Langton Capital – 2019-09-11 – PREMIUM – DPEU, Honest Burger, beer prices, costs etc.:
DPEU, Honest Burger, beer prices, costs etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
People may be happy or elated or just comfortably smug but why do we never use the perfectly legitimate word ‘gruntled’?
Meaning satisfied or content but is it because it sounds too porcine?
You could imagine a pig gruntling around in its own filth but if you said that a top-flight politician looked gruntled, you’d probably conjure up the picture of some porky bloater with his snout in the trough.
And that wouldn’t be a fair reflection of how our politicians behave now, would it? Anyway, bit busy again so, without further ado, let’s move on to the news:
PRIVATE COMPANY RESULTS: Honest Burger has reported full year numbers to Companies’ House. 11 Sept 2019:
• Honest Group Ltd was incorporated in November 2014. At that point, the company pushed into the ‘better burger’ market. The company says ‘the principal activity of the group is that of the operation and management of restaurants’.
• The period under review is the 12mths to 27 January. The group had 9mths to lodge its accounts. It has not, therefore, taken it to the wire.
• The main subsidiary is Honest Burgers Ltd. During the year, Honest Burgers Ltd ‘secured additional financing to fund the investment in new restaurants’ and ‘drew down further on existing facilities’.
• The company says ‘following the refinancing in February 2018, the previous loan held within the Company was repaid and net debt increased in the Group by £2.8m’.
The management comment:
• Honest Group says turnover rose 38% on the year adding ‘this growth is due to the maturing of sites opened in the previous financial period as well as contributions from new site openings.’
• The group added five new restaurants in the year. As at 27 January 2019, the group had 30 restaurants open & trading.
• EBITDA rose by 42% to £4.2m. EBITDA margin rose slightly. This may be down to a lower number (or at least proportion) of immature sites.
• The group had ‘a strong pipeline in place at the end of the current reporting period’.
• It says it is ‘expecting to open further restaurants in the period ending 26 January 2020’.
• The group says ‘the impact of Brexit on the Group’s labour force is being closely monitored and they are actively targeting other channels to change the source of new recruits’.
• The auditor is BDO LLP. BDO is being proposed for reappointment.
• BDO says the accounts ‘give a true and fair view of the state of the Group’s and of the Parent Company’s affairs at 27 January 2019 and of the group’s loss for the period then ended’.
• This is a clean audit report but, elsewhere, as is usual, the accounts state ‘the directors are responsible for preparing the strategic report, the directors’ report and the financial statements in accordance with applicable law and regulations’.
• There has been no churn of directors. One left during the period and two joined. As at 27 January, the group had eight directors.
• Revenue and EBITDA moved as the company described but, as always, there is red ink below the EBITDA line.
• This will be the case for most companies. With companies in an expansionary phase (excluding start-up losses or whatever as well as depreciation and interest), this can be more marked than for more mature operations.
• Below the EBITDA line (of £4.2m for FY19) the company charges £1.0m of exceptional costs* (£0.9m in FY18 and see below), £2.6m of depreciation and £1.9m of interest.
• The charges bring operating profit down to £518k (FY18: £62k) and the loss before taxation is £1.4m in FY19 (FY18 also £1.4m).
• The group (which owns the operating company) has negative shareholders’ funds of £4.9m. Accumulated losses are £5.6m.
• The group has paid £3.7m in lease premiums. This amounts to a gross £4.6m with £0.8m amortised to date).
• Intangible assets* amount to £12.9m meaning that tangible net assets are negative £17.8m. Such situations can persist so long as capital providers, both internal and external (if any) are happy with the position.
• The large negative number is partially as a result of the company classifying £20.2m of preference shares as debt rather than equity. The preference shares accrue interest at rates between 5% and 8% annually,
• Net debt, excluding the preference shares, is £9.5m this year (£7.0m last).
• Exceptional costs include £589k of pre-opening charges, £96k of aborted opening costs and £255k of ‘management enhancement costs’, whatever they are. Arguably no harm done provided all capital providers are OK with this (and understand is).
• Intangible assets comprise goodwill on consolidation. The group has, effectively and in line with accounting practise, paid more for assets than their ‘fair value’. Any excess will be amortised through the P&L.
• In private companies, much depends on the relationship between debt and equity.
• If the equity holders have provided the debt, then most, if not all, of the Enterprise Value will be aligned.
• This can be a problem (with vulture funds and the like) if it isn’t.
