Langton Capital – 2019-09-05 – PREMIUM – LfLs, Dart Group, Fullers, CAKE, Grind etc.:
LfLs, Dart Group, Fullers, CAKE, Grind etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I’ve developed the unwelcome habit of presenting the wrong loyalty card in coffee shops.
And I’m sure the staff think I’m snootily doing it on purpose as they look at me waving my burgundy card when it should have been green (or vice versa) and that I’m making the point that, whilst their coffee is good enough in this moment, they’re hardly a Starbucks (or a Costa, Caffe Nero or whatever) are they?
Of course, that may work to my advantage. But, as I think it’s more likely to get half my coffee slopped into the saucer or get me a sly shove in the back when I’m negotiating my way to my seat, it’s something I’m working to stop.
And, in the convenience stores of the bigger retailers, I’ve lost count of the times I’ve (increasingly grumpily) thrust the wrong card at the automatic till reader until either somebody puts me straight, I run out of energy and leave the store or I discover the error myself.
Still, there are worse things happen at sea. On to the news:
LIKE FOR LIKES. DO THEY TELL THE WHOLE STORY? Well clearly there’s more to life than increasing sales from the same unit. You could make more profit, open more units or generate oodles of cash, for example. 5 Sept 2019:
Why the focus on LfLs?
• Well, why not? It’s a decent-enough measure as LfL growth shows that a company is generating more in sales from its existing units.
• And that has to be good, doesn’t it?
Some of the problems:
• There is no reference to profitability. Any operator can give away ten-pound notes for nine quid. Turnover will rise if food is heavily discounted. But profits may fall.
• External factors (World Cups, weather, cinema releases) can buffet the numbers
• There are many other aspects like-for-likes don’t capture (changing sales mix, discounting activity, impact of competitors, and return on capital to name a few) meaning that a balanced score card makes a lot of sense
• Incentives, as Charlie Munger says, are always more important than you think they are. Even if you think they are mega-important, they are bigger than even that
• Companies have been known to chase like-for-like sales growth at the expense of margin
• Targets can be hit by pushing the workforce for a short period of time and misleading investors as to the group’s sustainable rate of growth
• Can a single pub or restaurant really grow its sales, year after year, until the end of the world? Sometimes this appears to be the implication
• There is no industry standard for said metric. It is a useful but imperfect measure. Capex on site can increase sales – but at a cost. It may prove to have been the right thing (e.g. to enhance a beer garden) but the return on capital will need to be monitored
• One measure of ‘like-for-like’ can differ from the next, and companies aren’t obliged to define how they measure the metric
• LfLs may distract the eye from a wider expansion (or contraction). If a company’s LfLs are +1.0%, for example, but it is adding 10% to its unit numbers on an annual and sustainable basis, is it a ‘better’ or ‘worse’ company than one growing LfLs at 3% that has no unit growth?
Some areas for potential sleights of hand:
• LfLs can be ‘managed’.
• Excluding or including capex up to a defined or non-defined limit. This will buoy sales and, unless units that have benefited from capex are excluded, they may give a false picture. But what is the cut off point? A £5k paint job, a £25k sparkle or a £250k new kitchen?
• Excluding ‘non-core’ units. How is non-core defined? Are these units effectively held for sale? If not, perhaps they should be added back into the mix
• Promotions, discounts, and bought sales. This is not the same as organic growth. Similarly, one-off boosts such as World Cups should be clearly flagged
The good points:
• It would only be fair to point out some of the advantages of looking at LfL sales because, when used consistently, like-for-likes usefully quantify market and company trends
• They also inform as to whether or not the company may be resting on its laurels.
• Or maybe LfLs are under pressure due to nearby competition or a wider industry malaise
• Overall, LfLs are a useful measure but, as with so many things, they shouldn’t be looked at in isolation.
