Langton Capital – 2020-01-17 – PREMIUM – Whitbread, GVC, Gym Group, Premier Foods & other.
Whitbread, GVC, Gym Group, Premier Foods & other.
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
The word ‘solid’ is getting a bit of an outing these days. It’s challenging the word ‘challenging’ for supremacy and, along with ‘broadly’
Whitbread yesterday said that its results were ‘solid’ and its shares fell 5% as analysts tried to work out where the word stood in the wide spectrum that runs between ‘ghastly’ and ‘brilliant’.
And, if the above is anything like a normal distribution (which it may well not be – at least not in the short term), then most comments should be in the highly nuanced middle ground where the poor analyst has to work out whether ‘solid’ is better than ‘broadly solid’ and whether the word ‘broadly’ itself can be substituted by ‘worse’, ‘down’ or ‘lower’.
So, with plenty of results still to go, we’ve got our work cut out. On to the news:
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CAN DELIVERY EVER BE PROFITABLE? Delivery is great but, at some point, delivery companies have provide a service at a price acceptable to restaurants, customers and, ultimately, their own capital providers: 17 Jan 2020:
• Unless something has changed in the laws of economics, whilst price has to be acceptable to the customer, there ultimately has to be enough of an income stream for delivery companies and restaurants to make money
• That is, of course, unless the delivery companies intend that their own dark kitchens ultimately squeeze the restaurants out of the market
• Ultimately, suppliers will have to supply a product or a service at a price that customers are willing to pay
Delivery companies are loss-making – the micro side:
• It can be tricky to see where the money is being made in food delivery.
• And the easy answer is that, at the moment, it isn’t. Deliveroo reported a loss for the year ended 31 December 2018 of £232m on revenues of £476m.
• Start-up losses to one side, Deliveroo sold £708m worth of product and service and recouped two thirds of it via revenue
• Hence, these revenues would need to be 50% higher for Deliveroo to have broken even
• Revenues currently come from the end customer (about £3) and from the restaurant (about 30%)
• This may be in the region of a blended mix of £6 per ‘cover’ or diner – and someone, either Deliveroo’s capital providers, the restaurants or the customer, is going to have to take a three quid hit.
• Realistically, it can’t be the restaurant as this would equate to fees of perhaps as much as 60%
• And the depth of even the deepest-pocketed of Deliveroo’s customers must be finite in terms of its depth
• So that leaves the customer. At which point he/she may well ask themselves, do we really want a delivered meal that much?
• Deliveroo will not report December 2019 numbers for some months – but it will have made another substantial loss
Further general thoughts on financing:
• For the same period, Just Eat reported profit of around £80m on revenues of £780m. Until recently, Just Eat has not delivered food itself
• Takeaway.com’s acquisition of Just Eat will provide the firm with more resources and greater economies of scale.
• However, Just Eat is relatively new to providing its own delivery proposition, having invested £50m in 2018, whereas Deliveroo and Uber built their own logistics networks from the onset.
• This may not be a problem for Uber as it can cross subsidise using its other divisions, such as its ride-hailing business.
• Deliveroo, however, cannot cross subsidise & Amazon’s investment in the company is being investigated by the CMA.
• Admittedly, Deliveroo is in a growth stage at present, therefore losses are perhaps to be expected.
• For outside investors, disaggregating operating losses (which are not sustainable) from start-up costs (which should be finite) may not be possible.
• But eventually the company will have to start making profits.
How might customers react?
• At the moment, delivering food to the punter’s door is a loss making initiative.
• It isn’t perhaps 100% clear whether the product is being demanded by customers or pushed by suppliers
• Over time, the delivery platforms may have to increase the amount they charge consumers for delivery.
• Currently, in London, Deliveroo charges £2.49-2.99 per delivery and Uber Eats charges £3.50. For now, the customer appears to be willing to pay this.
• However, if the cost to the consumer were to rise, delivery platforms could face substantial push back.
• Would you be willing to pay, say, £5 delivery just for the convenience of not getting your own meal? How about £6?
• For a lot of consumers, £5 would be a notable threshold at which they may decide against delivery.
• When prices do rise it might turn out to be the litmus test of profitability in the industry.
• The modern day public has made it clear there is a demand for food delivery.
• But there is a demand for most things if the price is low enough and companies will need to show their delivery models are profitable in the long run.
• However, if demand for delivery turns out to be elastic, then a rise in delivery charges may not be a viable solution.
• For now, the market seems content to continue investing capital into these companies while they are still in a ‘growth phase’.