GENERAL NEWS – PUBS & RESTAURANTS:
• The British Beer & Pub Association has reported that total beer sales in both the on- and the off-trades fell in Q2 by 2.2%. The on-trade fell by 2.8% whilst supermarket and other off-trade sales fell by 1.7%.
• The BBPA has ‘highlighted that the decline was against a particularly strong Q2 2018, where sales were boosted by a long period of good weather and the group stages of the World Cup.’
• It adds ‘beer sales in the on-trade, however, remain under considerable pressure generally with pub numbers continuing to decline as a result of high taxes including beer duty.’
• The BBPA ‘has been clear that measures need to be taken by the Chancellor to at the very least cut, or if not, freeze, beer duty in the Budget. Without doubt this will help many community pubs to survive.’ CEO Brigid Simmonds comments ‘Britain’s beer industry is a world-class manufacturing sector. Together, brewing and pubs support 900,000 jobs in towns and villages across the UK.’ Ms Simmonds continues ‘we know that cuts and freezes to beer duty make a big difference in helping pubs and boosting beer sales. There is a very real threat, however, that the Chancellor, Sajid Javid, will increase beer duty at the next Budget. After two back-to-back beer duty freezes in 2017 and 2018, an increase would be a big step back. What we really need is a beer duty cut to give pubs a big boost.’
• DP Eurasia NV has reported H1 numbers to end-June saying that its store numbers rose from 672 to 736 with system sales up 26.4% at 645.4m TRY. Group revenue is up by 21.6%. System sales in Russia are up 63.0%.
• DPEU reports adjusted EBITDA (excl. IFRS 16) up 15.1% to TRY 46.4 million. The company says it expects the full year Adjusted EBITDA for 2019 to be in line with expectations. CEO Aslan Saranga comments ‘we are pleased to report another strong set of results for the first half of 2019. Both Turkey and Russia recorded solid top-line growth accompanied by increased adjusted EBITDA.’
• Mr Saranga adds ‘in Russia, like-for-like growth for the period was at mid-single digits, reflecting the strong comparables from the FIFA World Cup in 2018.’ He says ‘we remain on target for store openings for the full year in our markets and the Board expects the full year Adjusted EBITDA (excluding the impact of IFRS 16) for 2019 to be in line with expectations.’
• Food prices rising at twice the rate of inflation.
• The latest CGA Prestige Foodservice Price Index has suggested that price rises have slowed to almost zero in July as Brexit itself has approached. Prices are nonetheless rising more than twice as quickly y-o-y as they were a year ago.
• The CGA Prestige price index highlights fish and seafood as expensive (up 9% on the month) but says that ‘farm gate milk prices have been falling considerably in the past few months, but the lag between this and a price drop in the Dairy category of the Foodservice Price Index has been longer than usual over the summer.’
• The CGA Prestige index says ‘the biggest Brexit-related challenge will be to short shelf-life products, especially salad leaf. The key anxiety is that import delays at ports will cause some stock-outs and shorten shelf lives for customers.’
• Prestige says ‘both food and drink inflation remain at much higher levels than both the government’s CPI measure and historical norms for the foodservice market. For much of the past year food supply markets have been faced with challenges of supply (mostly because of unpredictable weather conditions), the weakening of Sterling and the increasing uncertainty around Brexit. Good contingency planning and supplier communication is essential in the run-up to Brexit.’
• Research by PwC and The Local Data Company has suggested that a net 1,234 shops closed across the UK’s top 500 High Streets in H1 this year. This is up from 1,123 in the prior year and is the highest since the survey began in 2010. These are numbers net of openings. Around 1,634 stores opened and 2,868 were closed.
• Worst hit for closures were fashion retailers, followed by restaurants, estate agents and pubs. Restaurant Group last week said that around 1% of capacity had come out of the casual dining market in the last year or so. LDC says that a net 103 restaurants shut in H1.
• LDC reports that there were more openings of takeaways and sport and health clubs. It says ‘the decline in store numbers in the first half of 2019 shows that there’s been no let-up in the changing ways that people shop and the cost pressures affecting High Street operators.’
• The Society of Independent Brewers has written to JDW chairman Tim Martin regarding his comments about low beer prices. It says ‘your commitment to deliver value to your customers is admirable’ but goes on to say that SIBA members ‘regardless of their individual views on Brexit…feel that selling a pint of beer for as low as £1.39 and creating the impression beer will remain that cheap is dangerous.’
