is little to suggest that the retail crisis and the associated downward pressure on rents and property values will deviate from this path
GENERAL NEWS – PUBS & RESTAURANTS:
• The Grease Contractors Association has introduced an auditing and certification programme for companies and has called on UK water utilities to join the cause to fight fatbergs. GCA chair, Lila Thompson, said: ‘We have worked closely with a very experienced auditor to build a tailored programme that will serve all stakeholders well. Companies have to comply with the core criteria and all regulations that pertain to the sector’.
• Fat and fatbergs are real problems but, as once the stuff has gone down the sink they are usually ‘somebody else’s’, there is often a lack of focus on the solution. Higher business rates, levies on F&B operators etc. would come under the heading of ‘stealth tax’ but, as they would at least partially address the problem, they may have some public support.
• On the other hand, Synergy Grill produces grills without fat trays. The fat is carbonised. Water vapour rises and the fat that hits the ceramic tiles can be hoovered up when cool with a standard vacuum cleaner. Nothing goes down the sink. Let us know if you would like any more detail.
• The MCA’s UK Pub Market Report 2019 reveals that seven of the top ten pub groups ranked by number of outlets have been reducing the number of pubs that they operate over the last four years.
• MCA says ‘following a five year trend for many, leading groups are continuing to re-shuffle portfolios, with unprofitable sites being sold off or transitioned into alternative operations.’ It says ‘market leader, Ei Group, is aiming to convert between 40-50 sites a year from its Publican Partnerships arm to its commercial properties estate, as well as driving growth through its managed arms, Bermondsey Pub Company.’ Only Marston’s, Stonegate and New River have increased their number of units.
• A major survey into business optimism undertaken by CGA and Fourth ‘shows patchy optimism amid major challenges and plans to invest on existing sites instead of opening new ones.’
• The survey finds that ‘confidence levels among the leaders of Britain’s pub, bar and restaurant groups remain broadly flat in light of on-going political uncertainty and multiple continuing business challenges.’
• As usual, contributors were more confident about the outlook for their own businesses than they were for the market as a whole. They can’t all be right.
• CGA & Fourth found that 41% of company bosses were optimistic or fairly optimistic about the outlook for the eating & drinking out market over the next year (up from 39% in February). Some 65% were similarly optimistic about their own companies.
• 61% of drinks led business leaders were optimistic about the market but only 33% of those heading up food-led businesses.
• Some 29% of respondents had seen business undershoot their expectations in the last 6mths, up 9% on the level at the time of the last survey. CGA says ‘the patchy optimism among food-led business leaders confirms that 2019 has been a rough ride, with casual dining operators buffeted by ferocious headwinds and several high profile brands struggling. But leaders of drink-led businesses clearly feel they have much more to look forward to—a sign that after many years of pub closures and restaurant expansion, the tables have turned.’
• There is some evidence that more operators intend to refurbish their existing units rather than expand the number of sites from which they trade.
• Restaurant sales in the US slowed to a slight decline, with LfL sales down 0.01% on last year for the month of June, TDn2K has reported.
• The basement of the Grade I-listed Hensol castle in South Wales will open up as a craft spirit distillery and visitor experience. The project is part of a £7m investment scheme to bring the castle back into use.
• POD has lodged documents with Companies’ House confirming that it has appointed administators to run the company.
• Ei Publican Partnerships will team up with Star Pubs and Bars and Punch for the third National Pub Fortnight, a two-week celebration of British pubs.
• The BBPA has awarded Members of Parliament who have championed Britain’s beer industry with an trophy. Chief Executive of the BBPA, Brigid Simmonds commented: ‘This award recognises MPs for their invaluable support for the Great British pub and Britain’s historic brewing industry. I want to thank MPs from across the house for the work done in securing two beer duty freezes in this parliament, and for their support for the brewing and pubs sector since the 2017 election’.
• A report from The Financial Reporting Council (FRC) has found that none of the top UK auditors reached the 90% quality mark required. The FRC found that only 75% of audits of FTSE 350 firms were of good quality.
• Microsoft has picked London’s Oxford Street as the location for its first European store.
• Nielsen reports last month’s ‘monsoon’ weather cost UK supermarkets more than £120m in sales, with grocery market growth slowing to 0.4% in the four weeks to 15 June.
THOMAS COOK – PROPOSED RECAPITALISATION:
• Thomas Cook has confirmed that ‘it is in advanced discussions with the Group’s largest shareholder, Fosun Tourism Group and its affiliates (“Fosun”), and Thomas Cook’s core lending banks on the key commercial principles on which they would make a substantial new capital investment as part of a proposed recapitalisation and separation of the Group.’