GENERAL NEWS – PUBS & RESTAURANTS:
• Fuller, Smith & Turner has updated on its plans to return cash to shareholders after the sale of its brewing business to Asahi saying that, following a £24m payment to its pension scheme, the group ‘the Company intends to return a total of approximately £69m of cash to ordinary shareholders, representing a return of 125 pence per A ordinary share and C ordinary share in the Company, and 12.5 pence per B ordinary share in the Company.’
• Fuller’s is to circulate information tomorrow and the GM needed to authorise the transaction will take place on 1 October. Cash should change hands in mid-October.
• Fuller’s managed pubs currently running ahead, tenanted slightly behind last year. Fuller’s has also updated on trading for the first 22wks of its current year (the period to 31 August) saying that ‘the Company has made a good start to the new financial year with like for like sales in Managed Pubs and Hotels rising 2.5% and like for like profits in Tenanted Inns down 2%, against exceptionally strong trading for the same period last year.’
• Fuller’s CEO Simon Emeny comments ‘we are now focused on driving the performance of our premium pubs and hotels business.’ Mr Emeny continues ‘I am pleased to see our Managed Pubs and Hotels showing like for like growth and, while our like for like profits in Tenanted Inns are down a little year on year, it is important to remember that the first half of last year included the halcyon period where sun and sport combined to create perfect pub-going conditions. I look forward to updating the City on our plans and progress in more detail at our half year results presentation in November.’
• KPMG, which is the administrator to Stonebeach Ltd, the main trading subsidiary of the bankrupt cake shop chain Patisserie Holdings, has reported that it now believes a dividend will be due to unsecured creditors.
• This may not be very large. KPMG says it will be for the liquidator in due course to determine a figure.
• Coffee shop operator Grind has reported full year numbers to end-April to Companies’ House showing that the group increased its accumulated losses in the year by £536k. The group has now lost some £4.5m since incorporation. Much of this will have been ‘invested’ in start up costs, immature store losses etc.
• Grind has positive shareholders funds of £5.7m (including £600k of intangible assets) after raising £10.2m from investors in a number of funding rounds. At end-April, the group had net cash of around £2.3m.
• The Local Data Company has reported that 32% of BHS’s sites remain unoccupied, three years after the company shut down. Around 14% has been either demolished or redeveloped. The number of sites still empty varies by region. Only 25% are empty in Northern Ireland while 69% of Scottish sites are still boarded up.
• Street food market Kerb is to open at Seven Dials this weekend. The Standard calls it ‘a massive new indoor arcadia located at the very heart of London’s West End.’ The market will feature bars as well as a number of food retailers. The site will be the group’s first permanent home.
• There will be a total of 25 food and drink vendors with the space divided into two areas. Cucumber Lane will focus on London-based produce including bakeries & butchers whilst Banana Warehouse will host street food traders and new restaurants. The market will occupy a 24,000 square foot space on Earlham Street, WC2.
• Pernod Ricard reportedly considering introducing additional flavoured gins to its UK portfolio.
• UK Hospitality has commented on chancellor Sajid Javid’s Spending Review saying ‘an extra £60m for the GREAT marketing campaign abroad and continuation of the Discover England Fund will help promote inbound tourism and showcase visitor destinations across England. It is important that the UK remains welcoming and seen to be open for business as we navigate Brexit. Deal or no deal, hospitality is a key element in the tourism offer.’
• Money to regenerate High Streets will be welcomed by the F&B industry. Anything that helps to generate footfall could boost business.
• UKH has commented on the Scottish Government’s proposals re tourism and hospitality saying ‘we welcome the support for tourism as a career of choice and the tone and sentiment of the Scottish Government’s statements on immigration. We hope that it can be heard in Westminster. We also welcome Government recognition of our warnings about the relentless burden of regulation of our sector and the costs of compliance; there is a pressing need for an overview to be taken about new regulation in our sector, the timing of introduction and the ability of businesses to cope with implementation.’
• The UKH is less pleased that the Scottish Government is to continue with its consultation on a tourist tax north of the border.
• CESA analysis has suggested that restaurants are increasingly opting to repair catering equipment rather than replace it partly as a result of economic uncertainty and soft demand.
