Langton Capital – 2020-02-04 – PREMIUM – Catalysts & collapses, coronavirus, Escape Hunt, veganism etc.:
Catalysts & collapses, coronavirus, Escape Hunt, veganism etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
We are what we are.
Nearly half a century after it was written, Richard Dawkins’ The Selfish Gene is still well worth a read as it suggests that, in going against our genes (and sometimes this is the wise and decent thing to do, our default position might not be very attractive), we are pushing a very big rock up an interminable hill.
And, whilst gravity exerts its force effortlessly 24-7, we need to work hard not to backslide but we’re not going to go into heavy topics like religion, gansterism, war-lordism, xenophobia etc. this early in the morning.
Rather we’d just like to mention pattern recognition because somewhere in our lizard brain (it’s a thing, look it up), we have been programmed to spot patterns.
It’s probably something to do with predators. Or food but so good are we at spotting patterns that we identify quite a few that aren’t there at all and this leads to superstitions such as reading palms, tea leaves, chicken bones, omens of various sorts and, in the world of finance, charts.
Hence chartists spot spinning top candles, Doji candles, indecision candles and long-legged Doji events of one sort or another, most of which are hocus pocus but some of which, annoyingly, have something in them.
After all, you can read the sky (it’s cloudy, it might rain), can’t you? Or maybe I‘m just being too human. On to the news:
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CATALYSTS & COLLAPSES: Economic forces, either positive or negative, may be like pushing on a piece of string. The force is in a certain direction, but outcomes may be delayed. 4 Feb 2020:
Setting the scene:
• As mentioned above, economic forces may be propelling businesses in a certain direction, but the movement can be delayed by mitigating actions
• Sometimes the ‘outcome’ may never transpire.
• If the forces are in a negative direction, the ultimate outcome may be administration but an economic boom, the collapse of a competitor, or other events may intervene and ensure that the result is much less definitive
• Like tectonic plates, movement may be jerky. Mitigating action (e.g. an economic boom) could slow any negative movement whilst catalysts (such as a recession) could speed it up
• Yesterday, we highlighted the fact that a number of start-up companies in the F&B sector remain loss making
• Ultimately, this is not sustainable. But additional capital raises, CVAs and the like could delay what would otherwise be inevitable
• Hopefully the UK will avoid a recession but a catalyst, such as an economic slowdown or here we consider a 6.2% hike in the wage bill, could have negative consequences
NLW and loss-making businesses:
• As we discussed last week, the National Living Wage (NLW) is set to rise 6.2% to £8.72 per hour on 1 April 2020.
• Chancellor Sajid Javid told the Tory Party Conference last September that the Tories would raise the NLW to £10.50 by 2024.
• This may imply rises of 6.2% (the rise just announced) each year for three years in order to reach the target (admittedly a year early)
• Yesterday we discussed how many start-ups and companies rolling out concepts are loss making.
• As such these companies require funding, but if start-up losses persist for too long, then investors will start asking questions.
• Thus far, additional fund-raises have proved to be possible for some companies. Others have turned to crowd funding or mini-bonds etc. Some have still gone under
• The NLW could provide a significant hurdle to these operators, with senior politicians implying the pressure will continue to ramp in coming years.
An exacerbating effect:
• As a result of the most recent cycle, a lot of operators have already utilised efficiencies to reduce costs.
• Businesses that provide labour intensive services such as casual diners and care homes will feel the brunt of the NLW.
• This will be a substantial problem for companies that have tapped their investors a number of times already and who are yet to break even
• There are problems across sub-sectors such as Mexican food, grab and go, Asian lunchtime offers and coffee
• The NLW may exacerbate these losses. It certainly will do little to diminish them and it will push future profitability further out to the right
• Investors, who may be a little jaded already, will then have to decide how long to support these unprofitable businesses
The possible consequences:
• If investors lose confidence, then there will be some difficult conversations to be had
• But any crunch could be delayed by mechanisms such as further crowdfunding (an area yet to be meaningfully regulated) and CVAs.
