Langton Capital – 2019-11-18 – PREMIUM – GBK, Azzurri, Ceviche, Pizza Express etc.:
GBK, Azzurri, Ceviche, Pizza Express etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
After eating what afterwards felt like a kilo of the things in one sitting, I promised myself over the weekend that I was never going to buy peanuts again but, sadly, that proved to be an assertion that stumbled and fell after less than 24hrs.
And tell myself as I might that they, the peanuts in question, are pretty much pound-for-pound the most fattening thing that you can cram into your mouth alongside a couple of pints and a pizza, it’s still hard not to eat buy them, open them and eat them (all of them) because, when all’s said and done, how can you just eat a couple?
I suppose as addictions go it’s got to be put into perspective. There are worse things to find than empty bags of peanuts hidden around the house. On to the news:
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PRIVATE COMPANY ACCOUNTS: GOURMET BURGER KITCHEN: Gourmet Burger Kitchen, which is owned by South African company Famous Brands, has reported results to 24 February to Companies’ House. 18 Nov 2019:
• Given its travails, there is little attempt to sugar-coat what has been a difficult period and GBK’s comments on the year under review are necessarily realistic.
• GBK’s directors report that they ‘acknowledge the challenging trading environment that the company is currently operating in.’
• The company underwent a CVA on 9 November 2018. The group has ‘brought an end to the programme of organic openings with no new openings in the period’ under review.
• Instead, the group closed 24 sites as part of the CVA taking the total net number of sites operated by GBK to 70 restaurants as this year end
• GBK reports that revenue decreased 7% to £76.1m. The reduction was ‘driven by site closures, difficult trading conditions in the wake of economic uncertainty prompted by Brexit, continued oversupply in the sector and a significant number of new entrants.’
• The company says this culminated ‘in a decline in like for like in-store performance.’
• Delivery was a bright spot. GBK says this is ‘driven by increased consumer demand for convenient dining at home as well as management’ s decision to increase GBKs online footprint with more [delivery] providers.’
• Overall, whilst the company maintains that it has a superior product, GBK says it ‘operates in a very competitive and fragmented market which is constantly bringing new concepts and products to the expanding customer base.’
• Revenue is down to £76.1m from £81.7m in the prior year.
• The gross profit margin is down from 40.0% to 37.0%.
• Admin expenses are up by 4.4%.
• The group reports an operating loss of £5.6m versus an operating profit of £402k last year.
• Exceptional charges, largely a non-cash property impairment, amount to £17.9m and the loss before taxation is £24.3m against a loss in the prior year of £6.4m.
• GBK now has retained losses of £17.7m with negative shareholders’ funds of £16.3m.
• The company is a subsidiary of Famous Brands.
• Although this did not prevent it from undergoing a CVA, the company says ‘the financial statements have been prepared on a going-concern basis.’
• The directors are comfortable that they have the financial support of other group companies.
• Auditor Rees Pollock have signed off the accounts on the basis of continued support.
• Clearing the decks is often expensive and so it has proved at GBK.
• The directors believe that the company has the attested support of its fellow group companies and, in this regard, it is perhaps more fortunate than are some private-equity-owned companies.
• Witness recent comments with regard to Pizza Express and Chilango amongst others.
• Nonetheless, the going is extremely difficult and, if The Restaurant Group is right when it says that 25% extra capacity went into the market over the last five years but only 1% has come out recently, this may be the case for some time.
• The CVA, whatever the merits, do re-base costs to some extent and provide slimmed down companies with something of a competitive advantage.
PUBS & RESTAURANTS:
• Discounting out there. Pizza Express 25% off food, Prezzo 40% off mains.
• The Guardian reports that Chilango, which has 12 outlets, mostly in London, remains in refinancing talks that could see its burrito-bonds investors lose some of the value of their investment. The group earlier this year raised £3.7m from investors. Langton’s work on the Mexican food market (too hot for some?) last month suggested that most operators in this space were losing what might prove to be unsupportable amounts of money.
• The Guardian names RSM as the accountancy firm brought in to oversee the restructuring. If the financial moves involved negotiations with landlords, the latter would likely wish to see both equity and non-bank debt take a severe haircut.
• RSM says ‘Chilango has engaged RSM to assist on working on long-term planning, options and strategy.’ Chilango’s bond returned 8%. This was arguably inappropriate as it was offering a bond return on a financial instrument that perhaps carried an equity risk. The operator was offering bond-issue paperwork to passers-by in the street, ironically directly beneath Langton’s global HQ on London Wall. Chilango says there is ‘nothing to report …We are working with RSM on some long-term business planning.’ The first half of this statement seems to be inconsistent with the second.
• The Night Time Industries Association maintains that the night-time economy is becoming critical to the survival of the UK High Street.
