Langton Capital – 2020-03-04 – PREMIUM – Hostelworld, Gregg’s, Beer Duty, Wizz Air, Covid-19 etc.:
Hostelworld, Gregg’s, Beer Duty, Wizz Air, Covid-19 etc.:
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A DAY IN THE LIFE:
I suppose in the dim & distant past there would have been a difference in pronunciation but, putting that to one side, have you ever wondered why there’s an ‘h’ in whistle but not in wistful, and in there’s one in white but not in Wight (or weight for that matter)?
I mean it’s almost as if the manufacturer of letter Hs was on commission. Or perhaps he managed to bung the printers a few bob to ensure that his letter was well-represented in the dictionary.
But nowadays, the teacher who insisted on telling us, in Hull of all places, that you should pronounce why as h-why and white as h-white has long-since died of exhaustion after generations of kids took no notice whatsoever and kicked the ‘h’ into touch.
Still, suggesting that we should standardise out spelling is likely to get nowhere so, with that firmly in the ‘too difficult’ pile, let’s move on to the news:
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THIS IS THE SOLUTION, NOW WHAT WAS THE PROBLEM: Tech makes a lot of things possible, even things that we don’t want. 4 Mar 2020.
• This is the solution, now what was the problem does appear to be the way in which some companies have approached technological change.
• Such an approach does risk expanding the market via supply-push rather than demand-pull.
• This can work – but there are risks of overcapacity, long-running loss-making positions and the rest.
A bit more detail:
• It sometimes pays to take a step back and ask whether you are looking through the right end of the telescope.
• Just because you can do something, doesn’t necessarily mean that you should – there is no moral judgement implied here, just that you may be ahead of the market or, more frustratingly, you may be cleverly addressing a problem that does not really exist
• In the 70s and 80s, miniaturisation meant that producers could turn out watches with calculators on them – but nobody wanted them
• Similarly, you could now attach a miniaturised GPS system to your toothbrush (or, mor practically, your car keys) and it would never be lost again – but who cares? You could grow bananas on the side of Ben Nevis, import icebergs to provide fresh water etc. etc.
More practical, modern-day considerations:
• And not only does the producer or service provider have to get the product right, but they have to get the timing right
• The Internet (and before it steam trains and the motor car) was a product that would succeed but, in the 1990s to 2001, many, many, many fortunes were lost
• And the big one that we have to keep an eye on today may well be delivery
Demand may not be real demand:
• Because sure, people will ‘demand’ delivery if it is free. Or even if it costs a nominal amount – but will they pay a commercial price?
• And the ‘commercial price’ needs to have enough in it to pay the delivery company’s staff a reasonable wage and to provide a sustainable margin for that company, for the restaurant, for the food and drink producers and for the various logistics companies putting all of the above in commercial touch with each other
o Arguably, that doesn’t appear to be the case at the moment. In the UK, Deliveroo is making huge losses and its staff do not believe that they are being paid very well
o Reading between the lines, it really wanted Amazon’s money and there has been talk of it taking convertible debt until the CMA gives it’s opinion on Amazon’s investment
o Deliveroo has been putting prices up – see earlier emails – but the numbers would suggest this needs to go considerably further before the company makes a profit
o And restaurants, though they save on labour, for the most part see delivery as diluting their margin
• Discounting in general:
o Though a little off-topic, it is probably worth mentioning that another way of creating demand is giving away your product for an unsustainably low price
o This may work for drug dealers, as they are creating a market, but it may not work in the long term for the casual diners
What is the answer?
• There may not be one. To shoot off down the odd dead end, or to commit too much capital to a market, may be a fault line in capitalism
• However, it is worth taking a step back from time to time. Putting a real-snow ski slope in that caravan park may not be the answer.
PUBS & RESTAURANTS:
• Gregg’s CEO, Roger Whiteside, has said his firm would pay staff who have to self-isolate because of coronavirus. At this early stage, it’s not clear what such a commitment might cost. Other operators have been unwilling or unable to commit themselves to open-ended payments.
• The TUC has asked the government to allow all workers who do not qualify for statutory sick pay to receive payments in the wake of the coronavirus. TUC General Secretary Frances O’Grady said ‘we all want people to follow the government’s health advice. No-one should be out of pocket for doing the right thing.’
• Gregg’s. It says: ‘significant slowdown in Feb’. But still did +7.5% LfL for the 9wks to 29 Feb. To make the maths work, January positive trading must have been an absolute monster
• The BBPA has reported that beer sales rose in volume terms during 2019 by 1.1% to 8.06bn pints. The BBPA says ‘Government plans to increase Beer Duty could stifle further growth, unless Chancellor Rishi Sunak cuts it in his Budget on March 11th.’
