Langton Capital – 2019-11-21 – PREMIUM – Dart Group, W Hill, Naked Wines, M&B, discounts etc.:
Dart Group, W Hill, Naked Wines, M&B, discounts etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
It may be the Yorkshire upbringing but it really pains me to throw food out and thankfully, as we have a dog, a few composters and we used to have chickens and ducks, it’s something that rarely happens.
And if you take ‘sell-by’ dates as a rough guide, it happens even less so it does confuse and upset me to hear that restaurants regularly chuck out uncooked food simply because they haven’t been able to sell it, it’s getting a bit dated, and its taking up shelf space.
Of course, ‘chuck out’ might mean ‘give away’, in which case there’s little harm done other than to the restaurants’ bottom line but surely (naïve comment alert) something could be done to prevent this from happening?
Meanwhile, in the real world, restaurants are no doubt working hard to judge their customers’ wants and needs and to balance ‘fresh ingredients’ with the need to sell them in a timely fashion. I suppose nobody said it would be easy. On to the news:
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MITCHELLS & BUTLERS FULL YEAR NUMBERS: Following the release of its full year numbers for the 52wks to 28 September this morning, M&B hosted a meeting for analysts and our comments are set out below. 21 Nov 2019:
• M&B stressed that growth was broadly spread across food vs drink and across the group’s various brands
• Volumes are in marginal decline, but the trend is much better than had previously been reported
• Drink volumes were down 1% in FY19 (down 2% in FY18) and food volumes were level vs down 5% in FY18.
• M&B says that its uninvested units were also in growth
• Recent LfLs are slower, largely due to the poor weather. Christmas, as always, will be key. Early bookings (not very meaningful at this stage) are reported to be encouraging.
• M&B was up 1.4% in the last 7wks. The Coffer Peach Tracker puts the industry as a whole down 0.6% in October
• Cost headwinds were around £64m in FY19. They will be broadly similar in the year just started
• An immediate £10 NLW would necessitate some labour shedding. M&B made three points. 1) it could labour schedule and job-cut, 2) some of the money going into wage packets would come back through its own tills and 3) more competitors would go bust
• Dividend comments – see debt & balance sheet below.
• The group has now ‘turned in three half years of profit growth.’ It would clearly like to continue this. Ignite III begins in May next year. Further efficiencies will be sought.
• Early days, but the first Miller & Carter in Germany is having £30k weeks.
• Some ‘underperforming sites’ (around 50-60) are in special measures. These smaller sites (£12k to £13k per week) are responding to treatment. There is no real indication that these sights might be for sale.
• Delivery is progressing. Some 270 sites are with Deliveroo or Just Eat. Delivery growth is not the major reason that food volume decline has fallen from 5% to 0%. There may be some cannibalisation, but this is very hard to measure.
• Trading observation. It is better to cannibalise your own site than have somebody else do it. If the customer demands delivery, best provide it.
Balance Sheet, Debt etc.:
• The returns of most recent capex are sharply higher. M&B says it is getting some 34% back annually on its recent spend. The refurbishment and realignment process is only half way through.
• Re the resumption of dividend payments:
• Cash flow is good, and debt is down. This does not, immediately, make funds available as the amortisation of debt continues (alongside pension payments). A real-world feature of cash flow is that repayments of debt are unavoidable.
• Pension payments could cease in 2023 and some bonds fall away after 2030.
• Bolt on deals are possible. The group will be ‘opportunistic’. It says that most companies becoming available are in distress. In line with Langton comments two days ago, M&B does not believe that failed concepts will find it easy to turn themselves around.
• The group will open 7-10 new sites per annum. It does not plan closures or sales.
The Wider Market:
• Election, Brexit & consumer confidence uncertainty continues. These are industry issues & M&B continues to outperform its peer group
• M&B reckons restaurant numbers are down 3.4% from their peak. Bars & restaurants together are down 2.4%. Restaurant Group mentioned down 1% – but that was several months ago and CVAs have continued apace
• M&B believes that, in many cases, CVAs are simply a ‘stay of execution’
• M&B is justifiably pleased with its performance. It is determined not to be complacent, however, and Ignite II will morph into Ignite III in May next year.
