Langton Capital – 2019-11-22 – PREMIUM – Governance, turnover rents, Xmas, Playtech etc.:
Governance, turnover rents, Xmas, Playtech etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I bought some milk for the office yesterday.
The sell-by date was 1 December and, though it shouldn’t have been because this year has been no shorter than any other, that was a bit of a shock because where did the year go?
And what did we achieve?
More importantly perhaps, what did the country achieve? I suppose we kept things broadly on the rails whilst we cycled through one Prime Minister and on to another, sailed through two (immovable, I really mean it this time) deadlines and pushed the sunny post-Brexit uplands further into the future and that’s an achievement of sorts, I suppose.
But still, the year could have a few surprises left in it yet. On to the news:
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TALKING SENSE: Company bosses often, of necessity, toe the company line. Optimism is more often than not mandatory but occasionally we get flashes of inspiration and some straight talking. 22 Nov 2019:
• Some companies are run along the same lines as major government departments whilst others retain an entrepreneurial feel.
• Neither approach is ‘better’ though it is sometimes more interesting to read the trading comments of the latter than it is the former.
Safe, middle of the road comments:
• Institutionalised companies, and there is certainly nothing intrinsically ‘wrong’ with them, will often say that the company has turned in good, strong or resilient figures.
• It will then add that the market is challenging or uncertain and will conclude by saying that the company they run is well-positioned for the future and is focused on shareholder value.
• They will rarely say that trading is either awful or brilliant.
• Comments from more entrepreneurial companies, think JDW, Sports Direct, Super Dry or even large companies such as Next or WPP (under Sorrell), tend to be rather different.
A few insights from those at the front line:
• Putting Mr Martin (JDW)’s comments on the Euro and Brexit to one side, his views on VAT, beer taxes, property taxes and other issues relating to property law, stifling compliance regulation etc are interesting and astute
• Mr Martin, in common with Messrs Ashley, Gormley (Naked Wines), Dunkerton (Super Dry) etc can say what he thinks.
• Yesterday’s AGM votes show that he, thanks to his own shareholding and those of his loyal supporters, is safe to air his views. This is often a feature with companies that ‘speak their minds’. The bosses either are – or they believe they are – bulletproof
Very recent comments – corporate governance – JD Wetherspoon:
• Rather than ‘go down the rabbit hole’ re contentious corporate comments, we’ll just talk about a handful. First JDW and corporate governance
• Tim Martin spent much of the company’s recent Q1 update lambasting the suffocating impact of corporate governance etc on a company’s operations
• He pointed out, quite rightly, that acres and acres of paper now goes into the production of annual reports, with much of what is written going unread
• He says that all the corporate governance in the world will not stop collapses and frauds such as Pat Val, where incompetence and/or dishonesty is involved – and that appears to be correct
• However, having covered companies in the 80s and early 90s, it does seem to us that there are fewer cases of accountancy or corporate malfeasance than there used to be (think Brent Walker, Resort Hotels, Polly Peck etc.)
• And saying that corporate governance doesn’t stop all fraud is akin to saying that the police don’t stop all crime. It doesn’t mean that we shouldn’t have any
• So, the issue may be one of scale. But this is a grey rather than a black & white area and it will attract fewer headlines
Running larger companies – Rowan Gormley:
• Naked Wines’s boss Rowan Gormley yesterday said that he was stepping down in order to make way for a new management team ‘to guide the Company through its next chapter of growth.’
• Mr Gormley says that he is a start-up guy and that a bigger company needs to be managed in a different way.
• This appears to us to be true. Some operators can bridge the gap (see JDW above) but this is rare.
• Mr Gormley says ‘now it is time to hand over to a new team. 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.’
• Bosses who hang on too long as their companies change risk turning strengths into weaknesses.
• It may be different in a stable business but, in one that moves from a start-up to a large company, the line between single-mindedness and bloody-mindedness becomes very grey
Turnover rents – Mike Ashley:
• Retail tycoon Mike Ashley (Sports Direct) has said that new rent deals should be tied to sales across high street shops
• He has previously said that landlords are ‘greedy’ but, whilst there will doubtless be greedy landlords out there, that is a little simplistic
• Overall, this is a huge issue
• The economy, at any moment, is at ‘an’ equilibrium. There are many more than one equilibria but, moving from one to another will involve upheaval
• Look at the potential (though long odds) move from a Conservative / New Labour type business model to a Jeremy Corbyn model
• For a long time, property has demanded rents at the lowest risk to the property owner possible
• This is what it is. It means trading risk is passed (as much as possible) to the operator and landlords have borrowed from their banks accordingly
• Changing this would involve costs and, intuitively attractive as it seems, if landlords took more risk, then rents would probably have to rise
• Nonetheless, it would evolve the current model from an adversarial one to a more collegiate one, where it was in all parties’ interests that revenues rose
• Models along these lines do exist (at airports, for example) but they are not in the majority
• Still it’s in all our interests that this should work because, as we have commented before, detritus rolls downhill.
