Langton Capital – 2019-11-29 – PREMIUM – Nando’s, new entrants, delivery, Remy & other:
Nando’s, new entrants, delivery, Remy & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I haven’t played chess for years but, on the spur of the moment, I downloaded an app and had a go.
And I gave the machine a sound thrashing which highlighted two traits in me that are probably present in a lot of people. The first was suspicion. Why was I beating it, was it a trick, was there a nasty surprise around the corner and the second was overconfidence.
So, regarding the latter, I was left pondering which of the three statements – I was beating it, I had beaten it and I could not be beaten – was not true.
No prizes for pointing out which and, anyway, my world-beating enthusiasm didn’t last long as I found the setting was at number two (our of ten), and was probably meant for 8yr olds who thought that pawns were really prawns and that they could move backwards.
Hence, we’ll be keeping the day job. On to the news:
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PRIVATE COMPANY ANALYSIS – NANDO’S. Peri Peri chicken restaurant chain Nando’s has reported full year numbers for the period to 24 February to Companies’ House. 29 Nov 2019:
• Nando’s says ‘the principal activity of the Group in the year under review was that of operating fast casual dining restaurants.’
• It says ‘Nando’s is not just about the chicken. It’s never been just about the chicken. It’s about the people who make the chicken.’
• The company says ‘overall, we delivered a robust performance in-line with our expectations as we grew revenue in very competitive markets and continued to invest for the future.’
• Nando’s comments it’s growth in revenue ‘was driven by organic growth in key markets along with increased sales associated with franchise acquisitions.’
• It says that it’s margin decline (see below) ‘reflects investment in our people, and costs associated with growing our international footprint.’
• The company adds that its units ‘operating in overseas markets have not fully matured and the number of restaurants in these markets still need to reach critical mass.’
• The company maintains ‘there is significant growth potential in these markets and we will continue to invest in opening new restaurants.’
More from the company:
• Nando’s says it will ‘add value through investing for profitable and socially responsible growth.’
• It has a ‘defined, unique and distinctive brand’ and a ‘cohesive and expanding international business.’
• The group says ‘the strength of our brand, core values, and unique customer experience have been key to the long-term development of Nando’s’ business.’
• During the year, ‘the number of restaurants in operation decreased from 937 at 25 February 2018 to 936 at 24 February 2019. This total includes the 740 (2018: 711) company owned restaurants and 196 (2018: 226) restaurants run on a franchise basis.’
• It says its key markets are the United Kingdom, Ireland, USA, Canada, India, Australia, New Zealand, Malaysia and Singapore.
• Nando’s revenues have risen by 8.5% to £1.05bn
• Gross profit is up by 4.4%. Gross margins are down 80bps at 20.3%
• Operating profit is down by 1.9% at £41.9m and the privately-owned group has financing costs that push it to a pre-tax loss for the period of £25.2m (2018: loss £20.0m)
• Nando’s has accumulated losses since incorporation of £88.3m and shareholders’ funds of £101.9m (although this does include intangible assets of £718.7m)
• Of the group’s £909.5m of interest-bearing borrowings, some £722.2m of it is to related parties.
• This means that the interest charge could be, and probably is, a movement of funds from one part of the ultimate owner’s portfolio of assets to another
• The loans to related parties (Deep Discounted Bonds) bear interest at rates between 3.5% and 8.5% and are repayable between 2019 and 2027.
• KPMG are the group’s auditors. They have reported that the accounts give a true & fair view of the state of the company’s affairs
• The accounts are prepared under the Going Concern principle and the auditors are happy with this
• KPMG says ‘as we cannot predict future events or conditions…this auditor’s report is not a guarantee that the group…will continue in operation’
• This is true but, given the inter-company nature of the group’s debt, the auditors have no reason to be unduly concerned
• Nando’s has been and is a success story.
• It continues to trade well in the UK and, though several of the company’s comments regarding challenging markets will have referred to the UK, it looks set to continue to do so
PUBS & RESTAURANTS:
• Foodservice analyst Peter Backman has released the latest Ones to Watch study, which looks at the foodservice companies that are showing most promise and that are currently growing most rapidly.
