Langton Capital – 2019-09-27 – PREMIUM – T Cook, CCL, Escape Hunt, min-pricing, landlords etc.:
T Cook, CCL, Escape Hunt, min-pricing, landlords etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, Boaty McBoatface, the democratic choice of the people as the name for the polar research ship that was launched yesterday, was rejected in favour of the more sensible Sir David Attenborough.
Because, presumably, it was deemed a protest vote where voters hadn’t been informed of or were aware of the far-reaching consequences of doing something foolish on the spur of the moment for a bit of a lark.
No parallels with the fisticuff-infested House of Commons there, obviously and, as it’s Friday and even the dreadful weather can’t prevent the weekend from actually happening, we’d better leave such sensitive topics there for the moment.
Anyway, the Langton trip to Go Ape on the NY Moors this weekend may have to be shelved as the forecast lightening, gale force winds and torrential rain threaten to make it rather dangerous. A forty-foot drop from a slippery tree may be amusing to observers but it’s not what the doctor ordered so it sounds like a visit to one of the nearby pubs with a roaring open fire could be on the cards instead. Could be worse. On to the news:
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TO SEE OURSELVES AS OTHERS SEE US: A brief look at the casual dining, pubs & bars market from the perspective of the landlord. 26 Sept 2019:
• Looking at the F&B market from the position of the operator has the plucky casual diner trying to break into a market dominated by the majors and big money, with landlords seen at best as an irritant and, at worst, as a threat to business.
• Like banks, they are deemed to take ‘little’ risk and they can be trigger happy when things get tough. However, we’d suggest that 1) CVAs and the like have levelled the playing field (albeit at the cost of ripping up the rules) and 2) things were never that simple in the first place.
• Property owners fall into a number of categories. Apart from private landlords, large & small, there are the diversified property companies (holding offices, warehouses, manufacturing sites, shopping centres etc.) and some that are more targeted towards B2C outlets. These might include Intu, Shaftesbury etc.
• See also comments below from Local Data Company.
An integrated player, Shaftesbury:
• We are not property analysts and do not have a view on the company but Shaftesbury’s H2 update, for the 25wk period to 24 Sept, brought the above to mind.
• It’s often interesting to turn the telescope around and look through it from the other end and, whilst Shaftesbury, as a West End property specialist, isn’t altogether typical of the UK property market as a whole, it does have something to say.
• Shaftesbury says the ‘West End remains busy and our food, beverage, leisure and retail occupiers continue, on average, to report year-on-year sales growth.’
• Shaftesbury is seeing ‘continued good demand for our regular space’ and says rents are robust and that its ‘vacancy remains low and consistent with long-term average.’
• CEO Brian Bickell does emphasise that Shaftesbury is not a typical property co when he says ‘our exceptional 15.2 acre portfolio, located in some of the busiest parts of the West End, continues to perform well.’
• The company, unlike many property companies, is spoiled for choice when it comes to tenants. It says ‘our long-established tenant selection strategy has ensured that we have been largely unaffected by high-profile retail and restaurant failures and restructurings.’
• Imagine, the cheek of it, picking and choosing your tenants.
Putting it in context:
• Whilst we’re by no means experts in the area, it hasn’t come as much of a shock to discover that property companies in general tend to be optimistic. Almost to a fault and occasionally in the face of contradictory evidence.
• Shaftesbury says ‘despite the uncertain political and macroeconomic backdrop, London’s global city status continues to draw businesses and visitors from across the World, reinforcing the West End’s long-term appeal and prospects’ and that, as far as it goes, may be true.
• Shaftesbury also says ‘despite reports of a small decline in overseas visitor numbers, mainly attributed to fewer European tourists, the West End remains busy. In our areas, the largest components of daily footfall comprise the huge local working population and daily visitors from across London and the Home Counties.’
• This is true but, if you have to use the word ‘despite’ too much, then you’re point to a mixed rather than a perfect market.
• But it doesn’t say much about Scunthorpe High Street or the retail parks around Bury, Burnley, Blackburn, Bolton or Blackpool.
• And what’s a property company really going to say? That the market’s soft and that its tenants should be asking for rent reductions?
The view from our side of the fence – a silver lining?