• The BBPA says the 2019 increase was ‘especially impressive’ as there was no football in the summer and the weather wasn’t a patch on 2018. It reminds readers that sales were up by 2.8% in 2018, aided that year ‘by good weather, a Royal Wedding and the FIFA World Cup.’
• The BBPA says ‘former Chancellor Philip Hammond’s decision to freeze Beer Duty in his last Budget back in October 2018 appears to have been a key factor in the growth of beer sales in 2019, with the duty freeze coming into place in February 2019.’
• BBPA CEO Emma McClarkin says ‘beer sales increasing is clearly good news for our sector.’ She says ‘Rishi Sunak has a fantastic opportunity to nurture this growth by cutting Beer Duty in his Budget. Pubs and brewers have an overwhelmingly positive impact not just on the UK economy – supporting 900,000 jobs – but also socially and culturally across the UK, so it’s important the Chancellor actively supports them.’
• The IEA has commented on the taxation of sugary drinks saying that, although ‘the law of demand dictates that, all else being equal, higher prices lead to fewer sales’ there is a bigger question as to why the government should get involved at all.
• The IEA suggests that people on lower incomes will be impacted most, although that is true for taxes on any income inelastic products such as beer, cigarettes or food in general.
• British supermarkets are said to have drawn up ‘feed the nation’ plans for if there is a run on products or panic buying of some essentials.
• GfK has commented on the impact of the covid-19 virus saying that it has pulled down retail sales globally by as much as 5% over the last 4wks. GfK points out that Italy has been particularly badly impacted.
• GfK says that there are signs Chinese consumers are postponing big ticket spending.
• Plenty of discounts still to be had. Prezzo offering 40% off mains till 29 March. Pizza Express 25% off food & drink until tomorrow. Café Rouge & Bella Italia offering 25% and 30% respectively off food and mains until the end of this month.
• Windsor & Eton Brewery opens its fourth site, the Rose & Olive Branch, located at Virginia Water. The brewery says the new location is ‘a traditional country pub with a log fire and wooden pews serving fresh food and afternoon tea alongside its beer range.’
• Campari completes the acquisition of Baron Philippe de Rothschild France Distribution S.A.S. for a reported €60m. Baron specialises in the distribution of international premium spirits, wine and champagne brands in France.
• HMRC reports 90 new distilleries opened in the UK in 2019, up 22% yoy.
• Asahi has offered to divest brands it would acquire through purchasing Carlton & United Breweries, including Stella Artois and Strongbow, in a bid to appease competition regulators.
• Impossible Foods has cut the price it charges restaurants to stock its products by 15% in a move to step up its challenge against the meat industry.
• Looking at developments in the US casual dining market, journal NRN says that delivery is still one of the areas seeing the most active innovation. It points out that McDonald’s has added Postmates to its delivery partners saying ‘as customers demand more convenience, McDonald’s restaurants around the world are working with multiple partners to support the growth of McDelivery.’ Elsewhere, Inspire Brands is perhaps to launch ghost kitchens and Panda Express is experimenting with “lockers” or small kiosks and online orders.
• Amazon stock has plunged more than 10% over the last two weeks as third-party sellers struggle with stock shortages. The online giant has been encouraging sellers to put their companies on “vacation status”.
HOLIDAYS & LEISURE TRAVEL:
• Hostelworld back in growth H2 but warns on costs of Covid-19.
• Hostelworld Group has reported full year numbers saying that EBITDA is in line with guidance and is ‘underpinned by a return to net bookings growth during the latter part of H2 2019.’ The company says it has identified significant opportunities for future growth.
• Hostelworld says ‘while full year net revenue of €80.7m declined 2% (2018: -5%), H2 net revenue of €41.8m increased 6% (H1 2019: -9%).’ It says full year net bookings declined by 5% (2018: -1%), with a return to net bookings volume growth during H2 2019 -1% (H1 2019: -8%), driven by Q4 2019 +1%.
• Marketing costs rose and adjusted EBITDA of €20.5m (2018: €22.5m) was ‘in-line with market expectations, down 9% on 2018 and 11% on a constant currency basis.’
• Adjusted EPS is 15.5c (2018: 18.2c) with the dividend ‘rebased’ to 6.3c for the full year (but a final of only 2.1c vs 9.0c last year). CEO Gary Morrison says ‘following the group’s return to growth in 2019, I see significant opportunities to build a broader catalogue of experiential travel products beyond hostel accommodation. These types of experiences may include opportunities to study, work or volunteer abroad, with hostel stays featuring as part of an extended itinerary.’
• Hostelworld says ‘overall, the Group sees significant potential for the further deployment of capital to enhance future growth through both organic and inorganic investment opportunities. As a result, the Board has taken the decision to rebase the dividend policy. A rebased progressive dividend with a pay-out of between 20-40% of Adjusted Profit After Tax will enable investment in organic and inorganic opportunities which should see shareholder return increase in the medium to long term.’