• Backman says ‘the foodservice world is constantly changing.’ He says that ‘new types of offers from small-scale, fast-growing operators bring innovation to consumers and drive change throughout the industry, reflecting and affecting consumer tastes now and into the future.’
• The companies watched will have between 5 and 25 outlets and have experienced an outlet growth rate of at least 20% over the previous 3 years. Some will doubtless burn bright then burn out but the successful restaurant chains of the future should be amongst the ones that do not.
• Backman also has a ‘bubbling under’ section, which includes smaller chains that are nonetheless looking interesting.
• Backman reports that, despite CVAs etc, the decline in the number of Ones To Watch (that started in 2016) has now halted. Whilst the number of brands has grown, the number of outlets has remained stable since the average number of outlets in each brand has fallen. Some of the fastest growth has been exhibited by coffee shops. Backman reports that coffee is the largest sub-sector, with 21 brands (16% of the total) operating a total of 220 units.
• Casual diners are also well-represented with Italian and Far Eastern cuisine predominating. Backman says there are a number of single-product offers, such as doughnut chains, but ‘vegan is still to make its mark.’ It can arguably only really be a matter of time before meat-free chains make the list.
• CGA reports that the foodservice delivery market should grow by 18% this year over last. It says the market for delivered product should be worth £8.4bn and it will only grow from here.
• CGA says delivery offers ‘significant growth opportunities for operators.’ It says ‘it is vital that both operators and manufacturers have a comprehensive understanding of this dynamic sub-sector and an appreciation of where this extraordinary growth is coming from, who is driving this and how they are achieving such impressive results.’
• Langton agrees that the delivery market is in growth but 1) Deliveroo is making large and thus far persistent losses, 2) operators are taking a significant margin hit, 3) they may be cannibalising their own business and 4) they could be letting the fox into the hen house.
• Operators may believe that they have to do something if their competitors are doing it. But if that ‘thing’ is banging their head against a wall and paying money to do so, it will be worth reappraising the situation at some point in the future.
• The BBPA has published the latest edition of its operating cost guide for tenants and lessees. It says ‘the data is intended to help those wishing to take on a tenanted or leased pub business to be as well informed as possible about the current costs involved in running a pub.’
• The BBPA’s guide gives a range of costs across a number of business models based on turnover. The BBPA says ‘whether you already run a pub or are thinking of taking one on, this new report is a must-read. It includes essential information on the current costs involved in running a local pub and can be downloaded – free of charge – from our website.’
• Remy Cointreau has said that core earnings would be flat this financial year as it faces an ‘uncertain geopolitical environment’. The group says that LfL operating profit fell in the half year to end-February. Remy’s earnings have been hit by political disturbances in Hong Kong amongst other issues.
• CGA reports that around 22% of consumers are making around 70% of wet-led visits to the on-trade. Speaking at Drink Tank on 27 November, CGA director Rachel Weller spoke about the industry as a whole saying ‘about two thirds of operators are optimistic about their own business prospects but fewer are optimistic about the market as a whole.’ She says ‘footfall is flat and has been for the past two years.’
• Brewdog’s James Watt has suggested that IPA could overtake lager as the biggest-selling beer type in the next 10-15 years.
• UK Hospitality has commented on the vote in the Scottish Parliament to give local authorities powers to set business rates levels saying ‘business rates are already a scourge for High Street businesses across Scotland, directly leading to business closures and the erosion of local communities. Hospitality is the hardest hit sector and any increases will hit Scotland’s pubs, hotels and restaurants the hardest.’ It says ‘devolving powers to local authorities, who are desperate for any extra tax revenue, is wrong-headed and will inevitably lead to higher costs for local businesses.
• UKH says ‘Scottish Parliamentarians should be looking at ways to support business as a creator of jobs through cutting punitive business rates, rather than saddling them with even more cost and complexity.’ It concludes ‘we urge everyone involved to work to overturn this amendment and concentrate on reducing the burden of tax on Scotland’s hospitality businesses.’
• Amazon has rolled out a range of ‘affordable’ wines. The online retailer launched a gin range last month.
• EI Group is to roll out a new initiative that aims to save 80 million litres of water per year in washrooms across its managed estate. It is working with washroom specialists PHS, that ‘will see technology fitted in pub washrooms across the Ei Managed Operations portfolio, significantly reducing the number of hygiene flushes required, resulting in a financial saving alongside a substantial water reduction.’