• Players in the industry will need deep pockets, and some conglomerates may continue choose to run delivery platforms at a loss to acquire market share.
• Observers will be watching for the outcome of the CMA’s Phase 2 investigation of Amazon’s investment into Deliveroo.
• Should Amazon be instructed to divest from the company, then Deliveroo may find itself at a competitive disadvantage.
WHITBREAD Q3 CONFERENCE CALL: Following its q3 update yesterday morning. WTB hosted a conference call for analysts: 17 Jan 2020.
Premier Inn & Restaurants – UK:
• WTB sees opportunities in the UK. It will take market share and focus on brand extensions.
• F&B was ‘stronger’ in Q3 due to the introduction of ‘attractive customer offers’.
• The group will not be drawn on Q4 performance. Says the return to work period post Xmas can be volatile
• Why are you underperforming in the regions? No real answer. Ms Brittain says ‘we’ve narrowed the gap.’
Premier Inn Germany:
• Frankfurt is performing well and the group is actively looking for more purchase opportunities
• Losses of around £12m are expected this year.
• By the end of next year, the group will have 20 hotels open and trading
Company comment, corporate issues, future trading etc.:
• The company expects inflation to cost around £70m this year. 1% REVPAR means £12m to £15m on or off profits.
• There are cost headwinds but the group believes it can still grow. Costs include the NLW (being more aggressive than expected), meat prices (especially pork) higher etc.
• £25m of marketing spending? No ‘granularity’ but money will be spent on trialling more ‘Premier Inn Plus’ sites (facility creep), targeting B2B customers etc. The co will also ‘invest in our people’.
• £40m of efficiencies. E.g. consolidating procurement in China. Laundry contract, delivery distribution, rolling German buying into the UK etc. Can this be accelerated? It clearly gets harder. The low-hanging fruit has gone.
• Forward bookings? Leisure looks good (same as last year).
• Are your competitors putting on capacity? Says capacity growth peaked in 2018. Says 2019 is ‘strong for capacity growth as well’ but that it has edged down slightly
• Is Germany behind earlier projections? Ms Brittain says ‘we are not uncomfortable.’ The break even will be at a higher number of hotels as there will be fewer freeholds. German property market is ‘difficult’ as properties are well-bid. Also the refurbished hotels are being kept closed a little longer than anticipated.
• This year’s target openings been slipping. The group has only ever talked gross numbers. There is now a little more churn so, for the first time in a while, there will be a difference between net and gross.
• The group doesn’t want to forecast disposals hence it will not forecast net additions.
• Should you use OTAs more? This is a topic of internal discussion but, at the moment, the group believes that OTAs would be more likely to fill hotels that are already full. If OTAs can really add value, WTB will use them.
• Whitbread’s shares have been extremely strong and, on the back of a slightly hesitant (though realistic) presentation, it is perhaps unsurprising that they have given back a little ground today.
• Much remains unchanged. Headwinds, capacity, the economy, the fact that Germany remains an opportunity and a risk etc.
• As mentioned earlier, there is no upward pressures on forecasts.
• Facility creep (aka brand extensions) is tempting and probably unavoidable but it is not without risk. E.g. JD Wetherspoon has done pretty well without ever trying to be everything to everyone
• The rating is somewhat stretched although WTB does have an impressive freehold estate. Until there is a little more clarity on UK demand, there could be a little further weakness. Clarity in Germany, though the group remains optimistic, is some little way off.
PUBS & RESTAURANTS:
• The ONS reports the number of pubs and bars operating in the UK rose for the first time in a decade last year. Senior statistician Hugh Stickland said, while smaller pubs have been struggling to survive in recent years, ‘bigger pubs have been growing in number.’
• However, total employment in pubs grew from 426,000 to 457,000 between 2007 and 2019, despite the total number of pubs falling from 51,120 to 39,130. The share of pub employees working as bar staff fell from 37.6% in 2007 to 28.9% in 2019, while kitchen and waiting staff increased from 29.1% to 43.8%.
• The national living wage (NLW) will give workers their ‘biggest ever cashboost’ according to the government. However, the Morning Advertiser asks whether this could put pressure on operators in a time of great economic uncertainty.
• Rosa’s Thai reported somewhat historic numbers to end-March back in December saying that revenue had risen from £11.4m to £16.2m with profit before tax down from £735k to £606k (on the back of an increase in interest costs from £83k to £223k). The company says its ‘strategy is to continue to invest in earnings enhancing sites in London and across the UK, whilst investing in the teams and processes needed to support that growth.’