• SIBA says ‘beer sold this cheaply has to be made cheaply’. It adds ‘selling a pint of beer for as low as £1.39 may appeal to consumers but it doesn’t support independent craft brewers who fear further downward pressure on price.’ SIBA says ‘moves like this signal a race to the bottom to the brewers that supply your pubs.’
• Tim Martin has responded by saying that brewers will not have to pay for his sweeping price cuts. He says that he has not asked Greene King, the brewer of Ruddles, for a contribution.
• Sadiq Khan has announced that Walthamstow High Street will be London’s first-ever Night Time Enterprise Zone. The designation will see trials of ‘innovative ideas’ to boost the town centre & support local businesses. The pilot will receive a £75,000 grant from City Hall.
• The BBPA has responded to the news that duty-free shopping between the EU and the UK is set to return saying that 82% of the beer consumed in Britain is already brewed in Britain. Consumers can bring what they like back from the Continent at the moment (duty paid). The BBPA says ‘deal or no-deal Brexit, if the Chancellor is serious about supporting British brewers, beer drinkers and pubs, then he should cut beer duty in his next Budget.’
• Beer is rather heavy. There won’t be any meaningful quantities brought back on airplanes. The booze cruise could become a live issue in southern England, however. This would potentially cost sales in the region.
• Burger operator Five Guys is reported to be considering a further trial of a breakfast menu across its UK restaurants.
• The MA quotes Cotswolds Distillery as suggesting that demand could be weak for spirits in general this Christmas if the economic outlook clouds further.
• Uber Eats is to close its South Korea business.
• Amazon is reported to have received €241m in tax credits that it can deduct from future taxes on profits across Europe.
• McDonald’s has agreed to acquire Apprente, a two-year-old Silicon Valley startup specialising in voice-recognition for an undisclosed sum.
HOLIDAYS & LEISURE TRAVEL:
• Staycity Group points to headwinds in the UK. The company also reports LfL sales +2.4% in the year to July ‘on the back of an increase in occupancy and a rise in average daily rates.’
• Staycity, which now operates nearly 3,000 apartments across 12 European cities, has seen occupancy grow by 2.2% in the first half of the year, to an average of 86.4% across the group, with UK properties seeing a 2.5% increase to 85.8%.
• Staycity CEO Tom Walsh says ‘despite this year proving challenging for the hotel sector with increasing cost pressures this performance demonstrates the strength of demand for our product as we continue to expand across Europe.’
• Staycity says ‘the challenges in the UK are well documented.’ He says ‘we are already witnessing a softening of demand for corporate travel.’ Mr Walsh says ‘we believe a hard Brexit will impact GDP and consequently reduce demand for hotel accommodation, this along with a devaluation of sterling is likely to create significant headwinds which we must prepare for.’ Staycity’s first property in Germany is set to open in November.
• Potential for indigestion? London is reportedly set for a record number of hotel openings in 2020. STR says that, over the 10yrs to 2020, hotel capacity in London will have risen by 41%.
• ABTA CEO Mark Tanzer says the UK holiday market remains resilient despite the upcoming Brexit deadline. He told a Brand USA meeting ‘2019 so far has been a strange year of stop and start bookings. As the March deadline approached we definitely saw people holding back, not sure what’s going to happen and bookings started to drop off. Now we are seeing the same as we get towards the October deadline, you get to the clinch points and people think, “I’m not sure what’s going to happen so I’ll hold back booking” so there have been dips.’
• The current deadline could affect people’s decisions over whether or not to take an October half term holiday.
• Drivetime, a voice-based trivia quiz company, has raised $11m in funding in the US. The company offers free, limited access tiers along with a subscription offer.
• Thomas Cook predicts that smaller Turkish resorts and holidays to North Africa will continue to grow in popularity.
• Voyages to Antiquity will close at the end of October following its decision to cancel ten of its 2019 departures when its sole vessel suffered engine trouble this year.
• Uber has cut more than 400 engineering and product jobs. This is its second round of lay-offs since its IPO in May.
• Apple’s new streaming TV service will cost $4.99 per month. Its Apple Arcade game streaming service will be available later this month.
FINANCE & ECONOMICS:
• Good news in the labour market. Wages grew at their fastest rate in over 10yrs in the year to July at +4.0%. Unemployment in the UK dipped to 3.8%.
• The NIESR says ‘with CPI inflation at 2 per cent in the three months to July, real wages excluding bonuses grew at an annual rate of 1.8 per cent over the same period.’