• The company ‘is targeting an injection of £750 million of new money which would provide sufficient liquidity to trade over the Winter 2019/20 season and the financial flexibility to invest in the business for the future. At completion, the new money would comprise a capital injection and new financing facilities.’
• The group says ‘the recapitalisation proposal will require a reorganisation of the ownership of the Tour Operator and Airline businesses which is expected to result in Fosun owning a significant controlling stake in the Group Tour Operator and a significant minority interest in the Group Airline.’
• EU rules prevent Fosun from controlling the airline.
• TCG says ‘the proposal envisages that a significant amount of the Group’s external bank and bond debt will be converted into equity, to be agreed following discussions with financial creditors.’
• TCG adds ‘existing shareholders will be significantly diluted as part of the recapitalisation. However, shareholders may be given the opportunity to participate in the recapitalisation by way of investment alongside Fosun and converting financial creditors on terms to be agreed.’
• TCG CEO Peter Fankhauser says ‘after evaluating a broad range of options to reduce our debt and to put our finances onto a more sustainable footing, the Board has decided to move forward with a plan to recapitalise the business, supported by a substantial injection of new money from our long-standing shareholder, Fosun, and our core lending banks.’
• Fankhauser adds ‘while this is not the outcome any of us wanted for our shareholders, this proposal is a pragmatic and responsible solution which provides the means to secure the future of the Thomas Cook business for our customers, our suppliers and our employees.’
• Re current trading, TCG says margins are weak. It says ‘the Summer 2019 programme is 75% sold, slightly ahead of the same period last year. Group Tour Operator bookings are down 9%, largely consistent with reductions in risk capacity to help support pricing, which is up 2%. While bookings in recent weeks have seen a marked improvement, reflecting the annualisation of the Summer 2018 heatwave, margins remain weak due to continued intense competition with high levels of promotional activity across all businesses.’
• ‘Group Airline bookings are down 3% overall, with pricing up 2%.’
• TCG says ‘looking forward, it is clear that the trends experienced in the first half of the year have continued into the second half, reflecting an uncertain consumer environment particularly in the UK, leading to intense competition. As a result, the Group expects underlying EBIT in the second half to be behind the same period last year.’
• TCG says it has a ‘rigorous focus on cost’.
• Press comment below has been overtaken by events. Some of the interpretation is still of interest.
• A debt for equity swap had been proposed but an injection from Fosun would prevent the Chinese group from suffering any equity dilution. Fosun already owns Club Med in Europe.
• Fosun has said ‘there are advanced discussions among the company, Thomas Cook and Thomas Cook’s core lending banks on the key commercial principles on the proposal.’ CEO Peter Fankhauser says though this should stabilise the company, it is not ‘the outcome any of us wanted for our shareholders’.
• Sky quotes banking sources as saying ‘the outline of the proposed deal would see Fosun – which is already Thomas Cook’s biggest shareholder – and the British travel company’s lenders injecting hundreds of millions of pounds of new equity and debt into it.’ Fosun would become the majority-owner of Thomas Cook’s tour operating arm and own a minority stake in its airline. Fosun is not permitted under EU rules to control the airline.
• Fosun has been a shareholder in Thomas Cook since 2015. Any transaction will require both shareholder and bondholder approval.
HOLIDAYS & LEISURE TRAVEL:
• Strathmore Hotel Group acquires the Ben Wyvis hotel from Crerar Hotel Group for a guide price of £2.5m. Strathmore Hotels, owned and run by the Rickard family, has a seven-strong portfolio of hotels.
• Cox & Kings India and Iata have commenced talks after the former was suspended from the airline association’s Billing and Settlement Plan (BSP). Cox & Kings India was suspended after it defaulted on two debt payments.
• The owner of Manchester, London Stansted and East Midlands Airports, MAG has seen passenger numbers increase 1.8% year-on-year.
• The US Travel Association has stated that it expects domestic and international travel to the country to grow but at a noticeably slower rate. The association expects international travel growth to the US to fall to 0.4% from 1.2% during the second half of 2019.
• STR has reported that US hotel occupancy increased 2.6% to 65.3% during the week of 30/6 June/July. Over the same time period, ADR rose 2.6% to $127.31 and RevPAR climbed 5.2% to $83.18.
• The Gym Group has reported half-year results for the period ended 30 June 2019, showing sales up 26.9% to £74m as membership figures increased 10.6% to 796,000. The group said it was on track to meet expectations for the rest of 2019.
• The CEO of The Gym Group, Richard Darwin commented on the company’s H1 results: ‘The Gym Group has performed well in the first half of 2019. I am pleased with the pace of growth and the delivery of our rollout which builds on the strong platform and systems put in place to expand the business in 2018’.