• Operators will default on their rents, landlords default re their banks, banks will go to the government and the government will go to the taxpayer – that’s you and me
PUBS & RESTAURANTS:
• CGA reports that around 62% of people visit the on-trade to eat or drink out over Christmas ‘with half going out more than they would at other times of the year.’
• Only half, you may say but, as the CGA goes on to say, because last year’s weather was benign and Christmas fell midweek (re the latter at least, it will again this year), there are some pretty tough comps to beat.
• In 2018, it’s worth remembering, ‘the on-trade saw impressive sales growth over the festive period’ with sales of food up 4.3%, and drink sales rising 4.7%, according to the annual CGA Christmas Report 2018.
• CGA said last year the weather was ‘mild and ice-free.’ It says ‘with Christmas Day and Boxing Day again falling mid-week this year, we should see consumers tempted out – although that does depend on the weather and sentiment following the General Election. A festive sales boost will be a welcome relief to restaurant, pub and bar operators who have experienced a difficult trading year.’
• CGA says ‘some 66 million visits are made to the on-trade in GB over Christmas with 43% of consumers spending more on drinking out than they normally do and 45% spending more on eating out.’
• JD Wetherspoon’s shareholders have approved the company’s Report & Accounts despite regulatory advisor PIRC telling them to vote against. Chairman Tim Martin told shareholders he has been 40 years in the role next month and was ‘hoping to do another 40’.
• The Chief Executive of the BBPA, Emma McClarkin has commented on the Labour Party’s manifesto: ‘The Labour Party has rightly noted in its manifesto that too many pubs are closing. When it comes to community pubs, what is needed is investment and support. It is important that measures to bolster the rights of individual communities to purchase pubs do not act as a disincentive to invest in or operate a pub business’.
• The chief executive of SIBA, James Calder also commented on the Labour Party manifesto: ‘Any targeted support for the alcohol sector needs to consider the UK’s national drink, beer, and the people who make and serve it. All parties need to commit to fair and positive review of small breweries relief and at least a freeze in all excise duty for the next Parliament’.
• Hawthorn Leisure, the pub operating branch of NewRiver REIT, has seen a 5.5% increase in LfL income per pub in its latest H1 results.
• Drinkaware has relaunched its night-time economy safety scheme with a new name, Nightlife Crew. The scheme offers five different training regimes to extend the campaign into a wider range of environments.
• Itsu and dessert dining brand Heavenly Desserts has signed leases for new restaurants at International Quarter London.
• The masterchef finalist, Chef Dean Banks has launched a new premium Scottish Gin, Lunin Gin.
• The closures of three Peruvian Ceviche restaurants in a pre-pack administration deal have seen sixty staff lose their jobs.
• PayPal has announced the acquisition of Honey Science Corporation for $4bn, mostly in cash. The acquisition, which is PayPal’s largest to date, will give the payments giant a foothold earlier in the customer’s shopping journey.
• Müller scraps plastic straws, pledging to offer fresh school milk with paper straws instead.
HOLIDAYS & LEISURE TRAVEL:
• Abta urges political parties to recognise the importance of travel and tourism, which it says contributed £146bn to the economy in 2018. The association highlights that the outbound and inbound sectors support more than three million jobs and has said cutting carbon emissions, reviewing airline insolvency and guaranteeing overseas workers’ rights must be a priority for the UK’s next government.
• DART shares finished trade up 4.6% yesterday on the back of the company’s report that estimates for the current year needed to be materially upgraded.
• The US hotel industry saw occupancy fall by 3.6% in the week to 16 November reports STR. It says daily rate was down by 0.6% with REVPAR some 4.2% lower.
• Hays Travel, which bought Thomas Cook’s retail stores after the tour operator collapsed, has announced plans to hire an extra 1,500 staff.
• Rail commuters are to face 27 days for strikes from 2 December on lines running into London Waterloo after talks with the RMT broke down. The RMT says ‘no proposals that would enable the development of a resolution to the dispute have been put forward by SWR.’
• A Spanish court has deemed Ryanair’s policy of charging a fee for hand luggage as ‘excessive’ after a passenger was forced to pay an additional €20 fee to carry her 10kg luggage on board. The budget airline said it would not change its baggage policy.
• IHG has rebranded an Oxford city centre property into an upscale ‘voco’, making it the UK’s fourth voco hotel. The hotel features 181 rooms and is located alongside the River Thames and on University College Oxford grounds.
• Profit warning from Playtech.
