Langton Capital – 2019-11-25 – PREMIUM – Wagamama, Just Eat, MARS, JDW, costs etc.:
Wagamama, Just Eat, MARS, JDW, costs etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
The line between conditioned responses and intelligence is a blurred one.
With people, it raises a lot of moral and ethical issues but, with our dog, it’s just plain amusing as he’s full of the former and pretty lacking when it comes to the latter.
Indeed, I’m tempted to conclude that he’s just a mass of impulses because, even when he sees me carrying a plate that is plainly empty, he’ll follow me around on the off-chance that food will appear from thin air just because it has been spotted on plates at some time in the past.
Furthermore, very much into voluntarism. That’s the belief that desire can change facts and, as he’s associated hopping from foot to foot and whining piteously with food, that he’ll put on his best show for an empty plate and keep it going for some time even when everything that could be vaguely interesting has long since been consigned to the dishwasher.
Anyway, at least his voluntarism is in tune with modern thinking which holds that we don’t need experts and that wanting something enough is bound to make it happen. On to the news:
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INCREASING COSTS: Operators have been describing their various cost headwinds for some time. They are united in their belief that these headwinds will persist for some time. 25 Nov 2019:
• Inflation is more common (and some would say less undesirable) than deflation and, for that reason, rising costs are not a new phenomenon.
• However, operators have been drawing observers’ attention to the accelerated growth of costs for some time.
How did we get here?
• It is natural that, in an upcycle, operators may put on costs and indeed bid up in terms of rents, pay staff more, etc.
• But government is also tempted to increase costs to business at a time when the latter is perceived to be ‘able to afford it’
• Hence costs for disabled access, bike racks, sugar levies, energy levies etc. are more common in the good years than the bad – but they are rarely scrapped when the going gets tougher
• But the big costs have been the Apprenticeship Levy, mandatory pensions, business rates increases and, above all, increases in the National Minimum Wage and the National Living Wage
• These tend to be on a ratchet such that they never go down
• Other irritants will include increase planning costs, green levies, focusing on the treatment of tips etc
• Add in a weaker Sterling (though it has recovered a little recently, and food and drink costs should also rise
Putting the above into context:
• Operators may like the odd moan. And there is a lack of symmetry in that they may like to imply that lower costs (when or if costs ever fall) is down to their operational genius but costs have become more of an issue in recent years
• Partly because it has become more difficult, if not impossible, to pass these on, and partly because there are simply more of them
So where are we now?
• F&B costs may have stabilised, but they did arguably take a step up in the period post the Brexit Referendum in 2016. On the face of the P&L, they account for between 25% and 30% of sales.
• Labour costs were reported to have risen by 10% ‘because of Brexit’. This may have been true in some areas where access to European labour dried up but the NMW and the NLW have been a bigger influence for many
• This has become a political football with operators picking up the bill. Various promises (£9.50 per hour or £10.00) are being made. Labour accounts for between 25% and 30% of sales.
• Property costs (perhaps 15% to 20% of sales) have also risen. Business rates took a lurch upwards for many and rents, because of the nature of property leases, cannot go down
There is nowhere to hide & this is bad enough in an upswing
• Whilst it may be possible to cope with the above in an upswing, when trading gets tougher (due to either a slacker economy or overbuilding), then some operators will fail
• We would expect to see operators 1) mitigate cost increases via efficiencies and 2) pass some costs on via price increases
• But 1) may be finite and, in a downturn, number 2 may not be possible.
• We would then expect to see discounting & the attempt to beggar thy neighbour
• Overall, we have seen some of the ‘better’ and the freehold based operators go for Plan A above, whilst Plan B is common across High St diners – Prezzo, Pizza Express, CDG brands etc.
• Whilst a rising tide would float all boats, this has to be hoped for as Plan C involves CVAs and, ultimately, administration and failure.
PUBS & RESTAURANTS:
• Restaurant Group has released its 22wk report to Wagamama bondholders covering the period to 29 September. The numbers cover Wagamama only. Wagamama says that turnover rose 11.0% to £93.5m ‘with the continued expansion of our restaurants in the UK (6 new restaurants and 1 delivery kitchen opening in the quarter).’
• Wagamama reported 6.3% UK like for like sales growth in the period and 12.5% US like for like sales growth.’
• Wagamama 22wk adjusted EBITDA is up 27.2% in Q2 2019 to £16.7 million from £13.2 million in Q2 2018/19 (13 weeks). The adjusted EBITDA margin is up sharply at 18.1% in Q2 2019 compared to 15.7% in Q2 2018/19.
• Wagamama says that it outperformed the UK market in its financial Q2 2019 and ‘traded ahead of the competition consistently for over 5 years (287 weeks).’ Emma Woods, CEO, comments ‘great businesses are built from dedicated people, a commitment to always be on the side of their customers and a galvanising sense of purpose. wagamama has always followed this model, and I am thrilled to say has delivered another quarter of strong outperformance versus the market with a number of record restaurant sales weeks.’