• From the operator’s point of view, the market is soft. The cookie-cutter, me-too sites have been coming under pressure and demand for generic units has fallen.
• We’ve seen in a number of administrator’s reports that leasehold sites (with £600k or £800k of fixtures & equipment in there) are either being sold for a pittance or ‘abandoned’ as the costs of recovery exceed the value.
• Many, perhaps most, operators have slowed their opening programmes. This is driven by self-interest but it has made units more readily available, cut demand and put downward pressure on rents.
• Fulham Shore (Franco Manca) said last month ‘we continue to see more properties coming to the market at ever lower rents as a result of the current conditions in the wider property, retail and dining out sectors, and will continue to take advantage of these as and when is appropriate.’
• It said in July ‘landlords are facing falling retail and restaurant demand for their sites.’ It added ‘many of these landlords and their commercial agents continue to suggest we are at the bottom of the cycle. However, we believe there is a way to go. Consequently, we feel the longer we wait for properties the better value we can achieve.’
• FUL points out ‘holding out for lower rents feeds through to continued low prices on our menus, which is excellent for our customers. We have sometimes seen as much as a 30% fall in rent where an existing tenant ceases trading and the landlord re-lets the property.’
• FUL believes ‘we are due for a longer period of rental decline this time around.’
• JDW has slowed its opening programme. So has Restaurant Group, Tasty, Comptoir and a number of other operators.
It’s hard work:
• That goes for both operators and landlords.
• Me-too operators, who may have survived 5-10yrs ago, are no finding the going much more difficult but, perhaps more interestingly, landlords cannot simply throw up a shopping centre, retail park or leisure park and expect it to attract business.
• That means that the cookie-cutter approach may be inappropriate.
• And, as anyone who’s had even a passing glance at operators such as McDonald’s, Subway, Gregg’s or the like knows, anything that can’t be produced in this way involves much more effort.
• Shaftesbury, for example, accepts that ‘structural changes in shopping and spending patterns continue to have a considerable impact on businesses exposed to these nationwide trends.’
• It points out that ‘earlier this month, the Seven Dials Market opened in Thomas Neal’s Warehouse, a 23,000 sq. ft. Victorian warehouse in the heart of Seven Dials.’
• This concept is ‘a hybrid operation providing an exciting line-up of street food concepts, a bar and a market selling fresh produce. This has increased the food and beverage offer in Seven Dials, further improving this popular and distinctive village destination.’ One thing that it isn’t, is simple to conceive, build, tenant and manage.
• Rubbish, as they say, rolls downhill. Operators feel chill winds first. They pressure their landlords. The landlords are geared. If they have trouble paying their interest bills then the banks are in trouble. The banks turn to the government and the government turns to the tax payer – and that’s us.
GENERAL NEWS – PUBS & RESTAURANTS:
• A study by the British Medical Journal has found that the introduction of minimum pricing for alcohol in Scotland has cut drinking, with the amount of weekly alcohol consumed decreasing 1.2 units. Since May 2018, the price of alcohol has had to be at least 50p per unit.
• Mintel has published its Economic Outlook report and says that, whilst some factors such as rising real wages are a source of comfort, consumer views on Brexit’s impact on the economy are polarising.
• Mintel reports ‘for the first time since the referendum, for example, more than half think that Brexit will have an impact on their household income; whereas in the past, most thought that it wouldn’t directly affect them.’
• The Local Data Company has reported that nearly 12% of shopping locations across the UK were empty in H1 this year up 0.6% since H1 2018.
• LDC says some 25,700 locations closed last year and only 22,115 opened. LDC says that major chains, in addition to those closing altogether, had been cutting back on outlet numbers.
• LDC says 70% of Maplin and Poundworld stores remain closed, more than a year after the chains went out of business. LDC says, however, that ‘independents have seized the opportunity available to them as larger national chains consolidate and focus on the key cities.’ Whether small chains are able to pay the same levels of rent, or not, is unclear.
• LDC says ‘the retail industry continues to be challenged on multiple fronts and with this, legacy brands are being forced to radically overhaul their operations, while newer entrants take advantage of available space and the opportunity to capture spend from progressively less loyal consumers.’
• ABInBev has priced its Far East offer at 27.00 HKD per offer share.
