Langton Capital – 2020-02-25 – PREMIUM – FUL, premiumisation, managing decline, HOTC etc.
FUL, premiumisation, managing decline, HOTC etc.
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
It’s Pancake Day today.
More properly titled Shrove Tuesday, it’s the day on which the faithful historically emptied the contents of their larder into a pan and fried it up to have a mega-binge ahead of the 40 days of Lent that follow which, all things considered, must have been much less fun.
But, as I’m in London, I won’t have the chance to make pancakes for the family. And that’s a shame, as these aren’t just pancakes, they’re dad pancakes.
Meaning that they come in all shapes and sizes. And some will be cooked to a crisp, others will be gooey and wet, and, on occasion, they will be adorned with whatever was in the pan before I put the batter in (or by whatever fell in subsequently).
So, despite the fact that the family up north don’t seem too distraught to be missing out, what’s not to like? On to the news:
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WHY IS IT SO DIFFICULT TO ENGAGE REVERSE GEAR? Downsizing is, arguably, tougher than growing a business. 25 Feb 2020.
The usual Plan A:
• Companies often (indeed almost always) tell shareholders, the press, analysts etc. that their ambition is to grow their estate.
• They often pick a number of units, which may well-thought-out after exhaustive demographic studies, or it could just be after a little post-code analysis, but it seems somehow natural.
• The ambitious company has 20 sites and it wants to grow to 120. Or it has 150 and it believes it can get to 300 etc. etc.
Bumps in the road.
• In reality, endless expansion is difficult or impossible.
• If GDP growth is 2% and capacity is flooding into markets such as coffee shops, Asian grab and go or casual dining, there may not be enough growth to go around
• Furthermore, putting the size of the market reality check to one side, mistakes are made on the ground
• Some proposals go out of fashion and other estates, such as Frankie & Benny’s, are arguably expanded beyond their optimal point
• At this stage, contraction becomes a real possibility. Indeed, it may be the most sensible option
There’s no magic wand when it comes to contraction:
• The theory that a company should retrench is fine but, at this stage, a sensible question to ask will be ‘how’?
• The only quick way to retrench is to go bust.
• But this may be deemed suboptimal and other solutions could be sought.
• Some contraction may be achieved via a CVA or via one-on-one negotiations with landlords. Natural wastage of 25yr leased sites is a slow process and ‘selling’ or even giving away units that the operator wishes to exit may not be possible.
• We know of some operators offering to take sites from less successful players but only if the latter leaves all its kit, pays a reverse premium and subsidises the rent on the unit(s) for the remainder of the lease
• And that one could be a hard sell to shareholders
The lessons from history:
• When one of two opposing armies attempts to disengage, there is often a rout.
• Although the partition of India was very difficult, the decline of the British Empire was a triumph of diplomacy in that it was otherwise largely bloodless.
• This is not always the case.
• In the world of commerce, many variables change when a company is seen to be in decline.
• This isn’t just some academic exercise where the ruler is pointed in a different direction.
• Staff may leave, good would-be joiners may look elsewhere, suppliers will be cautious, ditto banks, shareholders might not support cash-calls, bolt-on acquisitions won’t take paper, customers may be chary etc.
• And the markets are historically not good at valuing decline. The net present value of future earnings streams will be hard to put a price on.
• There is hopefully a U-bend out there where decline stops and growth resumes. But where is it? And what are the gradients and lengths of both the downward and upward legs?
The academic versus the actual:
• It is very tempting for incoming managements to put a line through problem divisions and to ‘provide’ for all future costs in one fell swoop
• The idea being that the division no longer exists but, in reality, it does.
• Negative cash flows are unaffected by accounting provisions and the failing units may be absorb even more management time in their disposal phase than they did when they were limping along as a valued member of the group
• And ‘saying don’t make it so’. All of the practical repair and disposal work still needs to be done.
• All things considered, decline may indeed be harder to manage than growth.
PUBS & RESTAURANTS:
• CGA has suggested that the out-of-home drinks market is ‘increasingly polarised between super-premium niche brands and big mainstream names.’