• The Governor of the Bank of England, Mark Carney has told Facebook that its digital currency, Libra must be shown to be ‘rock solid’ before it can be allowed to launch. Mark Carney said: ‘If you are a systemic payment system, you have to be on all the time. You can’t have teething issues, you can’t have people losing money out of their wallets. This is not learning on the job stuff, it’s got to be rock solid right from the start or it’s not going to start’.
• President Trump orders an investigation into France’s proposed tax on technology companies, with US trade representative Robert Lighthizer said there were concerns the tax “unfairly targets American companies”.
FINANCE & ECONOMICS:
• The Bank of England has said that British banks hold enough capital to cope with a no-deal Brexit and a global trade war should they both strike at the same time.
• Fed Reserve Chair Jerome Powell indicated yesterday that the Fed is likely to cut rates at its next meeting later this month
• Sterling up a shade at $1.254 and €1.1125. Oil down a little at $66.93. UK 10yr gilt yield up 7bps at 0.84%. World markets down in Europe & the UK yesterday but US higher & Far East up in Friday trade.
• Brexit & politics:
o Telegraph reports government suggesting UK has ‘failed to make meaningful progress towards a free trade deal with the United States amid “chronic” staffing shortages and communication breakdowns in Whitehall.’
o FT says ‘the chances that [the EU] will support more generous Brexit terms for a UK government led by Boris Johnson or Jeremy Hunt lie somewhere between remote and non-existent.’
o Ursula von der Leyen, the nominee to replace Jeane Claude Juncker as European Commission president, said last year that Brexit was a ‘burst bubble of hollow promises . . . inflated by populism . . . castles in the air’.
o Belgian Charles Michel, who is to replace Donald Tusk as head of the European Council, has said that he would prefer ‘no-deal’ to a bad deal as the former would have the ‘merit of clarity and responsibility’.
o Boris Johnson has said that he will ‘continue to be robust’ with Donald Trump, which suggests that he ever has been. He implies that he will not suck up to him if he becomes prime minister.
START THE DAY WITH A SONG:
Yesterday’s song was Rock ‘N’ Roll Queen by the Subways. Today who sang:
Stand up brush off get moving,
Get moving, get moving
What’s that coming over the hill
RETAIL WITH NICK BUBB:
• Lookers: We said on Monday that after the calamitous collapse in the share price of the Manchester-based car dealer Lookers, the company had some work to do to restore confidence ahead of the interims in mid-August, notwithstanding the news that the long-serving FD, Robin Gregson, is to leave the business. Well…today Lookers has announced a profit warning, after a challenging Q2 and pressure on used car margins in June, so it will be interesting to see hwo far the share price falls today, despite the property backing to the balance sheet
• Today’s Press and News: There isn’t quite as much coverage as we expected in today’s papers of the news from M&S yesterday that it has parted company with its Clothing MD, Jill McDonald, at last, but the Daily Mail goes to town on the subject, screaming “M&S clothing boss is shown the door” as its main Business headline, whilst the FT goes with “M&S loses its forth Clothing boss in a decade”.
• News Flow Next Week: Tuesday brings the Burberry Q1 update and then on Wednesday we get the Watches of Switzerland finals and the Koovs finals. Thursday is “D-Day” for #MadMike, via the much-awaited Sports Direct finals, but Thursday also brings the Hotel Chocolat update, the AO.com Q1/AGM and the ONS Retail Sales figures for June. The British Land AGM is on Friday.
• BDO High Street Sales Tracker: We flagged on Wednesday that sales at John Lewis were boosted again last week by the “Clearance” Sale and price-matching activity and today’s BDO High Street Sales Tracker for medium-sized Non-Food chains also looks good for last week, w/e Sunday July 7th. BDO Fashion sales were up by 5.9% LFL (including Online), despite a decent comp and total BDO LFL sales (including Homewares and Lifestyle sales) were up by 6.1% last week (up by 2.1% in Store sales and up by 18.7% in Online sales).
• Trade Press: Retail Week magazine has not been published this week, but Drapers magazine is out, with a Womenswear special devoted to the essential trends and market knowledge for the spring 20 buying season. In her column the Editor mourns the loss of Primark founder Arthur Ryan and thunders that “Retail legend Arthur Ryan never forgot his roots”. In terms of News stories, apart from industry reaction to the death of Arthur Ryan, Drapers flag that the private equity owner of Jack Wills is looking for the “right kind” of buyer and that the Monsoon CVA plan was approved by landlords. In terms of features, Drapers look at the next steps for the struggling fashion chain Jack Wills, interview the boss of the German luxury brand Mytheresa and also analyse how “last-mile delivery” is a big contributor to pollution from the fashion industry.