• Rosa’s said in its financial accounts, which were signed of on 23 October last year, that ‘the business is focused on driving ‘Like For Like’ performance in existing restaurants by maintaining and leveraging the quality of its offering’ whilst at the same time looking for expansion opportunities.
• During the period the company opened four new sites and says it ‘saw strong growth, not only from opening new sites but also from the mature part of the estate, this despite market conditions, which during the year became more challenging, with reduced consumer confidence and increased price competition.’
• Rosa’s said at the time ‘the company expects to continue its expansion plans by opening five to six new sites each year. It is anticipated that half of these sites will be in London, and half of them outside, with the recent openings in Liverpool and Leeds showing that the concept is well received outside London.’ Rosa’s is now 100% owned by PE house TriSpan.
• Mintel has suggested that sales of meat-free foods could exceed £1.1bn by 2024.
• Property agent Christie & Co has released its 2020 Leisure Outlook report saying that ‘a healthy level of investor interest in the ‘alternatives’ property sector continued throughout 2019, with well invested and well-located businesses remaining the most sought-after assets.’
• It adds ‘it was a year of major M&A activity, as well as a number of opportunistic acquisitions of distressed portfolios. Notable transactions included the sale of Merlin Entertainments to Blackstone, Canadian pension firm, CPPIB and Kirkbi, a company operated by the Danish family who control Lego, with an enterprise value of £5.9 billion. This transaction saw Merlin return to private ownership.’
• It says that cost increases ‘may influence owners’ capital expenditure plans in 2020 however, where possible we consider that continued investment is essential to maintaining competitive advantage and value.’
• The BBC reports that empty businesses cost UK taxpayers £1bn a year in lost business rates ‘prompting calls for urgent reform of the system.’ The Treasury has said it will announce a review of business rates “in due course”.
• Asda is set to launch a ‘sustainability store’ where shoppers can fill their own containers with food.
• Premier Foods has updated on its Q3 with CEO Alex Whitehouse saying that ‘we’re reporting another strong quarter with Group sales up +2.6% and UK sales up +3.6%. Our UK business has now delivered 10 consecutive quarters of revenue growth and has consistently outperformed the market.’
• Mr Whitehouse says ‘our proven branded growth model of delivering new product innovation based on consumer trends together with high quality advertising behind our major brands continues to work very well.’ He concludes ‘this performance, in our key trading period, reconfirms our unchanged profit expectations for the full year and we remain on track to meet our Net debt/EBITDA leverage target of 3.0x by March 2020.’
HOLIDAYS & LEISURE TRAVEL:
• Whitbread shares, though they have been strong recently, were notable for their weakness yesterday, finishing down more than 5%. The FT says that the group has been ‘hobbled’ by a sluggish UK economy. Other observers say that the group is having to place more chips on its German expansion. Both comments seem broadly justified. See above for further detail re the conference call.
• STR reports that the U.S. hotel industry saw occupancy down 3.1% in the week of 6-12 January 2019 with daily rate down 4.7% and REVPAR down 7.7%. The timing of Xmas and the sluggish return to work period (in addition to the weather) make this part of the year rather volatile.
• ABTA has commented on travel ahead of the UK leaving the EU in two weeks. It says ‘the UK is primed to enter a new Brexit phase from 31 January, when trade talks begin, and when it does nothing will change when it comes to travel.’ The specific advice can be found on the body’s website. ABTA says that during the transition period ‘valid passports can still be used, EHIC cards will still be valid and the same gates can be used at border check points.’ It says ‘people can continue to make their travel plans with confidence that things won’t change until at least the end of 2020.’
• More signs that the peak booking season has begun strongly.
• Fred Olsen Cruise Lines reports sales up almost a third in the first two week of January.
• Starwood Capital will operate The Grand Hotel in Birmingham following a £30m refurb. The 185-room hotel is set to reopen this summer.
• ‘Widespread demonstrations’ are expected to involve all modes of transport in France in a dispute over state pension reforms.
• Leeds Bradford Airport reveals plans to develop a ‘state-of-the-art’ 34,000sq ft terminal.
• GVC has updated on full year trading saying that EBITDA should be ‘towards the top end of the upgraded Q3 guidance of £670m to £680m.’ it says that it has maintained momentum in online with NGR of 11%. CEO Kenneth Alexander comments ‘the Group’s operational and financial performance in 2019 has been excellent with the strong momentum reported at Q3 continuing throughout Q4.’ He says ‘as the Group continues to deliver the opportunities provided by both the Ladbrokes Coral integration and our sports betting joint-venture in the US, the Board is confident that the Group is well placed for a successful 2020.’