• CGA’s ‘Premiumisation: Change, Challenge and Opportunity’ report attempts to identify growth opportunities for operators. It sasys that 47% of consumers are willing to pay more for a better-quality drink with demand for super-premium spirits rising by 21%. CGA says ‘premiumisation continues to reshape the beer category too, with 848,000 more people drinking world lager in 2019 than in 2016.’
• CGA says ‘from spirits to beer to soft drinks, premiumisation continues to disrupt the on-trade. But it’s a complex and fast-changing story, and we’ve seen the market diverge substantially over the last year, with examples of growth in both super-premium and mainstream categories. Where the market goes from here remains to be seen—but it’s clear that an understanding of the nuances in consumers’ attitudes to factors like quality, range and price is more crucial than ever in 2020.’
• CGA says ‘consumers are increasingly fickle and experience-driven and have developed very high expectations of out-of-home eating and drinking.’ It says ‘understanding the drivers, dynamics and habits of their behaviour has never been more important when it comes to capitalising on premiumisation.’
• HOTC had some supply chain issues but it remains confident. The company does not mention the words coronavirus, Covid-19 or tourist anywhere in its H1 statement.
• Hotel Chocolat Group has reported H1 numbers saying that revenues rose by 14% to £91.7m with underlying pre-IFRS16 EBITDA up 7% to £18.5m. The company reports EPS up 20% at 11.5p with a H1 dividend unchanged at 0.6p.
• HOTC says it opened 9 new UK sites in H1 (to move to 125) with 2 new sites in the US and 3 in Japan. CEO Angus Thirlwell says ‘this was another strong period for Hotel Chocolat. Our new store openings contributed three percentage points of the growth in the period, with the remaining balance coming from existing locations, digital and wholesale channels.’
• Thirlwell says ‘while our new markets in the US and Japan are still in the early stages of development, consumer response to the brand is encouraging, sales are growing, and we believe we have a deliverable plan to achieve attractive returns.’ He says ‘our strong growth came from a wider variety of sales channels than in previous years, which led to some initial challenges in our supply chain. We are now making good progress with investments and upgrades in our supply chain which will fully address these inefficiencies and increase our international and multi-channel supply capability, ensuring we continue to deliver profitable growth.’
• The BBPA has commented on the relaxing of licensing hours to mark the 75th anniversary of VJ Day, with Chief Executive, Emma McClarkin stating: ‘Relaxed licensing hours for pubs would be welcomed by people looking to celebrate the occasion and remember those who gave so much during the war. We look forward to responding to the consultation in due course’.
• UKHospitality has welcomed the consultation on relaxing licensing hours that mark the 75th anniversary of VJ Day. Chief Executive of UKHospitality, Kate Nicholls commented: ‘This is a pragmatic and positive step from the Government. As with the extension to mark the anniversary of VE Day, an extension of licensing hours on VJ Day will allow pubs to stay open longer without the costs associated with applying for a temporary extension’.
• Ei Publican Partnerships has launched a ‘Leap Year’ campaign, following the success of its recent ‘Cheer Up January’ campaign. The new campaign, which will run between 24 February to 14 March, features an extended range of drinks products and old favourites on offer to customers.
• Insolvencies in the hospitality sector have increased by 10.4% in 2019 according to research from real estate adviser Altus Group.
• The public purse paid out £346m to cover redundancies at failed firms including a wave of retailers and bust package holiday business Thomas Cook. Altus reports the figure was an 18% increase on 2018 and the highest in seven years.
• This is in line with normal practise. Poo rolls downhill and the taxpayer is right at the bottom. Companies fail, they pressure landlords and their banks, the latter pressure the government and HMG is nothing more than the sum of its taxpayers’ income.
• Liv-ex has announced that US buying activity on its platform has increased following the news that 100% tariffs will not be imposed.
• Premium bar operator Arc Inspirations has appointed Laura as Head of Marketing and Tim Knockton as Financial Director.
• Lucozade Ribena Suntory has launched a new sub-brand aimed at a new audience to the energy category. Natasha Baranowski, Lucozade Revive senior brand manager, said: ‘Lucozade Revive offers a different type of energy for shoppers. It’s not a boost or a buzz, it’s a naturally inspired uplift that makes drinkers feel revitalised and back in the groove’.