• Pizza Express’s owners, Hony Capital, have declined to comment on whether or not they were willing to engage with bondholders regarding a restructuring of the group’s debt. Bloomberg reports that ‘investors holding 70% of Pizza Express’s most senior bonds, sent a letter to the company a week ago pledging to provide new funds.’ It says that there has been no response.
• We wrote back in June that the group’s debt structure, with around £1.6m of debt per restaurant, was unsustainable. If the restaurants are worth less than that, and they are, then the company is in a negative equity situation. This can persist until the group needs to refinance any or all of the debt in question. This will be the case shortly.
• Any moves by Pizza Express may have to be done in a certain order. It may have to split its UK & Chinese businesses, then address its debt and, shortly after or at the same time, negotiation a restructuring of its leases with its property landlords. It would arguably be surprising if moves were not being made in all of these directions. S&P cut Pizza Express’s debt, which may now be held by very hard-nosed vulture funds, to below investment grade last week.
• Azzurri Group, the owner of restaurant chains Zizzi and Ask Italian, has reported a rise in full-year sales despite industry headwinds. It says that sales were up by 8.5% at £279.8m but EBITDA margins slipped from 14.5% to 13.2%. The group says that it has ‘continued to outperform the market.’ EBITDA was flat at £37m. The group last year reported fuller, statutory numbers to Companies’ House in mid-November.
• Azzurri opened 15 sites over the year — eight Zizzi restaurants, three Asks and four Coco di Mamas — bringing its total estate to 290. It refurbished 33 sites. The group has further expansion plans for Radio Alice, which was ‘emerging as a key player.’ Azzurri says it ‘has gone into the new financial year with good momentum. Despite the challenging backdrop in the UK market, we are confident there is further opportunity for our brands to continue to grow.’
• The Times suggests that Azzurri has ‘shelved plans for a sale amid concerns about the casual dining crunch that has triggered a wave of high street closures.’ The Times says that owner Bridgepoint Capital, has decided that its investment is ‘going to be a slightly longer hold.’ The group says ‘cost pressures in the UK remain an ongoing challenge for the sector, and although Azzurri is not immune, the group has made adjusted EBITDA improvement and continued to trade well through these difficult conditions.’ It concludes ‘we remain conscious of the current cost environment and continue to take a thoughtful approach to increased operational efficiencies.’
• Ceviche has been bought out of administration by the founders of Rosa’s Thai, Alex and Saipan Moore. Mr & Mrs Moore sold a majority stake in Rosa’s to TriSpan last year. They told The Times ‘we are very excited. Ceviche has got soul and it is cool. We want to keep that in the business.’
• More than two thirds of the Top 100 casual dining brands in the UK are engaging in the delivery market, a 4% increase on 2018.
• The BBPA has welcomed the Conservative Party’s pledge to support pubs. Chief executive of the BBPA, Emma McClarkin commented: ‘Pubs are the heart of our communities, so this commitment to ease the burden of business rates is welcome. Three pubs a day close their doors for good due to the tax pressures they face. On business rates alone, pubs pay 2.8% of the business rates bill, despite accounting for just 0.5% of turnover. Reducing rates for pubs is an important step in the right direction. Such reliefs are vital until the fundamentally unfair system is overhauled’.
• SIBA has responded to the conservatives pledge to ‘save our high streets’. A spokesperson for SIBA commented: ‘“It is great that the Conservative Party recognise the vital contribution pubs make in our communities. Taking business rate relief from 33% to 50% will be a huge boost for pubs and the brewing sector. Pubs owned by their communities is a model that is proven, so keeping more pubs in the hands of local people is also to be welcomed’.
• McDonald’s has launched a plastic recycling scheme named ‘The Big Toy Take Back’ that will see unwanted plastic toys recycled. Kate Nicholls, Chief Executive of UKHospitality said: ‘UKHospitality has been repeatedly calling for a cut in business rates for hospitality. The sector has been hammered by extortionate rates and high streets have declined as a result. The hospitality sector pays over £3 billion in business rates, 11% of the total UK rates bill. This is despite being responsible for 2.5% of eligible economic activity. If hospitality’s rates bill was fair it would be slashed by £2.4 billion’.
• The BBPA has published a manifesto urging the Government to commit to backing the 200,000+ supporters of the Long Live the Local campaign, calling for a cut in beer tax.
• The BBPA says the pub industry employs 900,000 people, adds £23bn to UK GDP and contributes £13bn in tax revenue. The manifesto also calls for the Government to address ‘the unfairness of the business rates system’.
• McDonald’s announces new green packaging trials in Europe aimed at fixing the U.K. paper straw problem – where straws dissolved too quickly and were not fully recyclable.
• Asahi’s brewing contract with Molson Coors to make Grolsch in the UK has ended, after Tesco and Asda delisted the lager from its supermarkets.
