Langton Capital – 2020-01-10 – PREMIUM – CVAs, consumer spending, coffee, Xmas updates & other:
CVAs, consumer spending, coffee, Xmas updates & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Our thanks to Incite Marketing for reminding us that Mark Twain supposedly said that, if you leap out of bed and immediately eat a live frog in the morning, you can be pretty sure that nothing worse will happen to you during the day and that the low point is behind you.
Now I’ve not tried this but, statistically, it is likely to be true.
Of course it won’t work if you’re about to have a motor accident (or be sacked from a job you like or rely on) and, if you’re planning on watching Hull City play, for example, Fulham, then you’d better eat two frogs just to be sure – but what is it really telling you?
Possibly that you can always make a bad situation worse. You can lose your job and then hit your thumb with a hammer. It would be ‘better’ to just do the former and, with regard to CVAs, you can arguably upset all of your investors, annoy your creditors, confuse and upset your staff and limp on for a couple of years rather than just do the former.
But anyway, where that’s capitalism for you. Where there’s a fee, there’s a way. On to the news:
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CREDITOR VOLUNTARY AGREEMENTS: The year was not a week old when Chilango became the first hospitality company of 2020 to enact a CVA. What does the future hold: 9 Jan 2020:
The prevalence of CVAs
• Last month, we discussed how CVAs were one of the hot topics of 2019.
• The Government reported that there had been 274 CVAs in the first three quarters of 2019.
• The latest CVA of note was Chilango’s. This fell into 2020 and saw 1500 mini-bond holders see their debt get turned into equity.
What are CVAs?
• CVA stands for Company Voluntary Arrangement.
• It is a mechanism where an insolvency practitioner will work out an ‘arrangement’ covering the amount of debt you can pay and a payment schedule.
• The CVA is approved if 75% (by debt value) of the creditors who vote agree. With leases running to 15yrs or even 25yrs, it is sometimes a matter of debate as to what the whole creditor liability is
What do CVAs want to achieve?
• A CVA aims to find an agreement between a company that may be insolvent and its creditors, so that the company may continue trading.
• It allows the directors to retain control and reduces the costs faced by the company, often via a reduction in rents.
• The key question regarding CVAs is whether they are genuinely helping businesses recover, or whether they are just a sticking plaster for poor business models.
• Are they even a workable Field Dressing Station, far less an effective hospital that includes effective rehabilitation?
What have they achieved?
• Recently, Colliers claimed that CVAs are ‘delaying’ failure.
• Companies are climbing up the funnel in a sinking ship. There isn’t much being done to stop the company from sinking further
• Perhaps, to be fair, only an economic recovery (or major competitor failure(s)) could perhaps do that
• Colliers International claims that since 2016, 13 out of 23 large businesses to have launched CVAs have gone on to file for administration.
• That’s a pretty high mortality rate
• Colliers International co-head of retail agency, David Fox, says ‘CVAs were designed to help struggling businesses, but they do nothing to address high debt levels, which often require restructuring, refinancing or a debt write-off’
• At Langton, we have previously noted that some failed operators will have bid up rental prices in the past, only to later issue a CVA pursuing rent reductions.
• This can ruin the business models of other companies as the rents of successful companies could be based on the foolish rental bids of subsequent failures
• Meanwhile, one might say, the advisors get rich
• Animal instincts mean that delaying tactics are always likely to be used. When bad news can be put off, it will be put off
• This has led to case studies where companies have taken years to call in the administrators on failing business models, rather than months.
• CVAs are often defended (by those who count them as a good income stream, i.e. accountants, lawyers, property agents etc.) as a good thing but, to say the very least, there are two sides to that argument
• There is a strong argument that market efficiencies are being lost.
• It appears that some companies have used the process to shed their tail sites.
• Also, as mentioned above, Chilango’s CVA saw a crowdfunded mini-bond get converted into equity (consequently the former bondholders will fall down the hierarchy in the case of an administration).
• If a company has a failing business model and the CVA just delays administration for a couple of years, then the market becomes increasingly polarised.
• A company in this situation may ramp up its discounting in desperation, thereby becoming a negative drag on the industry.
PUBS & RESTAURANTS:
• More early signs of a pickup in confidence.
• Barclaycard has reported that ‘consumer spending grows just 1.0 per cent in December as rise in consumer confidence fails to boost festive spending.’ It says supermarkets saw their spend fall by 0.9% whilst specialist retailers, such as toys and gaming stores, fell by 4.0 per cent.
• Barclaycard says cinema sales increased by 19 per cent (Star Wars and Frozen II) ‘while spend in pubs (11.7 per cent) and takeaways (12.5 per cent) rose over the festive period.’