• The group has recently outperformed the market and, if it continues to earn 30% returns on capex, this is set to continue.
• With around half of the estate yet to be refurbished, some growth here is relatively (as much as anything ever can be) assured.
• The rise in margin is particularly noteworthy and it is not surprising that the group’s shares have responded positively to today’s news.
• As mentioned this morning, the group has a large estate and all changes will take time to come through. Competitors will not stand still. Smaller operators will be more nimble but other, larger players, are facing much the same challenges as M&B.
• The group’s shares have risen strongly in the last six months but they are not optically expensive.
• MAB is strongly asset-backed and, though its share register and its dividend policy arguably require a bit of work the group is pulling what levers it can and it is performing well.
PUBS & RESTAURANTS:
• Mitchells & Butlers, some key takeaways.
• M&B says it is about half-way through its major, all-estate refurbishment programme. It thinks it has reached a ‘tipping point’ and returns of recent expenditure has been up to 34%.
• Re the industry in general, M&B says that the number of restaurants in the UK has fallen by 3.4% over the last 12mths.
• It says consumer confidence is ‘fragile’ but, despite this, ‘people ultimately still want to go out and treat themselves to social occasions.’
• Re critical trends, M&B identifies 1) the quest for quality, 2) busier trade across non-peak dayparts, 3) delivery (this ‘isn’t going away’) and 4) the company says that ‘the UK political and economic environment remains uncertain.’
• M&B says ‘the impact of Brexit remains unclear.’ It says ‘from an employment perspective, at a time when unemployment levels are at a 40-year low, any restriction on the free movement of labour would be expected to have a material impact on both the cost of labour and access to talent.’ The group says ‘we remain close to these issues and have contingency plans in place whilst we await further details.’ In such an uncertain environment, it can do little more.
• Prosus, which is challenging Takeaway.com’s bid for Just Eat, has said that the bid by Takeaway.com has ‘significant risks’ in that it has underestimated how competitive the British market is. Prosus says the rival bid ‘takes a narrow view of the food delivery sector based principally on its experience in the Netherlands and Germany.’ It says these markets ‘have so far been relatively insulated’ from competition. Takeaway.com has responded by saying that ‘being an operator is clearly different from being a financial investor.’
• Mitchells & Butlers joins the discounting fray. Two of the group’s brands, Harvester and Toby Inns, are offering 25% off mains. Elsewhere, Prezzo is offering 25% off Prosecco and 40% off main meals.
• Made of Dough has opened its first Roma pizza outlet on Brick Lane. The venue offers pizzas for £5. Made of Dough will offer authentic fare at EDL prices. You need to sell a lot of pizzas at five quid to make a mint but, at the other end of the spectrum, established operators that have undergone (or may undergo) CVAs have found that lazily offering me-too product at high prices does not work. The evidence of our own eyes suggests that companies get found out. They then need to discount to get customers through the door – and even then, they seem to be reluctant to come back.
• Time Out Group has reported that its Chicago market will open today ‘bringing the best of the city under one roof, based on the editorial curation Time Out has always been known for.’ The group says that the three-storey market has a line-up ‘of 18 of the city’s best chefs and restaurateurs.’
• BBPA CEO Emma McClarkin has commented on the Liberal Democrat manifesto, saying ‘With three pubs a day closing their doors for good, cutting or freezing beer duty as part of a review of UK alcohol taxation is essential…The current business rates system is hugely unfair on pubs – they pay 2.8% of the business rates bill, despite accounting for just 0.5% of turnover.’
• Jil McDonald has been appointed as CEO of Costa Coffee, replacing Dominic Paul at the end of the month. McDonald was the former clothing boss at Marks & Spencer.
• The Lib Dems believe legalising cannabis would help ‘break the grip’ of the criminal gangs that profit from the lucrative trade in illegal drugs. Legalisation has been backed by a number of high-profile politicians and police figures.
• E&J Gallo has acquired Napa Valley’s Pahlmeyer Winery, boosting its premium portfolio which includes Orin Swift, J Vineyards and Talbott.