• Wagamama concludes ‘we look forward to 2020, and whilst we don’t expect to be immune to the various headwinds facing our industry, we will stay true to our positive culture and growth mindset.’
• The Board of Just Eat has responded to the ‘unsolicited cash offer’ to acquire the company for 710p per share from Prosus saying ‘the Board continues to believe that the Prosus Offer significantly undervalues Just Eat both on a standalone basis and as part of the proposed recommended all-share combination with Takeaway.com.’
• Just Eat ‘the Prosus Offer of 710 pence per share is 20% lower than Just Eat’s all-time high share price of 890 pence and 13% lower than the highest share price over the last six months of 812 pence. Furthermore, the premium that Prosus is offering to Just Eat’s share price before the announcement of the Takeaway.com Combination is just 12%. By comparison, cash offers for FTSE 350 UK public companies since 2016 have on average been at a significantly higher premium.’
• The board continues to recommend accepting the proposed bid from Takeaway.com as it says the ‘combination is based on a compelling strategic rationale that allows you to participate in the upside potential of the enlarged group.’ It concludes ‘the Takeaway.com Combination enhances your business and provides you with the opportunity to remain invested through a premium listing in London with FTSE UK index inclusion and benefit from significant future upside. Your Board believes that the Takeaway.com Combination provides Just Eat shareholders with greater value creation than the Prosus Offer of 710 pence per share and that the Prosus Offer significantly undervalues Just Eat on a standalone basis.’
• Marston’s has reported that its announced disposal of 137 pubs to Admiral Taverns for £44.9m has completed.
• A JD Wetherspoon pub in Wanstead has been told that it may only operate two gambling machines after failing to stop children from accessing them in test operations mounted by local police cadets. Wanstead council says ‘businesses with permits to operate betting machines have a legal obligation to protect children and other vulnerable people from being harmed or exploited by gambling.’
• Two strong kebab chain Bababoom has passed its £400k target on Seedrs and is now overfunding. The group has thus far raised £400,031 off a pre-new money valuation of £3m. The company, which is led by former Nando’s executive Eve Bugler, reports that it has served over 170,000 kebabs to date and has built two profitable restaurants with ‘happy and motivated teams’.
• Social Entertainment Ventures (SEV), which owns Bounce, Flight Club and Puttshack, has raised $20m from US investors to drive expansion of its brands across America. A second Flight Club will open in Boston next month.
• City AM reports that SEV will also launch a new bingo-focussed venue Hijingo, ‘which is due to open in London in spring next year and the expansion of ping pong bar Bounce beyond London and Chicago.’
• SEV CEO Toby Harris says ‘this raise enables use to kick start a roll out of our existing brands in both the UK and US, our two key markets, and bring further new concepts to life following the successful launch of Puttshack.’ Mr Harris adds ‘innovation remains at the heart of our business as we seek to build a platform of industry leading brands which can travel.’
• SEV’s founder Adam Breeden comments ‘I’m delighted that SEV is now in a position to roll out at pace across its brands internationally. I’m also very excited to be able to focus much more of my time on developing new concepts knowing that the business has the financial backing and a first class management team in place to scale the business.’
• UK Hospitality has said re the Tory Party manifesto that ‘employment costs, property taxes and skills are key challenges for hospitality if it is to add yet more economic value and employment to the UK.’ It says ‘a fundamental review of business rates is long overdue. A commitment to cut the rates bills is certainly welcome and it is heartening to see pubs and music venues referenced in the context of reliefs – we wait with interest to hear further detail.’
• Changes in NIC, a little less than £100 in the pocket of most taxpayers from year one, should also help to bolster demand.
• UKH says ‘these are all steps in the right direction but there is much more still to be done to empower hospitality yet further as an economic driver of prosperity, jobs and growth.’
• Deals Cove reports Whitbread brand Table Table as offering 40% off mains on presentation of a voucher.
• Wear Inns has reported numbers to 30 March 2019 to Companies House showing that revenue was unchanged at £13.6m and that losses before tax were reduced slightly from £82k last year to £59k this. Accumulated profits dropped slightly to a little under £3m.
• M&B is reported to have saved 500 pieces of kitchen equipment from being consigned to landfill by refurbishing them to use in new projects. Food Service Equipment Journal says the chain has ‘given greater consideration to the environmental impact of its investment programme’ recently.
• The French government has said that it will not officially support a move to promote ‘dry January’. Wine growers and on-trade operators had expressed concern over the move that would have seen France emulate the UK in dissuading alcohol consumption post Christmas.
• CGE reports that ‘between 2019 and 2022, the UK Eating Out market is expected to grow by £5.5bn over the next three years.’
• Fullers has reported that the Half Moon in Herne Hill has won its annual Pub of the Year competition.
• An Ed Sheeran-owned pub has been given a food hygiene score of only two.
• Black Friday at the end of this week. Many retailers offering deals for most of the week.