• It’s Black Friday today, cyber-Saturday tomorrow. Knock yourself out.
HOLIDAYS & LEISURE TRAVEL:
• More capacity coming into the market.
• EasyJet has officially relaunched its holidays business with packages on offer to more than 100 destinations. EasyJet Holidays hopes to sell a full million holidays in its first year of operation. CEO Garry Wilson comments ‘EasyJet has been a pioneer in transforming travel for almost 25 years and we want to bring that to the holidays sector.’
• Thomas Cook’s aircraft maintenance arm is to close some two months after the travel group collapsed.
• Snowstorms are reported to have disrupted the start to the Thanksgiving Holiday in the US.
• Model railway company Hornby has reduced its H1 losses from £3.2m to £2.5m.
• Facebook has bought games developer Beat Games for an undisclosed sum.
FINANCE & ECONOMICS:
• The Nationwide reports that UK house prices rose by only 0.8% in the year to November, comfortably below the rate of inflation.
• The Society of Motor Manufacturers and Traders has reported that UK car production was 4% lower in October this year than it was in the same month last year. SMMT CEO Mike Hawes has said that the UK’s ‘global competitiveness is under threat’ as a result of Brexit uncertainty.
• Sterling lower at $1.2915 and £1.1728. Oil lower at $63.57. UK 10yr gilt yield 1bp down at 0.67%. World markets broadly lower with Far East down in Friday trade.
• Politics & Brexit:
o The IFS has said it is ‘highly likely’ that the Tories will breach their own spending limits and has added that the spending plans of both the Conservatives and Labour are not credible. It says that neither party is being honest with voters.
o The Guardian reports that pay growth ‘took a knock in October’ due to trade issues and ‘Brexit uncertainty’.
o Boris Johnson and Nigel Farage fail to show for the C4 climate emergency debate. C4 criticised for showing an empty chair in Mr Johnson’s place.
START THE DAY WITH A SONG:
• Taking a break due to exam commitments. Back later in the week.
RETAIL WITH NICK BUBB:
Consumer Confidence Watch: The widely-followed monthly GFK Consumer Confidence survey came out overnight and the overall index for November stayed at -14, much as expected by City economists, but polling was done in the first half of the month (Nov 1st-14th), so it is not a bang up to date feel for the mood of the nation ahead of the General Election on Dec 12th. Joe Staton, client strategy director at GfK, said in the report that “In the face of Brexit and Election uncertainty, consumers are clearly in a ‘wait-and-see’ mode”.
Ocado: Hot on the heels of yesterday’s news of a “mini-CFC” concept in the UK, Ocado has announced a big new Overseas licensing deal, this time in Japan with the giant Aeon supermarket chain. The deal is ambitious in scope, but the devil will be in the detail of the balance of upfront costs and cap ex and fees: no doubt Ocado will give more of a feel for these issues (and the management bandwidth required to cope with both this push into Japan and the US at the same time) on the planned 7.30am call with the analysts.
BDO High Street Sales Tracker: We flagged on Wednesday that the poor John Lewis sales figures for last week were meaningless, because of the fact that Black Friday falls a week later this year, and today’s BDO High Street Sales Tracker for medium-sized Non-Food chains (which has been reporting surprisingly/suspiciously good progress in recent months) is also, predictably, poor…In w/e Sunday Nov 24th, BDO Fashion sales were down by as much as 28.4% LFL, for what it’s worth. And Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were down by 25.3% last week (down 17.1% in Store sales and down 37.7% in Online sales).
News Flow Next Week: After BLACK FRIDAY comes CYBER MONDAY…but as we move inexorably on into December, there is less going on in the Retail sector next week to distract us from all the General Election campaigning…The BRC-KPMG Retail Sales survey for November is out first thing on Tuesday, however, and the key John Lewis sales figures for this week will be published on Tuesday morning. The fashion chain QUIZ has interims on Wednesday morning and the latest quarterly FTSE Index review is out on Wednesday evening. The Joules pre-close is on Thursday and the jeweller Signet also has its Q3 in the US that day. Friday then brings us the ABF (Primark) AGM update.