• Over 200 Ei Publican Partnerships pubs have been recommended for the quality of their real ale in Good Beer Guide 2019, published by the Campaign for Real Ale.
• JD Wetherspoons has announced a selection of new vegan dishes to be added to its menu.
• McDonald’s has announced it will introduce a meatless burger to its menu, the ‘PLT’ or ‘Plant, Lettuce and Tomato’. Ann Wahlgren, McDonald’s Vice President of Global Menu Strategy commented: ‘McDonald’s has a proud legacy of fun, delicious and craveable food—and now, we’re extending that to a test of a juicy, plant-based burger. We’ve been working on our recipe and now we’re ready to hear feedback from our customers’.
• The vegan ready meal producer, The Brook has reached its £200k crowdfunding target within its first day.
• A new survey conducted by Miele Professional has found UK restaurants are experiencing efficiency issues as a direct result of equipment downtime. The survey revealed that half of dishwashers broke down at least once per quarter, with 26% of UK restaurants having experienced dishwasher downtime for more than 20 business hours.
HOLIDAYS & LEISURE TRAVEL:
• Carnival Corporation has reported Q3 numbers saying that it has hit new records in terms of revenues and earnings for the 3mths to end-August.
• Carnival reports U.S. GAAP net income of $1.8 billion, or $2.58 diluted EPS, for the third quarter of 2019, higher than U.S. GAAP net income for the third quarter of 2018 of $1.7 billion, or $2.41 diluted EPS.
• CCL reports constant currency, net cruise revenues of $5.0 billion compared to $4.7 billion for the prior year, an increase of 5.3 percent.
• CCL President and Chief Executive Officer Arnold Donald says ‘we achieved additional cost improvements largely driven by leveraging our scale, offsetting the earnings impact due to voyage disruptions from the combined impact of Hurricane Dorian, the tensions in the Arabian Gulf and the delayed delivery of Costa Smeralda.’
• As regards the outlook, CCL says ‘due to an $0.08 impact from the recent spike in fuel prices caused by geopolitical events, we are reducing our full year guidance for 2019 by $0.05 per share.’ The company says ‘fourth quarter constant currency net revenue yields are expected to be down 2.0 to 3.0 percent compared to the prior year.’
• Some slower sales showing through. For 2020, CCL says ‘cumulative advanced bookings for the first half of 2020 are ahead of the prior year at prices that are in line compared to 2019 on a comparable basis. Since June, both booking volumes and prices for the first half of next year have been running lower than the prior year.’
• Trimming capacity. CCL’s CEO says ‘we are facing a number of current headwinds, including weakening economies affecting our Europe & Asia segment, a strong dollar and of course, the IMO 2020 regulations.’ He says ‘we have taken actions to bring capacity in Southern Europe more in line with demand, reflecting the current conditions which have been heavily influenced by ongoing economic malaise, the uncertain geopolitical environment and recent trends in consumer confidence.’
• More on Thomas Cook:
o Thomas Cook directors face questioning by MPs over the failure of the company. There has been some talk of ‘aggressive’ accounting practices. The auditors have signed off the accounts under the ‘going concern’ principle. This is now not going to be a useful way in which to value what is left of the business.
o Hidden costs: In addition to the loss of equity value, written down debts etc. there will be other costs. The emergency rescue will cost hundreds of millions and, in resort, hoteliers will be faced with bad debts. The FT reports that the insurance industry could be faced with £500m of pay-outs. Bond-holders may be looking at write-downs of £900m to £1bn. To date we have not seen comment on the state of the pension fund.
o Transport minister Grant Shapps has raised the possibility that Thomas Cook directors could have their bonuses seized or be disqualified from serving as directors in future.
o Speaking about the collapse of Thomas Cook, ABTA chairman Alistair Rowland told Travel Weekly ‘the industry won’t be the same. We’re very sorry for the employees.’
o Transport Minister Grant Shapps claims he ‘wasn’t aware’ of the similarities between his speech about the collapse of Thomas Cook and one made by his predecessor (a.k.a. Failing Grayling) about Monarch Airlines.
• STR reports that occupancy in the US hotel industry in the week to 21 September was up 2.1% y-o-y with rates up 4.8%. REVPAR is up 7.0%, largely due to the shift in the timing of the Yom Kippur holiday.