• Beverage Business World reports NPD as suggesting ‘there is an opportunity to increase coffee servings in offices by 5m servings a year’. NPD believes there were around 488m servings out of the home last year. It reports that some £5bn of the c£57bn spent on food and drink out of the home was spent and consumed in the workplace.
• Trade body Wine GB is optimistic that it will hit ambitious export estimates of around £350m of wine by 2040. That’s a long way off. Exports are reported to have increased from 4% of total sales in 2017 to 8% in 2018, representing 200,000 bottles with a retail value of £7m.
• Wine GB says ‘although 2040 is some distance away, our estimate that the value of exports would be in the region of £350m in just over 20 years seems a very achievable goal.’
• Read Deals reports that 95% of private equity firms expect the level of distressed M&A to rise in the next 12mths.
HOLIDAYS & LEISURE TRAVEL:
• Dart Group has updated on trading. It believes it can still hit its targets but is ‘very cautious’ in its outlook.
• At its AGM later today, Philip Meeson, Executive Chairman of Dart, will say ‘in our Leisure Travel business, the later booking trend as reported in our Preliminary Results Statement on 11 July 2019 has continued, with overall demand for both our Flight-Only offering and Package Holiday product continuing to strengthen. Encouragingly, package holiday customer numbers as a proportion of total departing customers have increased for summer 2019 to date.’
• Dart says ‘Winter season forward bookings have yet to match our seat capacity growth, therefore pricing for both our leisure travel products will need to remain continually enticing.’
• Dart says ‘with still some way to go in the Leisure Travel winter booking cycle, the Board remains optimistic that current market expectations for Group profit before foreign exchange revaluations and taxation for the year ending 31 March 2020 will be met.’ It adds ‘looking further ahead, given the cost pressures the Travel industry is facing in general, which will intensify given the weakness in sterling, plus the deepening Brexit uncertainty and the impact this may have on consumer confidence, we remain very cautious in our outlook.’
• Microsoft research has suggested that staycations are ‘posing an increased threat to foreign holidays’ per Travel Weekly.
• Holiday searches were mixed with the leaders comprising Spain, Cornwall, Turkey, Wales, Scotland, Devon & Greece. The Yorkshire countryside and the City of York featured in the top eight domestic searches.
• Leisure travel operators have begun to fret that, whilst there may never be a good time to deal with Brexit, if it were to slip to end-January 2020, it could hit the peak booking season for summer 2020 holidays.
• Travel to the US fell for the 4th month in succession in July per data from the US Travel Association. The 1.2% y-o-y decline was labelled ‘disappointing’. The USTA says ‘the worrying outlook for international inbound travel is consistent with US Travel’s forecast, which projects America’s share of the global long-haul travel market will fall from its current 11.7% to below 10.9% by 2022.’
• Ryanair’s UK-based pilots have voted for 7dys of industrial action towards the end of this month.
• William Hill has announced that CEO Philip Bowcock will step down as Chief Executive Officer and as a Director of the Company with effect from 30th September 2019. Ulrik Bengtsson, previously William Hill’s Chief Digital Officer, has been appointed Chief Executive Officer Designate.
• Roger Devlin, Chairman of William Hill, said ‘I would like to thank Philip for his important contribution to William Hill over the last four years, both as CFO and for three years as CEO.’
• YouTube has been fined $170m over allegations that it collected the personal data of children and tracked their behaviour without parental consent.
• Lego has reported strong numbers and a return to growth to date in 2019.
FINANCE & ECONOMICS:
• The UK Services PMI has weakened from 51.4 in July to 50.6 in August. Any number above 50.0 implies growth but, with construction and manufacturing sharply lower, the mediocre growth implied for the services sector may be insufficient to push the UK into the black.
• This does not sit well with PM Boris Johnson’s promises to borrow and tax less and to spend more in a whole range of areas.
• Markit is forecasting a contraction of 0.1% for the UK economy in Q3. It says ‘the lack of any meaningful growth…raises the likelihood that the UK economy is slipping into recession.’