• Playtech has updated on trading saying that ‘following a positive start to the second half, trading conditions in TradeTech have been highly challenging during September and October. Overall, Adjusted EBITDA for FY 2019 is now expected to be a little below current consensus.’
• World Chess has announced that it will have a ‘hybrid initial public offering’ where it will raise funds by issuing digital tokens to would-be investors. The body intends to float on AIM next year.
FINANCE & ECONOMICS:
• Government borrowing last month was up to £11.2bn, the highest October figure for five years. Spreadsheet Phil’s rainy-day fund is being spent.
• Year to date borrowing for the financial year is up 10% on last year. Reuters says ‘Britain ran a much bigger than expected budget deficit last month, showing government borrowing on the rise even before politicians have a chance to implement costly election spending pledges.’ The likes of Moody’s and S&P will be looking at this sort of stuff with interest.
• The OECD says risks to global growth have increased.
• World markets: Sterling unchanged at $1.292 and €1.1672. Oil up at $52.51. UK 10yr gilt yield up 2bps at 0.75%. World equity markets down yesterday but Far East higher in Friday trade.
• Brexit, politics etc.:
o Labour manifesto out. More spending promises (these at least with tax and borrowing increases costed in).
o Google will no longer allow political advertisers to target voters based on their political affiliation it says. Twitter has said something similar.
o Radical Labour Party manifesto both praised for its boldness and attacked as perhaps inoperable depending upon which newspaper you read.
o The Tories have raised 26x more money for this General Election than the other two national parties combined.
START THE DAY WITH A SONG:
Yesterday’s song was Careless Whisper by George Michael. Today, who sang:
“If I could have it back
All the time that we wasted
I’d only waste it again
If I could have it back”
RETAIL WITH NICK BUBB:
• Land Secs: The property company Land Secs (which owns the White Rose Leeds shopping centre and jointly owns Bluewater, Westgate Oxford and St David’s Cardiff, inter alia) announced back in July that its long-serving Chief Executive Robert Noel wanted to retire next year, so it was expected that Land Secs would soon be announcing the result of the hunt for his successor and…today’s news is that it is an outsider, Mark Allan, the boss of the St Modwen property company (which has a market cap of about £1bn).
• BDO High Street Sales Tracker: We noted on Wednesday that the John Lewis sales figures for last week were quite weak, on the back of tough comps in Electricals, but today’s BDO High Street Sales Tracker for medium-sized Non-Food chains (which has been reporting surprisingly good progress in recent months, possibly through sampling issues or the over-weighting of Online sales) is surprisingly good…In w/e Sunday Nov 17th, BDO Fashion sales were up by as much as 10.7% LFL (albeit against a soft comp). And Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were up by 8.7% last week (up by 3.9% in Store sales and up by 24.1% in Online sales).
• Trade Press (1): The front cover of Retail Week magazine today is a rather striking photo of a robotic hand holding up an apple, to flag up the main feature on “The future of food” (“Vertically farmed and ﬂexitarian – the trends determining how we’ll eat in the next decade”). Retail Week also have features on “Morrisons on the move” (a look inside Morrison’s new food-to-go store in Canning Town), “Ready for Takeoff?” (a look at the US tech start-up Takeoff, which is vying for Ocado’s Online Grocery crown) and “Growing pains” (a look at whether it is time for retailers to focus on getting better, not bigger). Finally, the Editor looks in his column at the new Marks & Spencer Christmas TV ad, noting that it “feels energetic and contemporary” and thunders that “M&S should be more like its Christmas jumper ad”.
• Trade Press (2): In Drapers magazine today and the Editor looks in her column at the recent party political announcements about reviewing Business Rates and thunders that “Business rates need a radical rethink”. The main focus, however, is on the glittering Drapers Awards 2019 ceremony held last night at the new Exhibition London venue next to Westfield London at Shepherd’s Bush: Primark swept the board, picking up the prizes for Best Fashion Marketing Campaign, Best Store Design and Fashion Retail Business of the Year in its category. The prestigious Fashion Leader of the Year Award went to Peter Cowgill of JD Sports and Dame Margaret Barbour was recognised with the Lifetime Achievement Award. In terms of News stories, Drapers highlight that John Lewis re-launched its Southampton store as an “experience playground” this week and John Lewis will also be pleased to see that it came top
• News Flow Next Week: There is again enough going on in the Retail sector next week to distract us from all the General Election campaigning…kicking off on Tuesday with the Pets at Home interims and the Topps Tiles finals. Wednesday brings the ASOS AGM and the ScS AGM (although no trading updates are expected). On Thursday we get the Motorpoint interims and then Friday brings us the GFK Consumer Confidence survey for November, the McColl’s pre-close and…the annual discount jamboree that is BLACK FRIDAY.