• The Trump Organisation’s plans to build 550 homes on its Aberdeenshire golf resort have been approved. Councillors backed the plans by 38 votes to 24.
• Tui’s UK and Ireland managing director, Andrew Flintham, paid respects to Thomas Cook and telling Travel Weekly ‘Thomas Cook invented our industry and is our oldest competitor. When you are dealing with [the failure of] a competitor and a rivalry goes back decades it’s an incredibly sad day.’
• IAG claims strikes called by pilots have cost the company €137m. The two-day strike on 9-10 September led to IAG cancelling 2,325 flights. Overall, IAG expects its operating profit for this year to be €215m lower than in 2018, with the company saying more strikes will hit profit.
• Escape games operator Escape Hunt has reported H1 numbers to end-June saying that revenues rose from £800k last year to £2.2m with an adjusted EBITDA loss of £1.2m (2018: loss £1.4m) and a loss per share of 14.6p.
• The company, which is growing its estate, says that it has seen ‘good growth in UK owner operated revenue’ with ‘strong TripAdvisor scores maintained across the sites.’
• ESC reports it had net cash of £3.9m at 30 June 2019 (31 December 2018: £2.7m). The group is now rolling out new outdoor games and has signed a ‘significant US and Canada franchise agreement.’ Discussions are taking place with potential franchisees in Europe.
• ESC says ‘negotiations and planning are well advanced on the four new UK sites.’ It says ‘heads of terms have been agreed on two new owner-operated sites in the UK, with two others in legal negotiations.’ Games are now being designed in-house.
• Re current trading, ESC says ‘the second half of the year has started well, with revenue in July growing on both May and June and revenue in August establishing a new record. Even more encouragingly, the revenue in August was before seeing any benefit from the corporate marketing referred to above which commenced only in late July.’ Some costs have been cut.
• ESC concludes ‘given the early stage nature of the business and number of initiatives being pursued, both in the UK and abroad, it is difficult to predict the exact timing when things come to fruition, but overall we are confident that during the remainder of the year, we will see continued progress in line with expectations.’
• Liverpool Football Club has failed in an attempt to trademark the word Liverpool, because of the ‘geographical significance’ of the word.
• US fitness start-up Peloton saw its share price fall more c14% on its stock market debut in New York.
• Hollywood talent agency Endeavor Group is shelving its plans to IPO in the US in the face of limited demand.
• London musical WICKED is set to welcome its 10 millionth theatregoer shortly.
• JPJ Group has reported the completion of its purchase of the business of Gamesys (Holdings) Limited. JPJ reports ‘effective from Completion, the Company has been renamed Gamesys Group plc.’
FINANCE & ECONOMICS:
• New IMF boss Kristalina Georgieva has said the global economy needs to be ready to cope with a fresh economic downturn.
• The US and Japan have agreed a trade deal that will remove of reduce tariffs on certain products traded between them.
• Rising levels of UK government borrowings may ‘blow apart’ the previous two chancellors fiscal rules reports the FT. The NIESR says a weaker economy and more spending means ‘the deficit will rise and the current fiscal rules be broken’.
• Zoopla reports the UK housing market is readjusting to reflect ‘more realistic pricing’.
• Sterling lower at $1.2327 and €1.1285. Oil down at $62.19. UK 10yr gilt yield down 1bp at 0.52%. European markets up yesterday but US down and Far East lower in Friday trade.
• Politics, Brexit etc.:
o The BBC reports a number of UK firms that were present at a meeting with no-deal Brexit minister Michael Gove this week have contradicted his claim that industry told him during the meeting that it was ‘ready’ for no-deal Brexit.
o German state broadcaster Deutsche Welle says ‘Johnson is the most dangerous politician to have moved to Downing Street in decades. He is power-hungry, opportunistic and completely irresponsible.’
o The FT reports ‘a politician with a smidgin of integrity would have responded to this damning verdict [of the Supreme Court] by resigning.’ Instead, a no10 whispering campaign is suggesting that the judges have usurped power in order to thwart Brexit.
o FT goes on to say that the ‘government has become a cacophony of chaos.’ It suggests that Mr Johnson ‘has given up on any chance of securing a Brexit deal with the EU next month.’