• Naked Wines has reported H1 numbers saying trading is ‘broadly on track.’ CEO Rowan Gormley, who is to leave the group shortly, says ‘we have built a solid foundation for growth. Naked Wines is now a pure-play online retailer, with a huge opportunity in the US wine market, and the resources to capitalise on that opportunity.’
• Electric Group, which specialises in music venues, is reported to have retained property advisor Christie & Co in a search for properties in the Edinburgh and Glasgow areas.
• City AM follows up on stories that Tossed owner Zest is asking landlords for rent cuts of up to 100% in order to stay in business. M&B said yesterday that it believes the number of restaurants in the UK has fallen by 3.4% in the last year.
• Moody’s reports that Alibaba Group Holding’s secondary offering of stock on the Hong Kong Stock Exchange is credit positive.
• Fevertree shares rose by around 8% yesterday despite the group warning on revenues in the UK. The shares, now around £20, had virtually halved since their highs in May this year.
• The Riverwalk food hall concept is set to open in Durham tomorrow, and will feature seven food and drink operators.
• The Food and Drink Federation has called upon the next government to champion the food and drink sector. It calls for the closest possible UK-EU trade and regulatory relationship alongside help to tackle obesity and other dietary concerns.
• The FDF’s CEO Ian Wright says ‘we know the next Government – of whatever political hue – will want to tackle the issues of productivity, obesity and plastic packaging. To do that successfully, it will need to work effectively with the industry and the FDF.’
• A vegan Burger King customer in the US is suing the company for cooking its plant-based patties on the same grills it uses for meat. The meat-free supplier, Impossible Foods, told Reuters that vegans ‘are welcome to ask’ for their food to be cooked in a microwave.
• Danielle Bekker, co-founder of Good Living Brewing has commented that the beer sector needs to look beyond its traditional offerings, as the brewery seeks to appeal to wine fans. Danielle explained: ‘Pubs and brewers need to embrace the idea that beer can be very different. It doesn’t have to be what we think of as beer today. It could look and taste very different’.
• Whitbread has announced plans to improve its kitchen performance by tapping into new technology that will allow chefs to work in a more structured way.
• Kirin-owned Lion Little World Beverages has announced its intentions to purchase 100% of the US based New Belgium Brewing company.
• Deliveroo has declared it will be targeting more corporate customers by unveiling a new package of catering services under its Deliveroo for Business banner.
• PubAid has celebrated its 10th anniversary, with the scheme having raised an estimated £1bn for charity at pubs.
• Popeyes aims to take on KFC and become the number 1 chicken brand in China. The company signed a lease in Shanghai for its first store in China on Monday, which is slated to open next year, with plans to build 1,500 restaurants in the country in the coming decade. KFC currently has some 6,300 stores in China.
HOLIDAYS & LEISURE TRAVEL:
• Sharp upgrades expected at DART.
• DART Group has reported H1 numbers saying that revenues grew by 16% to £2.6bn with operating profits up by 3% at £365m and PBT up 2% at £339.7m. EPS is 187p (up 2%) and the interim dividend is up by 7% at 3.0p.
• DART says ‘the modest increase in overall Group profitability reflected a later customer booking pattern in our Leisure Travel business, with customer demand strengthening throughout the summer season.’ It says (as usual) that ‘losses are still to be expected in the second half, as we continue to invest in readiness for further flying programme expansion at several of our UK operating bases in the summer 2020 season.’
• DART chairman Philip Meeson reports ‘despite customer booking trends being later than in previous years, overall passenger volumes for Summer 2019 have been pleasing.’ He says ‘Leisure Travel revenue grew by 17% to £2,528.8m (2018: £2,158.2m)’ but the operating margin fell to 14% from 16% in the prior year.
• Regarding the outlook, DART says ‘with Leisure Travel bookings continuing to strengthen and notwithstanding the important post-Christmas booking period that is still to come, the Board now expects current market expectations for Group profit before FX revaluation and taxation for the year ending 31 March 2020 to be significantly exceeded.’