• Some players have already shown us that the route to failure can be stalled by first going to the crowd and raising money from less-sophisticated investors.
• It should be said that profitability, if it were to be achieved, would wash away all sins
• However, some have run out of options already, utilising CVAs to shed their tails
• Even then, many have found themselves back on a financial conveyor belt heading in an unpleasant direction. Colliers says that 13 of the 23 CVAs that it examined had ended in administration
• Turkeys don’t vote for Christmas. It is not surprising that companies do everything they can to survive
• But interfering with the market’s clearing mechanism for failed companies is unlikely to prevent failure itself
• The ‘deconstructed crash’ may become more common. Whether observers see this as preserving jobs or rewarding failure will depend very much on whether or not they have skin in the particular game in question
PUBS & RESTAURANTS:
• A study conducted by Drinkaware has found that 72% of respondents consumed less alcohol in January. Drinkaware chief executive Elaine Hindal said: ‘It is good to see such a high proportion of people who reduced or stopped their drinking in January planning to continue to do so in the long term’.
• Pizza Hut Restaurants has announced plans to expand its vegan offerings after it saw sales of its vegan pizza double last month.
• Health organisations in the UK are urging the government to increase duty rates on alcohol, due to the ‘burden alcohol places on society’.
• The WSTA has called on its members to embrace Brexit and to focus on the opportunities ahead. Chief executive Miles Beale said: ‘We need to focus on the opportunities and to steer government towards breaking down barriers on trade, while also reinforcing the UK’s position at the centre of international wine and spirit trading’.
• Boxpark, the pop-up retail specialist, has seen its profits rise 22% to £1.6m last year and is eyeing expansion outside London.
• Fullers has appointed Kate Eastwood as Operations Director for the City division. Fuller’s Retail Director Fred Turner said: ‘Kate has an impressive track record and I am delighted to be adding her to my senior team. I know that she will bring fresh impetus to a team operating in an ultra-competitive marketplace’.
• Discounts still available. 40% off mains at Bella Italia & Café Rouge, 30% off at ASK. Prezzo 2-4-2 on mains, Pizza Express 25% off food and Domino’s Pizza 25% off orders over £25.
• Valentine’s Day on 14 Feb. Mothers’ Day next month and Easter in April. Hopefully something to look forward to as far as the F&B industry is concerned.
• The BBPA has marked Apprenticeship Week with Chief Executive of the organisation, Emma McClarkin commenting: ‘National Apprenticeship Week allows pubs, brewers and the wider hospitality sector to demonstrate the great careers we have to offer. We’re especially proud of our commitment to increase the number of apprenticeships by more than 50% in hospitality as part of the Sector Deal for Tourism’.
• The BBC has reported that the coronavirus outbreak has hit footfall at a number of Chinese restaurants. It quotes one, four strong chain as saying that bookings were down by 50%. One restaurant is said to have lost £15k over last weekend.
• TruRating, which garners feedback from diners at the point they pay their bill, has reported results for the year to December 2019 showing that it increased losses in the year by £3.3m. The group has now accumulated losses of £17.9m since incorporation. The group had raised some £27.9m from investors as at end-December. It raised a few more shares in January this year.
• TruRating’s balance sheet shows positive shareholders’ funds of £10.0m. However, some £12.9m of this represents debtors with a negative net balance elsewhere in the balance sheet. As is permissible with ‘total exemption’ accounts, the numbers are not audited. Over £12.0 m of the debtors balance is owed to the company by ‘group undertakings in which the company has a participating interest’. These companies comprise truRating Australia, truRating Inc and truRating Canada.
• Plans for a museum and new bar next to BrewDog’s head quarters in Aberdeen have been approved. BrewDog says that its existing bar is no longer big enough. The bar will feature a shop, a kitchen offering hot food, an events area and a beer museum.
• The Food & Drink Federation has said re the forthcoming negotiations with the EU that ‘the ultimate judge of the success of the forthcoming negotiations will be UK consumers and shoppers, who will rightly expect the same – or better – choice, quality and price for their food and drink.’