• Per Pragma Consulting, according to a recent survey, 80% of consumers regard sustainability as important and that 70% of them would pay an additional 35% for sustainable products.
• Mondelēz is developing a plant-based version of Dairy Milk. The company is understood to have been testing the recipe for milk-free Dairy Milk for around two years. More choc sans lait rather than chocolate.
• PepsiCo has agreed to acquire Chinese online snack company Be & Cheery from Haoxiangni Health Food Co for $705m. PepsiCo said Be & Cheery’s data-led innovation capability and flexible manufacturing and sourcing enables it to quickly adjust its product portfolio
• Barclaycard’s first Small Business Barometer has suggested that small and medium-sized UK businesses are optimistic about trading for 2020 after a growth spurt late last year. Barclaycard says small firms feel most confident. The card servicer says ‘it’s very encouraging to see that SMEs expect to increase revenue in both the near and longer-term.’
• Barclaycard says businesses in the North East and Yorkshire and the Humber were the most optimistic in the UK in both the short and long-term.
• Chairman of Fulham Shore David Page yesterday told a meeting organised by Shares Magazine that his company, which operates on a high volume, low margin business model, is trading well.
• Mr Page says that operating in the £9 to £15 all in cover price bracket meant that both Franco Manca (51 units) and The Real Greek (18 units) have defensive qualities in a challenging market.
• Estimates for the current year (year to March 2020 and estimates pre-IFRS16) are for 70 units, £70m of revenue and around £8.5m of EBITDA. The group has around £9m of debt with a market cap at 11.75p of £67m. EV is therefore £76m and the group is trading at around 9x (soon to be) historic EBITDA or just over £1m per restaurant. This implies perhaps 1.5x book value. Wagamama changed hands for almost three times that much.
• Fulham Shore reminds observers that it slowed its opening programme post the Brexit vote. Property opportunities are now becoming apparent and the group has put capex into its CRM system and into reducing debt.
• Fulham Shore says it believes it would have had takeover approaches before now in the absence of Brexit. It says financiers who put money into the market in 2007, 2008, 2009 now find themselves having paid too much, having secondary sites and see no way of getting out of their investment in the short term (despite having held them for more than 10yrs in some cases). There is something of a crowd at the exit door. In very recent trading, FUL says January and February haven’t been helped by the wet and windy weather but it remains confident in its prospects.
HOLIDAYS & LEISURE TRAVEL:
• Calls for a reduction of APD have been made by a group of 44 MPs and peers, urging Chancellor Sunak to cut the tax on outbound flights.
• Marriott International added 10,000 rooms to its pipeline in the Caribbean and Latin America in 2019. Last year, Marriott increased its portfolio in the region to 268 open properties and 55,195 rooms in 34 countries and territories.
• East Midlands Railway (EMR) is proposing a half hourly non-stop service between London St Pancras and Luton airport parkway in its December timetable.
• Abta warns that up to 15,000 UK travel jobs overseas could be at risk due to upcoming EU negotiations. The travel body has also urged the government to reconsider elements of its new immigration policy.
• Shares in European airlines fell sharply yesterday as the coronavirus outbreak in Italy sparked fears about travel across the continent. EasyJet shares were down 15% and Ryanair stock had dropped by 12% yesterday.
• STR reports European hotel occupancy up 1.4% yoy in January to 58.5%. ADR was up 0.5% to €101.14 with RevPAR up 1.8% to €59.18.
• Esports company Gfinity has announced that it has been appointed to deliver on-line platform for inaugural ePremier League USA. CEO Graham Wallace says ‘we are delighted to be delivering the online qualifying rounds and playoffs for the first ePremier League USA.’ He adds ‘we continue to focus on working with our clients to deliver unique and exciting events for gamers in countries all over the world.’
• Puttshack has plans to open two sites in the US in Chicago and Miami. The sites are scheduled to open late 2020 and early 2021 respectively.