• Barclaycard says that ‘consumer confidence in the UK economy reached the highest in all of 2019.’ It says ‘entertainment was…a bright spot, increasing by 5.5 per cent.’ It adds ‘following the General Election consumers showed renewed confidence in the UK economy, with four in 10 (41 per cent) indicating they were feeling upbeat – up 10 percentage points on November and the highest level throughout all of 2019.’
• Barclaycard comments ‘consumer confidence is finally improving after a long period of political uncertainty. This optimism hasn’t yet translated into high street sales, but spending on experiences continues to grow, with Brits enjoying box office hits and trips to the pub. While consumers remain reluctant to spend on big ticket items, the mood seems to be changing.’
• A New York City Council member has introduced legislation that would require third-party meal delivery companies to disclose how much of the tips they receive goes to drivers.
• The FT asks why do the Chinese like Kentucky Fried Chicken so much? It says the stores still attract crowds with YUM’s shares up 40% in the last year to trade on a forward earnings multiple of 27x.
• US wine retailers have suggested that President Trump’s wine tariffs are similar to the impact of prohibition nearly a century ago.
• This, a meat alternatives brand, has raised $4.7m in a funding round led by UK-based fund Backed and VC firms Five Season Ventures, Idinvest Partners, Seedcamp and Manta Ray Ventures.
• Allegra has reported that UK cafés have maintained positive sales growth ‘in a challenging market’ but it says that outlet growth has stalled
• Allegra World Coffee Portal’s Project Café 2020 suggests that there are now a total of 25,892 branded and unbranded coffee shops across the UK, up around 1.6% on the number a year ago.
• Branded coffee shop numbers have risen by 1.6% over the last year to 8,222 outlets. Sales for the industry as a whole are said to have hit £4.5bn in 2019, representing 4.2% growth, down 7pps on the growth seen in 2018.
• Allegra suggests that there was ‘significantly reduced outlet growth’ which was ‘indicative of restrained investment in the context of Brexit uncertainty and tough high street trading.’ This may change if a bounce in the economy post the General Election last month can be sustained.
• Coffee shops say that the cost of property, labour and the impact of Brexit are the main problems that they are currently having to deal with. Most operators believe that there is growth left in the market with around a third anticipating improved trading conditions over the next 12 months – up 5% on 2018.
• Allegra suggests that outlet growth could ‘regain momentum in 2020.’ It says ‘greater clarity on the UK’s future relationship with the European Union alongside the consummation of major M&A activity, including Coca-Cola’s purchase of Costa Coffee, and Causeway Capital’s rebuilding of the troubled Patisserie Valerie brand, will contribute to increased investment and outlet growth in 2020, albeit at a disciplined pace.’
• Allegra’s CEO Jeffrey Young comments ‘following two years of tough trading the UK coffee shop market has held up well against significant headwinds. We expect outlet growth to regain momentum during the next 2-3 years and forecast better times ahead for those operators that can readily capitalise on the opportunities and adapt to the challenges in what will remain a highly competitive market.’
• The CMA has given Stonegate the green light regarding its takeover of EI Group provided that a named 42, largely freehold, pubs are disposed of.
• Good numbers from pubs reporting. M&B pleased the market yesterday with LfL sales up 5.6% over the Christmas period. Private companies such as Mission Mars, Coaching Inn Group, Remarkable Pubs, Brewhouse & Kitchen and others have reported good numbers ranging typically between +5% and +8%. It looks as though Christmas has been good to very good for many. Whilst the listed operators will have to comment at some point, it’s just possible that that better-performing private companies are keener to speak to the market about trading than are their struggling competitors.
• TDn2K has reported that US restaurant same-store sales were down 2.1% year over year in December. This is ‘the worst result the industry has seen in more than two years.’ A shift in the day on which the Thanksgiving holiday fell is partly responsible ‘for the abysmal results, which offset the positive figures recorded in November’ says NRN. The sales in the first week of the period were down by double-digits.
• Australian wine company McWilliam’s Wines, which has been owned by six generations of the same family, has appointed administrators.
• Interesting to note that Tesco said the 0.1% sales increase that it reported yesterday represented a ‘strong performance in a subdued UK market’. John Lewis is considering not paying a bonus to its staff for the first time in living memory. Various trade bodies have suggested that 2019 was amongst the most difficult years ever for UK retail.
• Meatless Farm, a UK plant-based company, is launching Meatless Meatballs at Mexican eatery, Benito’s.
• Environment Secretary Theresa Villiers has said chlorinated chicken will be kept out of the UK under any trade deal with the USA.
HOLIDAYS & LEISURE TRAVEL:
• The Civil Aviation Authority has apologised for the length of time being taken to handle Thomas Cook refunds, with around 10,000 claims still outstanding.
• Riskline forecasts that the impact of climate change and potential final year of the Trump administration will be the two most important causes of travel risks in 2020.
• Hart Shoreditch Hotel London is set to open at 61-67 Great Eastern Street as part of Hilton’s Curio Collection.