• The Alchemist will open its biggest site yet in Canary Wharf, featuring two outdoor terraces and a 100-cover restaurant.
• Gruppo Campari is in talks to acquire Baron Philippe de Rothschild Distribution, saying ‘The transaction is subject to the completion of the appropriate social processes and to customary antitrust approval.’
• The institute for fiscal studies has warned political parties to be careful about setting higher minimum wage levels. The IFS highlighted the risks to having high minimum wages for younger workers, saying that many would struggle to find work at those levels.
• T. Rowe Price Group invests $100m in DoorDash, joining investors such as SoftBank Group Corp. and Sequoia Capital. The new investment will add to DoorDash’s war chest of $2bn.
HOLIDAYS & LEISURE TRAVEL:
• ACI Europe blames ‘softening’ growth in air traffic on a spate of airline failures in September. Q3 growth across Europe’s airports was comparatively slow at 2.6% yoy. ACI Europe declared it the ‘weakest EU market in six years’.
• BrewDog will open a series of mini-hotel chains in Scotland called BrewDog Kennels. Rooms in the Kennels will start at £75 and will feature shower beers, record players, guitars and rental bikes.
• Cathay Pacific warns of a ‘challenging and uncertain’ short-term outlook amidst political unrest in Hong Kong. Combined Cathay Pacific and Cathay Dragon passenger carryings fell by more than 7% in October to 2.7 million over the same month last year.
• Hong Kong has fallen into recession with GDP down 3.2% in Q3, its second quarter of negative growth. The recession is being blamed on the trade war between the US and China and increasingly violent anti-government protests.
FINANCE & ECONOMICS:
• Sterling up at $1.2923 and €1.1682. Oil up at $63.29. UK 10yr gilt yield up 1bp at 0.72%. World markets running higher.
• Brexit & politics:
o Battlegrounds established, Brexit & immigration vs NHS and an end to austerity. Mr Corbyn saying the NHS is not safe under Boris Johnson & the PM is reportedly set to offer £1bn of tax breaks to business.
START THE DAY WITH A SONG:
Our last song was I Fell in Love with a Girl by The White Stripes. Today, who sang:
“I heard your mother, now she’s going out the door
Did she go to work or just go to the store?
All those things she said, I told you to ignore
Oh, why can’t we talk again?”
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The news that the Board of Carpetright has agreed to a rescue deal from the poker-playing Meditor boss, Talal Shakerchi, was picked up by Guardian (which quoted our view that Meditor are clearly gambling that they can drive the loss-making rival Tapi out of business) and the Times (”Poker ace’s big bet on Carpetright”). Apart from the news that Capital & Counties has sold its struggling Earls Court development (to leave the property group focused on its core Covent Garden estate), the other big story in the Saturday papers was that the embattled Steinhoff have sold their struggling Benson Beds and Harvey’s furniture chains (aka the Blue Group) to the Alteri retail turnaround group (the Times headline was “Steinhoff puts deal to bed with sale of Blue Group”).
• Saturday’s Press and News (2): The Daily Mail’s “Hero of the Week” was Greggs boss Roger Whitesides, whilst the Daily Mail also featured Kingfisher in its “Popular Shares” column (ahead of next week’s Q3 update, noting that these will be the first results for new CEO Thierry Garnier) and flagged the £160,000 share incentive package given to DFS boss Tim Stacey in its “Director’s Deals” column. Elsewhere, on its News pages, the Daily Mail noted that many High Street retailers are already offering big Sale promotions (“The Black Friday Sales starting 2 weeks early”). The Times had a feature on how JD Sports’ domination of the trainer market has maddened Sports Direct (“The running sore in UK sports retail”) and the FT had a feature on the success of Games Workshop (“Warhammer enjoys spoils of victory after strategy turn”), highlighting that younger users are now taking up the hobby and
• Sunday’s Press and News: The Sunday papers were very thin in terms of Retail stories, but the Sunday Times came to the rescue, with the news that Sports Direct is now pushing landlords for turnover-rent deals and a couple of snippets: Next is opening “click and collect” pods on Retail parks and Kingfisher is expected to be downbeat about trading in its Q3 update. The Sunday Times also had a feature interview with the enthusiastic boss of the fast-expanding Lidl UK chain, Christian Hartnagel (“The man with an eye on every Lidl thing”), noting that he has an eye for detail. Elsewhere, on its News pages, the Sunday Times flagged that John Lewis has been accused of plagiarism, as its TV ad about Edgar, the excitable dragon, is very similar to a story about a dragon called Franklin in the “Franklin’s Flying Bookshop” kids book by Jen Campbell published two years ago. Finally, the
News Flow This Week: Tomorrow brings the AO.com interims and the Dunelm AGM. On Wednesday we get the Kingfisher Q3 update and then Thursday brings the Naked Wines interims and the Hotel Chocolat AGM.