FINANCE & ECONOMICS:
• The IMF has warned that the world’s ‘fragile’ economic recovery could be derailed by the Covid-19 outbreak. Growth in China, unsurprisingly, has been most impacted by the disease. The IMF says ‘even in the case of rapid containment of the virus, growth in China and the rest of the world would be impacted.’
• Stocks globally slumped yesterday on fears of the economic impact of the coronavirus. Several major markets fell by around 3.3% (including the UK), which represents the worst performance since 2016. The Italian markets fell by more than 5%. Gold prices rose to 7yr highs.
• Sterling lower at $1.2929 and €1.1913. Oil lower at $56.63. UK 10yr gilt yield down 5bps at 0.54%. World markets lower yesterday. Japan down 3.3% in Tuesday trading but Hang Seng in Hong Kong little changed.
• Brexit & politics:
o The Resolution Foundation predicts that the government may end up committing itself to £1,000bn per year of borrowing under its current spending proposals. This would mean a greater role for the state than at any time under the 10yr premiership of Tony Blair.
o The Resolution Foundation has warned that spending commitments will mean tax rises unless Rishi Sunak is willing to breach former chancellor Sajid Javid’s fiscal rules.
START THE DAY WITH A SONG:
Yesterday’s song was Tessellate by Alt-J. Today, who sang:
“And it’s Friday night and it’s kicking in,
And I can’t dress, they’re gonna crucify me
Oh, but you and all your vibrant youth
How could anything bad ever happen to you?”
RETAIL WITH NICK BUBB:
Hammerson: After its cut-price £450m retail park sale on Friday, the shopping centre Hammerson is in a less precarious financial position than its embattled rival Intu, but Hammerson was still expected to cut its dividend with its finals today and it has not disappointed. Oddly, it has held its final dividend, but has flagged that it will cut the total dividend payment in the new 2020 year, from 25.9p to 14p, as “with the outlook for the UK retail market remaining uncertain, we believe we should maintain our focus on reducing debt during 2020”. The c19% reduction in NAV per share is shrugged off and the CEO David Atkins boats of “the outstanding contribution from premium outlets”, with no mention of the current travails of its flagship Bicester Village outlet…
Hotel Chocolat: Talking of dividends, some eyebrows may be raised at the failure of Hotel Chocolat to lift its interim dividend today, even though interim profit growth (for the 26 weeks to Dec 29th) was held back, as expected, to 7% by supply chain inefficiencies. Encouragingly, however, trading so far in 2020 is said to have been in line with expectations.
Retail Sales Watch (1): The Retail Sales month of February (the 4 weeks to Feb 29th) is nearly over, but we haven’t seen the final word yet on how good January was on the High Street, given the debate about the strength of the “Boris Bounce”…The wretched Office of National Statistics (ie the ONS or what we mockingly call the “Planet ONS”) reported on Thursday that non-seasonally adjusted total Retail Sales by value were up by 3.7% last month (ex-petrol), thanks to improbably good growth from Small Businesses…But the BRC-KPMG unadjusted measure of gross sales (which is based on Large Businesses) was only up by 0.4% in gross terms (flat LFL). So, who was right? The ONS? Or the BRC? Well, the Retailing consultancy group, Retail Economics (RE), which was founded by Richard Lim (who used to run the monthly BRC-KPMG Retail Sales survey) has just come out with its own detailed overview of
Retail Sales Watch (2): Interestingly, RE say that “the climb in Retail Sales is unlikely to persist heading into February. Storms across the UK and fears around the coronavirus are likely to have dampened consumers’ spirits as well as their homes”. And RE have done some opinion polling on the subject of the coronavirus, finding that 23% of consumers see it as a high or very high threat to health in the UK and that 31% of all consumers would cancel Overseas holidays if the virus persisted, with many of the more concerned consumers already cutting back on public transport/public places (albeit with Online spending taking up the slack).
News Flow This Week: Tomorrow brings the finals from CapCo (the Covent Garden landlord), along with the McColl’s finals, whilst Thursday brings the Inchcape finals, the Howden finals and the Watches of Switzerland Q3 update. Then, with the end of the month approaching rapidly now, we get the monthly GFK Consumer Confidence survey first thing on Friday.