• Chancellor Sajid Javid has been accused of ‘grubby electioneering’ after promising an end to austerity and more money for many spending departments.
• Bank governor Mark Carney has said that the hit he expects the UK economy to take as a result of a hard Brexit has reduced from an 8% decline to a 5.5% reduction in economic activity.
• Make UK has suggested that manufacturers are halting investment ahead of Brexit. Even stockpiling activity is now said to be subdued
• Sterling up sharply on soft or no Brexit hopes at $1.2241 and €1.1098, Oil up at $60.68. UK 10yr gilt yield up 8bps at 0.48%. World markets higher yesterday with Far East up in Thursday trade.
• Brexit & politics:
o Despite largely abstaining in the vote for an election last night, Labour still suggesting that, when or if the current Brexit delay bill is on the statute book, it will help the government achieve the two thirds majority that it needs in the House of Commons to trigger a General Election.
o Tory veteran Ken Clarke has said that the current Conservative government is ‘the Brexit Party, rebadged.’ He said this is ‘the most right-wing cabinet a Conservative government has ever produced.’
o Le Monde points out that the last British PM to lose the first vote he put to the House of Commons was the Earl of Rosebery in 1894. He lasted 15 months in the job. Mr Johnson has now lost a couple more.
o The Telegraph reports some bankers as saying that a Jeremy Corbyn government would be the lesser of two evils when compared to a hard Brexit.
o FT speculates that Labour could be well-advised to attempt to topple Boris Johnson’s government via a no-confidence vote, in which case a caretaker government could be put in place to bring together MPs from a number of different parties.
o Reuters reports German government sources as suggesting that a no-deal Brexit is now more likely as the UK has not come up with any alternative proposal to solve the Irish border question.
o Nicholas Soames says the Tory Party has become a ‘narrow sect’.
o The government lost another vote in the Commons yesterday as the bill to force it to seek a negotiated Brexit moved to the Lords.
o The FT quotes a cabinet minister as suggesting that the expulsion of 21 Tories from the whip is a mistake. The unnamed minister says ‘we’ve got to bring them back if we want to win the coming election.’
o European sources insist there are currently no negotiations taking place and that the backstop remains non-negotiable in any case.
START THE DAY WITH A SONG:
• The song is taking a short break due to exam commitments.
RETAIL WITH NICK BUBB:
• FTSE Index Watch: As expected, last night’s FTSE index quarterly review saw the exit of poor old Marks &Spencer from the FTSE 100 index (with effect from Sept 23rd). There were also some changes in the mid-cap FTSE 250 index, with Ted Baker (and the beleaguered Intu Properties) demoted to the Small Cap index and Watches of Switzerland entering the FTSE 350.
• Dixons Carphone: The share price of Dixons Carphone was notably firm yesterday, as if somebody expected today’s Q1 update (for the 13 weeks to July 27th) to be not too bad, despite the difficult background for big-ticket retailing and mobile phones and the tough World Cup TV comps. And the headline of the statement is “On track to meet our commitments”, with UK Electricals up 2%, International LFL up 4% and Mobile LFL only down 10%. Alex Baldock, the CEO, says “We’re on track with both our trading this year and our longer-term transformation…The current political and economic climate is volatile but, assuming no material disruption from that, we stand by our full year guidance, as we do our longer-term commitments on EBIT margin and cash flow”. The absence of a profit warning will certainly have heads scratching in the City this morning, ahead of the AGM in London at 11am.
• Boohoo: The high-flying Online fashion group has, unexpectedly, announced a trading update for the six months to end August, to flag that trading has been ahead of expectations and that it has upped its full-year guidance. Even after the bumper Q1 growth of 39%, Boohoo was still expecting full-year growth of “only” 25%-30%, given the comps, but it has now raised that guidance to a heady 33%-38% and, even though it is still expecting EBITDA margins to still be around 10%, that will drive some useful upgrades in the City today, ahead of the interims on Sept 25th.