• It says ‘the EU market is the largest source of UK food imports and the largest destination for UK food exports.’ It adds ‘it is critical, therefore, that we carefully assess the costs and benefits of any changes to our trading relationship with the EU – and balance them against new opportunities we want to seize for easier food trade with the rest of the world.’
• Michelin-starred the Square restaurant in London’s Mayfair has been closed by administrators.
• HECK!, a Yorkshire sausage and burger company, is investing £1.5m into new production machinery, on the back of huge demand for its vegan and chicken products at the beginning of 2020.
• Punch Training Academy has held more than 80 events for Publicans and their teams and welcomed over 1,000 visitors in its first year, providing them with ‘an unrivalled’ training experience.
• The Dubai and New York based dark kitchen operator, Kitopi has announced it has closed in on its series B funding, raising nearly $60m. The funding round was led by Knollwood and Lumia Capital, with Chris Rogers, partner in Lumia Capital commenting: ‘Kitopi has demonstrated its ability to differentiate itself from others in an increasingly crowded space by collaborating closely with restaurants to achieve one common objective. It has shown success in building an innovative product that is capable of constantly adapting itself to suit customer needs while also being scalable’.
• The vegan grab and go concept, Yeda has opened its first site in London’s Covent Garden.
• A seven year high was reached in the departure of retail bosses in 2019, with 55 chief executives leaving their posts. Rising costs and high business rates alongside a consumer shift to online retail has been blamed for this increase.
• Media giant Sky has said that it wishes to be carbon neutral by 2030.
HOLIDAYS & LEISURE TRAVEL:
• HotStats has reported that the US hotel industry traded strongly in December. It says ‘RevPAR was up 5.3% in the month versus the same time last year, boosted by a 2.3% YOY increase in average rate and a 1.9-percentage-point jump in occupancy. For the full year, RevPAR at U.S. hotels was up 0.9% YOY.’
• HotStats says ‘U.S. hotels finished out 2019 on a strong note, but the overall yearly numbers were flatter, and portend what could be a very similar 2020.’
• Clia has announced cruise lines will deny boarding to passengers and crew who have recently been in China due to the ongoing coronavirus outbreak
• Hong Kong has announced its first death from the coronavirus, the second outside of mainland China.
• Abta has released new guidance on the latest developments with regards to Brexit.
• The UK’s aviation industry has promised to reduce carbon emission to zero by 2050.
• The Wood Street Police station in the City of London will be converted into a five-star hotel by Magnificent Hotels.
• Ola, the Indian ride-hailing app, will launch in London on 10 February. The company has raised around $3.5bn to date and has signed up more than 20,000 drivers in London.
• Escape Game operator and franchisor Escape Hunt has updated on trading for its year to 31 December saying ‘the Company is pleased to report that trading during the 12 months ended 31 December 2019 has shown continued growth, with a particularly strong Christmas period.’
• ESC says ‘the owner-operated sites delivered unaudited revenue of £3.8m (FY18 – £1.1m)’ and it adds ‘Escape Hunt’s three most mature owner-operated sites (Birmingham, Bristol and Leeds), now each 22 months old, delivered a like for like sales increase of 34% in the final quarter of 2019.’
• ESC says ‘across all eight established owner-operated sites, like for like sales increased by 70% in December. Five of these sites were opened in the final quarter of 2018 and hence benefitted from entering the final month of 2019 with a more mature market position.’ It adds ‘EBITDA from the owner-managed portfolio for the full year was ahead of management’s expectations.’
• ESC says ‘during 2019 the number of active UK games rooms increased from 38 to 49.’ In its franchise estate, the company says ‘the franchise estate delivered unaudited revenue of £1.0m which was in line with FY18.’ ESC says ‘overall performance was satisfactory, with EBITDA in line with management’s expectations, albeit with a slight reduction in the number of active franchisees.’