HOLIDAYS & LEISURE TRAVEL:
• EasyHotel has reported that Guy Parsons is to step down from his role as CEO in the wake of a takeover by major shareholder ICAMAP. Mr Parsons has headed up the company since 2015. Scott Christie, who is currently Non-executive Interim Chairman, will ‘from today become Interim Chief Executive Officer until such time as a new Chief Executive is appointed’ says the company.
• EZH reports that Charles Perello, a director at ICAMAP, will join the board with immediate effect. New non-executive Chairman Harm Meijer says ‘on behalf of the board and all of the company’s stakeholders I would like to thank Guy for his significant contribution and the key role he has played building the brand, the hotel portfolio and guests’ experience. Guy leaves the company with our best wishes and I personally wish him every success for the future.’
• Reuters reports that Airbnb’s non-US and China businesses made a net profit of $46.47 million last year versus a loss of $97.22 million the previous year. Airbnb’s revenue for 2017 (2018 is not yet reported) was $2.5bn. The group made an operating loss of $306m in Q1 this year on the back of increased marketing spend.
• Elegant Hotels’ shareholders have approved the takeover of their company by hotel giant Marriott
• The World Travel and Tourism Council has revealed a 358% increase in medical tourism around the globe. It says that spending on medical tourism products and services increased from $2.4 billion to $11 billion between 2000 and 2017.
• Uber is still waiting to hear whether it will retain its taxi licence in London, one of its most important markets. The license is due to expire this week. Uber was given a 2mth extension by Transport for London in September.
• Sky News reports that TfL is ‘contemplating the “nuclear option” of denying a permit for Uber to operate in the capital for the second time in little more than two years.’ Betting is still that Uber will secure another extension.
• Global gaming brand Razer is to open a flagship store in London on December 14. The company says ‘the popularity and success of the RazerStores is something we’ve wanted to bring to Europe for a long time.’
FINANCE & ECONOMICS:
• A YouGov poll quoted in The Telegraph suggests that 45% of Leavers and 28% of Remainers are ‘sick of experts.’
• Sir Vince Cable has said that the UK economy post-Brexit is likely to suffer the equivalent of a “slow puncture” rather than a “blow out”. He says that a recession is on the cards.
• Sterling lower at $1.2852 and €1.1651. Oil up a little at $63.65. UK 10yr gilt yield down 4bps at 0.71%. World markets mostly better on Friday and Far East higher in Monday trade.
• Politics & Brexit:
o Tussle still between a mendacious, unprincipled liar and a halfwit with some deeply unpleasant friends. Learnings? Business has to make the best of it but perhaps one should never have proffered the wheel to an idiot etc.
o Tories between 11% and 19% ahead of Labour. Jeremy Corbyn says he would remain neutral in a second Brexit vote. Tories promise to ‘get Brexit done & unleash a tidal wave of investment’.
o The Tory Party has promised no increases in income tax, national insurance or VAT for the term of the next parliament.
o Michael Gove has said that, should the Tory Party form the next government and leave the EU on 31 Jan 2020, it would under no circumstances extend the transition period beyond 31 Dec 2020.
START THE DAY WITH A SONG:
• Taking a break due to exam commitments. Back later in the week.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News: The main story in the Saturday papers (as highlighted by the Times and the Guardian, in particular) was the news on Friday afternoon that the much-travelled Richard Price has been poached from Tesco F&F to be the next head of M&S Clothing, despite his ignominious time helping to run BHS into the ground between 2012 and 2015…This overshadowed the earlier news that Land Secs had picked an industrial property expert, Mark Allan, the boss of St Modwen, to be its new CEO and push on with restructuring its Retail portfolio, as noted by the Times, for example. The Times also flagged that the Footlocker share price fell sharply on Wall Street early on Friday, on worries about the impact of US tariffs, despite beating Q3 sales and profit expectations. The Telegraph stockmarket report noted, however, that Footlocker’s UK rival, JD Sports, was boosted on Friday
• Sunday’s Press and News: The Sunday papers were again a bit thin in terms of Retail stories, but the Sunday Times flagged that the embattled shoe business Clarks has called in the consultants McKinsey to help on its restructuring plans, whilst the Mail on Sunday highlighted that Ocado CFO Duncan Tatton-Brown hinted to a private meeting of tech investors organised by Morgan Stanley that Ocado could soon launch its rapid-delivery service Zoom in the US to help its main client Kroger to take on rivals like Takeoff. The Sunday Telegraph noted that the up-and-coming US ecommerce business Shopify is to take on Amazon by moving into warehousing and logistics. The Sunday Telegraph also, rather shamefully, found a prominent fashion model photo opportunity in the otherwise obscure snippet that brokers RBC are cautious about Burberry’s ambitions to go upmarket. The Mail on Sunday had a
News Flow This Week: With the end of the month coming up quickly now, we get the CBI Distributive Trades survey for “November” this morning, for what it’s worth, whilst the widely followed monthly GFK Consumer Confidence survey is out first thing on Friday. In terms of Retail news, tomorrow brings 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 McColl’s pre-close, plus the ghastly annual discount jamboree that is BLACK FRIDAY…