• The group goes on to say ‘looking further ahead, whether the currently encouraging consumer demand for our products remains buoyant in the medium term is unclear as we believe that much will depend on the UK Government securing a pragmatic and balanced Brexit agreement with the EU.’ It says ‘a range of cost pressures’ remain a feature.
• More capacity coming into the holiday market.
• EasyJet Holidays, which is due to relaunch before Christmas, is now targeting more than one million passengers in its first year of operation. The ‘gap’ in the market left by the demise of Thomas Cook Group may not be there for long.
• Many behavioural scientists have suggested, you can’t observe or comment on something without altering the future – and the same certainly applies to the holiday market when ‘addressing a gap’ often means that there is actually no gap at all.
• Travel Weekly says EasyJet ‘is one of a number of operators to increase capacity in the wake of the Thomas Cook collapse.’ It says ‘TUI grew summer capacity by two million seats, while Jet2.com added hundreds of thousands of seats for this winter and next summer.’ In an industry with relatively few barriers to entry, there could be plenty of capacity come next summer.
• Macdonald Hotels has sold Rusacks hotel in St Andrews and the leasehold interest of the Randolph hotel in Oxford to Chicago-based AJ Capital Partners for an undisclosed sum.
• Trump hotels’ average room rate has fallen 16% since January 2017, equivalent to an average price drop of £661, according to research by money management firm Equals.
• The Lib Dem manifesto would see frequent flyers pay more APD, outlining plans for a £5bn rise in the air tax levy against the £3.7bn a year raised now. The Lib Dems claim infrequent air travellers, such as families taking annual holidays abroad, will save money.
• William Hill PLC has updated on trading, saying that it is in line with expectations. The group says ‘in the US our business has gone from strength to strength’ and adds ‘we have remodelled the UK retail estate, while the UK Online business has benefited from a series of customer facing improvements evidenced in the stabilising market share in the last two quarters.’
• Britain’s live music sector reached a value of £1.1bn last year, driving the music industry’s overall contribution to the UK economy to £5.2bn in 2018. Total concert attendance remained level at 24.9m while festival-going soared, up 23% YoY to 4.9m people.
• A report by the Entertainment Retailers Association has found music fans aren’t getting enough choice despite the prominence of brands such as Spotify, Apple and Amazon Music. The report identified several new avenues, including premium subscriptions that offer access to exclusive content and merchandise; and expanding popular family and student plans to other demographics.
FINANCE & ECONOMICS:
• Sterling higher at $1.2928 and €1.1671. Oil up at $62.18 and UK 10yr gilt yield unchanged at 0.73%. World markets down yesterday and Far East lower in Thursday trade.
• Brexit & politics:
o Mud slinging with one hand & giving away taxpayers’ money with the other. Both sides are at it.
o Manifesto says Lib Dems would legalise cannabis & tax frequent fliers more heavily.
o Labour manifesto due out today. Tory manifesto not out for a couple of weeks.
START THE DAY WITH A SONG:
Yesterday’s song was Go With the Flow by Queens of the Stone Age. Today, who sang:
To the heart and mind
Ignorance is kind
There’s no comfort in the truth
Pain is all you’ll find
RETAIL WITH NICK BUBB:
Naked Wines: Today’s Naked Wines interims are overshadowed by the shock news that the well-regarded CEO Rowan Gormley is to step down after Christmas. Investors disappointed that this is happening so soon after the recent restructuring and the sale of Majestic Wine will be reassured, however, that the new CEO is going to be Nick Devlin, the COO and the architect of the success of Naked in the US (which saw 17% underlying sales growth in the 6 months to Sept 30th). Rowan says “It takes one set of skills to take a business from zero to £200m of revenues, and it takes a different set of skills to build it from there. I am a start-up guy, and Nick is the perfect leader for the next chapter of growth…Naked has an exciting future ahead and I intend to remain a significant shareholder in Naked, and remain available to the company if ever needed. I also intend to remain a material
News Flow This Week: The Hotel Chocolat AGM is being held at 10.30am today at their HQ in Royston (which is halfway between Stevenage and Cambridge), but no update is expected.