• Re its US expansion, ESC says ‘good progress has been made with the newly signed US franchise partner. The first game has been shipped and is due to be installed in Houston in the coming weeks. Management remains excited about the longer term prospects for the US franchise business and believes that, in time, the US business will deliver substantial growth.’
• ESC says it ‘opened a new site at Birmingham Resorts World in mid-December 2019. The site has made a strong start and has been trading ahead of management’s expectations since launch.’
• ESC says ‘market challenges faced by retail landlords are protracting the time taken to complete commercial negotiations, causing the roll out of new sites to take longer than anticipated. However fit-out work is well underway at two more sites and Heads of Terms are agreed at a number of others, providing the Company with options to continue and manage the pace of further expansion.’
• ESC concludes that ‘the underlying Group EBITDA for FY19 will be modestly ahead of management’s expectations.’ CEO Richard Harpham says ‘we are pleased with our progress in FY19. The performance of our owner-operated sites continues to give us confidence in the proposition and opportunity in the UK.’ He says ‘our ambitious growth plans are centred on driving growth in our existing sites and expanding our footprint, which is underpinned by leveraging our market-leading brand. We remain excited by the significant opportunities ahead of us.’
FINANCE & ECONOMICS:
• The ICAEW reports in its Business Confidence Monitor for Q1 2020 that ‘the end of political deadlock, the election of a majority government and a concrete date for leaving the EU have all boosted British business confidence.’
• It says a positive balance of 1.3 percentage points of the accountants it surveyed believe ‘the next 12 months will be an improvement on the past 12 months and expect slightly stronger growth.’
• The IHS Markit PMI survey for the UK manufacturing sector came in at 50.0 in January, implying both that the sector had broken its longest spell of declines since the financial crisis but also that it had failed to grow. The survey says ‘reduced levels of political uncertainty following the general election led to mild recoveries in new orders and business confidence and a stabilisation of production volumes.’
• Consumer credit rose by 6.1% in December.
• Sterling lower at $1.3016 and €1.177. Oil lower at $54.94. UK 10yr gilt yield unchanged at 0.52%. World markets higher with Far East up in Tuesday trade. Casual Dining Group has launched its Leadership Academy Plus programme, combining its internal talent and leadership programmes with apprenticeships.
• Brexit & politics:
o PM Boris Johnson says the UK will diverge from EU rules. He calls for a Canada-style free trade deal. Michel Barnier has said that will be difficult in the event of divergence.
o Sky says ‘the biggest questions – the ones concerning our economic futures – have yet to be resolved.’ The details all now need filling in.
START THE DAY WITH A SONG:
Yesterday’s song was Daydream Believer by The Monkees. Today who sang:
Suspended from school, and scared to go home, I was a fool,
With the big boys, breaking all the rules
I shed tears with my baby sister
Over the years we was poorer than the other little kids
RETAIL WITH NICK BUBB:
• January Retail Sales Watch: We flagged yesterday that the BRC-KPMG Retail Sales survey for January was due out today, but it will in fact be out a week today, as it will cover the 5 weeks to Feb 1st. Normally, the only 5 week months are March, June, September and December, but every so often there has to be a calendar catch-up, ie a 53 week year and 2020 is a Leap Year. Unless we are very much mistaken, however, the latest monthly Kantar/Nielsen grocery market share figures (for the 4/12 weeks to Jan 25th/Jan 26th) come out at c8am this morning.
• Mulberry: #MadMike struck again yesterday, announcing at 4.43pm that Frasers Group (aka Sports Direct) had bought a 12.6% investment stake in the struggling British luxury accessories group Mulberry. As the latter is capitalised at c£150m, this will have cost him about £18m, which may explain why he didn’t try to buy up the ailing French Connection (where he is a big and frustrated shareholder), in pursuit of his much-vaunted “elevation strategy”. We can see some synergies between Mulberry and House of Fraser, not least as Mulberry lost quite a lot of money supplying HoF before the crash, but the bigger question may be why #MadMike hasn’t made a move on the embattled Ted Baker…