• ForwardKeys reports growth in international air travel slowed down last year to 4.5%, compared to 6% in 2018.
• The Cheese Suite, the world’s first cheese-themed hotel, will open between January 29 and February 6 in Camden, London. The suite, which will be in an apartment complex, is being created by Café Rouge to celebrate its new ‘cheesy menu’.
• Ocean Holidays’ Ocean Florida business is looking to hire a theme park tester. The lucky candidate will be paid £3,000 for three-weeks’ work testing rides, eating popcorn and scoffing burgers.
• US holiday park operator Cove Communities is to buy West Sussex-based self-catering firm Bunn Leisure. The buyer is to inject £23 million into the site as part of an investment started under the previous owners.
• National strikes in France will cause delays and cancellations of flights to and from the country.
• The Business Travel Show reports 41% of corporate travel buyers said they would have more money to spend in 2020.
• STR reports US hotel occupancy up 0.3% to 49% for the week ending 4 January, with ADR up 4% to $136.46 and RevPAR up 4.3% to $66.84.
• ClassPass, the global fitness and wellness marketplace, has raised $285m in Series E investment, led by L Catterton and Apax Digital, with additional participation by existing investor Temasek. ClassPass has expanded into 28 countries and has signed over 1,000 employers into its corporate wellness program.
• TeamSport Indoor Karting is set to launch its newest site in Watford in April 2020. The £1.35m centre will create over 25 full and part time jobs.
• Apple shares increased 2.4% on Wednesday to reach a record high, with App Store customers spending $1.42bn between Christmas Day and New Year’s Eve.
• Just A Fan’s Analysis, a digital platform for football supporters, has received over 180 crowdfunders, including Aston Villa player Tyrone Mings, on the Seedrs platform.
FINANCE & ECONOMICS:
• Outgoing Bank of England Governor Mark Carney has indicated that interest rates will be cut if the UK economy does not pick up in the near term. Carney told his audience ‘with the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response.’ The Bank’s MPC next meets on 30 January.
• Sterling lower at $1.3081 and €1.1774. Oil lower at $65.28. UK 10yr gilt yield unchanged at 0.82%. World markets higher yesterday with Far East up in Friday trading.
START THE DAY WITH A SONG:
Yesterday’s song was Mardy Bum by Arctic Monkeys. Today, who sang:
“Maybe I’m a different breed
Maybe I’m not listening
So blame it on my ADD baby”
RETAIL WITH NICK BUBB:
B&M: After a strong first half in the UK, with LFL sales up by 3.7%, B&M said with its interims on Nov 12th that Q3 to date had seen “continued solid LFL sales growth” and the update today is headlined “Continued growth in the quarter”, but the City will be disappointed to hear that core UK sales growth in the 13 weeks to Dec 28th was only 0.3% LFL, “against the backdrop of a challenging broader retail market and our decision not to engage in any early discounting activity”. CEO Simon Arora admits to a “slower UK performance than anticipated during the run up to Christmas”, but is chirpy enough otherwise, highlighting that costs were well controlled and that this year’s UK store openings as a whole have performed better than expectations.
JD Sports: There has been no trading update from JD Sports since its interims on Sept 10th, but after impressive growth of over 10% in core UK sales in the first half, the message at the time was that “we are pleased by the continued positive trends to date in the second half in Sports Fashion”. Now, today’s update talk about “positive” growth, but there are no figures and all JD Sports really say is that Overseas has done well enough for the group to be on track to hit full-year PBT “in the upper quartile” of the £403m-433m range. This is reassuring, but for a FTSE 100 company we would have expected a better level of information
Joules: The Joules share price has been under a bit of pressure recently, as if somebody thought that things were not going well and today’s unscheduled update is bad…with Retail sales in the 7 weeks to Jan 5th significantly behind expectations at -4.5%…Joules admit that this was “a result of disappointing online sales performance due to an internally generated stock availability issue through the important end of season sale event”, but the statement also talk about cost headwinds and the City will not be pleased to hear that, ahead of the interims on Jan 21st, “the Board anticipates that FY20 Underlying PBT² will be significantly below market expectations”.
Superdry: The Superdry share price was also weak yesterday and some people will therefore not be surprised to hear from today’s unplanned update that “Despite a strong Black Friday event, peak trading performance has been lower than expected as we continue our strategic transition to a full price stance”. Superdry go on to say that “Over this period the high street has seen unprecedented levels of promotional activity coupled with subdued consumer demand immediately after Christmas”.
News Flow Next Week: After “Super Thursday” yesterday, things quieten down a bit in terms of company news next week, but Tuesday brings the Boohoo trading update, the Games Workshop interims and the DFS trading update. Then Thursday brings The Works interims, the ABF (Primark) update, the Halfords Q3, the N Brown Q3 and the Signet (US) update. Friday brings the ONS Retail Sales for December.