o Mr Johnson has moved from played six, lost six, to all the sevens with the House yesterday declining to shut down parliament for 3dys over the Tory Party Conference
o The word that first comes to mind when surveying British politics at the moment is ‘ugly’.
o Jaguar Land Rover has said that it will shut its UK factories for a week towards the end of October to prepare for Brexit. Boss Dr Ralf Speth said ‘I need 20 million parts a day…I have to have every and each part available and I have to have it just in time.’
o The National Audit Office has repeated that there remains a real threat to the supply of vital medicines in the event of a no-deal Brexit
START THE DAY WITH A SONG:
• Training courses intruding. Back soon.
RETAIL WITH NICK BUBB:
• Consumer Confidence Watch: The widely-followed monthly GFK Consumer Confidence survey came out overnight and the overall index showed a surprising rise from -14 to -12, but polling was done in the first half of the month, well before the latest political drama over Brexit, and Joe Staton, client strategy director at GfK, said “British consumers appear to be treading water during this wait-and-see run-up to Oct 31st. You can almost sense people are keeping their fingers crossed”.
• Rachel Osborne Watch: It is still a bit odd, ahead of next week’s interim results, that Ted Baker still haven’t commented on the news that its FD Charles Anderson is off to join Mulberry, but it announced yesterday that the much travelled Rachel Osborne is to join as the new FD, in a few months’ time. She gushed in the statement that “I am thrilled to be joining Ted Baker as Chief Financial Officer. Ted Baker is an outstanding global brand and I am hugely looking forward to the opportunity to contribute to the next phase of its development”. But, lest we forget, a year ago, fresh from falling out with the CEO of Domino’s Pizza, as poor old Debenhams prepared to take analysts to look at their new Watford flagship, she said “I am delighted to be joining Debenhams. This is a challenging time for UK retail but Debenhams has a strong heritage, leading market positions and a credible plan
• BDO High Street Sales Tracker: We flagged on Wednesday that the John Lewis sales figures for last week were again very poor, with the “Indian summer” getting the blame, but today’s BDO High Street Sales Tracker for medium-sized Non-Food chains (which has been reporting suspiciously good progress in recent weeks) is again not too bad…In w/e Sunday Sept 22nd, BDO Fashion sales were only down by 2.1% LFL (including Online)…And total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion) were down by just 1.4% last week (down 1.7% in Store sales, but up by 10.8% in Online sales). The consultancy group, Retail Economics (RE) noted in its overview of August Retail Sales that the upward bias in the recent BDO figures probably reflects over-weighting of Online sales, as well as sampling problems.
• Trade Press (1): The front cover of Drapers magazine today is a photo of Hash Ladha, the boss of Oasis and Warehouse, to flag up a feature interview in which he reveals his forensic approach to expansion across channels, categories and markets – and further acquisitions. In her editorial, the Editor thunders that “Cut-throat competition could hobble fast fashion”, flagging that the high-stress world of fast fashion was laid bare last week in the first episode of a six-part BBC Three documentary on womenswear etailer In The Style. The main News story in Drapers magazine today is that increasing numbers of fashion retailers are demanding supplier discounts to offset sluggish sales. In terms of features, Drapers look at Debenhams’ acclaimed own-brand launch and asks whether the business is set for a revival. Drapers also explain why the new IFRS 16 accounting standard is hitting the
• Trade Press (2): The front cover feature in Retail Week magazine today is headlined “Unboxing Amazon” and analyses how the Amazon business operates. RW also have other feature articles on “Reclaiming Roddick’s Vision” (the Body Shop returns to its activist roots) and “John Lewis Profit Shock” (Can JLP recover from its unprecedented half-year loss?). And the Editor looked in his column at the continuing success of Next relative to Online competitors and thunders that “Being a disruptor won’t make you a success”.
• News Flow Next Week: As the Tory Party conference continues in rainy Manchester and as we move into October and Q4, there is again plenty going on in the Retail sector next week to distract us from the drama in US and UK politics, kicking off on Tuesday with a Marks & Spencer Capital Markets Day, the ScS finals and the Greggs Q3 update. Wednesday then brings the Tesco interims and the Topps Tiles pre-close update, with the Ted Baker interims following on Thursday.