• Gym Group has this morning updated on trading for the full year to end-December saying that ‘this has been another excellent year of progress for the Company with strong growth in members and revenue. As a result, the Company expects to deliver full year financial results for 2019 in line with the Board’s expectations.’
• Gym Group CEO Richard Darwin says ‘2019 has been another very successful year in which The Gym Group has again delivered substantial growth in members and revenue. Our strong proposition, as the UK’s lowest-price, high-quality gym operator, continues to grow the market and bring affordable fitness to more people across the UK.’ Mr Darwin says ‘there remains a long runway of potential sites in the UK and with our small box rollout underway we plan to accelerate the expansion of our gym estate in the coming year.’
• Claire Murdoch, the head of mental health services in England, said the link between betting and mental illness is ‘increasingly clear’ and incentives such as free bets should be banned.
• The Gambling Commission has said that Britons gambled away £14.4bn between March 2018 and April 2019. More gambling is taking place remotely by people using online gaming apps and websites, with £5.3bn now lost in this way.
FINANCE & ECONOMICS:
• The German economy grew by just 0.6% last year.
• Meanwhile China grew at its slowest rate (still good at 6.1%) since 1990 last year.
• Sterling higher at $1.307 and €1.1735. Oil up slightly at $64.58. UK 10yr gilt yield down 1bp at 0.64%. World markets lower yesterday in Europe & the UK but mixed in the US and in the Far East overnight.
START THE DAY WITH A SONG:
Yesterday’s song was Mountains by Biffy Clyro. Today, who sang:
“Oh my love, can’t you see yourself by my side?
I don’t suppose you could convince your lover to change his mind
I was doing fine without you
‘Til I saw your face, now I can’t erase”
RETAIL WITH NICK BUBB:
Planet ONS Watch: In “the real world”, as per the overall BRC-KPMG figures for December (the 5 weeks to Dec 28th), underlying Retail Sales were a bit weak last month, adjusting for the later fall of “Black Friday” this year, but we will find out at 9.30am this morning what “seasonally adjusted” life was like on the High Street on that strange parallel world, the Planet ONS (aka the Office of National Statistics in Newport), via their official Retail Sales figures…Now, City economists (who still, unaccountably, treat the dubious-looking ONS figures as the gospel truth) generally expect a rise of 0.4% in month-on-month seasonally adjusted sales volumes, but our friends at Capital Economics have pencilled in a rise of 0.5% (to give year-on-year volume growth of 2.5%), for what it’s worth. We will be ignoring these silly sales volume figures…and focusing, as usual, on the year-on-year,
Jewellery Watch: Given the weak vibes about the UK jewellery market in the BRC-KPMG Retail Sales survey for December, the Signet trading update in the US yesterday revealed that H Samuel and Ernest Jones did not do too badly in the UK at Christmas, with overall LFL sales only 3.1% down in the 9 weeks to Jan 4th.
BDO High Street Sales Tracker: We highlighted on Wednesday that the John Lewis sales figures for last week were a bit disappointing, but 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 pretty good…In w/e Sunday Jan 12th, BDO Fashion sales were up by 3.0% LFL, whilst Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were up by 4.8% last week (up 3.7% in Store sales and up by 15.0% in Online sales).
Trade Press: The front cover of Retail Week magazine has photos of the key executives at the John Lewis Partnership, to flag up the main feature on “New dawn or disaster zone?” (“what the leadership exodus means for John Lewis”). RW also has features on the key Christmas sales trends, the problem of Online Returns and Retail Leader’s 2020 predictions. And the Editor thunders in his column that “Retailers must make 2020 the year of self-help”, praising the way in which Next has adapted to the changes in the retail market. Drapers magazine is a special Autumn Menswear issue, but it also has features on the National Living Wage and the Retail market in Tokyo. In terms of News stories, Drapers highlight the “controversial” exit of John Lewis MD Paula Nickolds and the “Tale of two Christmases” (contrasting the success of Selfridges and JD Sports with the problems of Superdry and Joules).
News Flow Next Week: There are still quite a few retailers still to report on Christmas trading, kicking off with the Dixons Carphone update on Tuesday, whilst the struggling Joules also have their interims that day. Wednesday brings the WH Smith AGM update, the Burberry Q3 update and the Pets at Home Q3 update (and maybe the Hotel Chocolat update). The ASOS trading update is on Thursday.