• NIESR says the ‘data were again strong but more timely signals show that a turning point may soon be reached as Brexit and global uncertainties increasingly weigh on hiring.’
• The OBR has warned Sajid Javid that he may break government borrowing rules after he announced the biggest annual increase in spending for 15 years.
• Sterling up a little at $1.2357 and €1.1179. Oil up a fraction at $62.89. UK 10yr gilt yield up 5bps at 0.63%. World markets up yesterday with Far East higher in Wednesday trade. UK set to open up around 28pts.
• Politics, Brexit etc.:
o Sky reports CEO of Jaguar Land Rover as saying it would not be possible to stockpile parts ahead of a potential no-deal Brexit.
o BMW’s finance director Nicolas Peter has warned that the price of cars made in the UK could rise post Brexit
o Speculation that Boris Johnson with throw Ulster under the bus as the DUP is less special than it was and he has very few other alternatives. The DUP has voted twice for an early election.
o Kantar reports record numbers of consumers are stockpiling food and medicines. It says 31% of remainers are stockpiling against 21% of leavers.
o An FOI request reveals that around a quarter of civil servants in the UK’s various business departments are currently working on Brexit.
o Harriet Harman has confirmed that she will run as next Speaker of the House of Commons. In a sign that ‘getting rid’ of John Bercow may not be the same as getting rid of the problem, she says ‘I think what Parliament has to do, and the Speaker has to do, is to ensure that Parliament can have its say… and that is what John Bercow has sought to do.’
START THE DAY WITH A SONG:
• The song is taking a short break due to exam commitments.
RETAIL WITH NICK BUBB:
Sports Direct Watch: Hot on the heels of the news that #MadMike has bid for the struggling Links of London jewellery chain, the embattled tycoon has to face the music at the AGM today at 11am. So far there has been no trading update issued ahead of that. The AGM is being held in the company’s new HQ off Oxford Street and as he listens to all the criticism of corporate governance at his sprawling empire Mr Ashley will no doubt ask himself why he still thinks it’s right to be a publicly quoted company…No doubt a few intrepid journalists will be given us rolling coverage of the AGM on Twitter…
Superdry: Today’s AGM (at 10.30am) is also held at the company’s HQ, but this time it is sunny Cheltenham, rather than in London, and there has also been no trading update issued beforehand by Superdry…
Waitrose Watch: Disappointingly, yesterday morning’s JLP weekly overview, for w/e Sept 7th, revealed that Waitrose saw a dip of 1.0% in gross ex-petrol sales last week, despite a weak comp, continuing the weak start to Q3/H2…That left the last 32 weeks still down by 0.7% gross cumulatively, albeit store space must be fractionally down (after the sale of five Waitrose stores in June), meaning that the LFL sales movement won’t look quite so bad, although it would be helpful if Waitrose clarified this issue…
John Lewis Trading Watch: “The weather” wasn’t a problem for John Lewis last week, so it was a bit of a shock to see that overall gross sales were down by as much as 5.5% in w/e Sept 7th, despite a weak comp…In terms of sales mix, Fashion/Beauty sales were down by 4.9%, with John Lewis flagging that they were up against the own-label Womenswear launch last year, but Home sales were down by 9.1% gross and Electricals were down by 3.5% gross. There is only the new Cheltenham store in the figures, but overall John Lewis LFL sales, however, are down by well over 2% over the last 32 weeks (as gross sales are now running down 1.8%).
John Lewis Partnership: Tomorrow’s interims from JLP seem bound to be weak, although all we know is that total sales were nearly 1% down in the 26 weeks to end July. We assume that Waitrose gross margins were up (because of the range reviews) and that John Lewis gross margins were down (despite a favourable sales mix). We therefore think that Waitrose operating profits will have held up quite well (£90m vs £96m?), but John Lewis operating losses will have increased (from -£19m to -£39m?). After central costs and interest, we think that underlying PBT before exceptionals will slip from last year’s token £1m (which was 99% down…) to -£15m. Given a difficult start to H2 trading, JLP are bound to be cautious about the full-year outlook, regardless of Brexit uncertainty, and we’d look out for any weak London housing market/big ticket spending vibes and any comments about the cost of ramping
News Flow This Week: After the AGM’s today of both the embattled Sports Direct and Superdry, tomorrow brings the interims from both Morrisons and the John Lewis Partnership.