• Re Covid-19, the company says ‘while we entered 2020 with positive momentum, trading since late-January has been challenged by the outbreak of the COVID-19 virus which is having a significant impact on global travel demand, within Asian markets and more recently within the European market.’
• It says ‘given that the depth and duration of the virus outbreak is impossible to forecast at this time, we are unable to calibrate its effect for the balance of the year; however, if near term trends were to persist to the end of March we estimate the impact to EBITDA to be in the range €3m to €4m for Q1 2020. With continued tight cost control and our strong cash generative characteristics, the Group remains resilient in volatile market conditions.’
• Wizz Air has updated on trading saying that ‘demand for air travel within Europe in March 2020 has been impacted especially in those regions that are currently more affected by COVID-19.’ The company has ‘made adjustments to its flight schedule…primarily to Italian destinations.’
• Wizz Air says ‘at this point in time it is difficult to predict the extent and the duration of the outbreak and the impact on the next financial year, however we remain confident that as the situation normalizes, Wizz Air will continue its highly successful trajectory.’ CEO József Váradi says ‘our ever-disciplined attitude to cost enables Wizz Air to partly offset some of the headwinds due to the COVID-19 outbreak, which have driven a temporary decline in demand and an increase in the cost of disruption as we put the well-being of passengers and crew first.’
• The European Tourism Association (ETOA) claims the coronavirus crisis means tourism into Europe faces its biggest challenge since the 1991 Gulf War.
• The Global Business Travel Association estimates the coronavirus outbreak could cost the industry almost $47bn a month. a quarter of GBTA supplier companies have reported that the virus has had a ‘significant’ effect on revenues.
• Operators cutting flights in response to reduced demand (see below). This is a) sensible but b) doesn’t help with capacity utilisation as the planes and their staff are still on the books and costing the airline companies money.
• Ryanair cuts its Italy programme by up to 25% this spring in response to the coronavirus outbreak, affecting flights due to depart between March 17 and April 8.
• British Airways has cut or merged more than 200 flights from London between March 16-28 to destinations including New York, Italy, France, Germany and other European countries.
• Miles Morgan, a leading independent agent, claims the majority of consumers are carrying on with their holidays despite coronavirus concerns. Mr Morgan said ‘I am pleased to say over 99%, the vast majority, are carrying on with their holiday, which is absolutely right.’
• Travel Republic has closed its London Road, Norbiton headquarters after a member of staff tested positive for coronavirus.
• Companies such as Facebook and Amazon are restricting corporate travel within the U.S. because of the coronavirus outbreak. Analysts warn the move will produce a ‘cascading’ effect on hotels, airlines and convention centers.
• Hyatt Hotels has withdrawn its 2020 outlook and earnings sensitivity with president and CEO, Mark S. Hoplamazian, saying ‘This is an evolving situation, and our ability to assess the financial impact of COVID-19 on our business continues to be limited due to quickly changing circumstances and uncertain consumer demand for travel.’
• Talk that new Chancellor Rishi Sunak will increase fuel duty in his Budget next week will be doing little to lift the holiday companies’ moods.
• Heathrow baggage handlers represented by the union Unite are set to strike in March and April.
• HotStats has reported that US hotels increased their gross operating profit per available room by just 0.6% in January.
• The Saturday (England Wales) and Sunday (Scotland France) rugby Six Nations’ games are still scheduled to go ahead.
• MWM, the music app publisher, has raised $55.9m in its latest funding round led by Blisce/. Some of MWM’s apps include edjing Mix, Beat Maker Pro, Drum Machine, Beat Snap 2, TaoMix 2, Guitar and Drums.
• Sky News reports a letter from Dom Hallas, executive director of The Coalition for a Digital Economy (Coadec), has warned UK competition watchdogs that they risk ‘killing’ successful British start-ups by subjecting them to protracted probes while international rivals are left free to innovate.
FINANCE & ECONOMICS:
• The US Fed yesterday announced a 0.5% cut in interest rates in an effort to ‘protect the longest-ever economic expansion from the spreading coronavirus.’ The Fed reports ‘the coronavirus poses evolving risks to economic activity.’
• Mark Carney has said the coronavirus could have a ‘large’ impact on the UK (and indeed the global) economy.
• Rishi Sunak is reported (by the Telegraph) to have ‘re-written part of his budget’ in an attempt to combat the economic impact of the coronavirus.
• The UK IHS Markit Construction PMI for February came in at 52.6, up from 48.4 in January. Any number greater than 50.0 implies expansion. The much larger Services PMI will be announced at 9.30am today.
• Some anticipating a rate cut by the Bank of England.
• Sterling higher at $1.2813 and €1.1479. Oil up at $52.62. UK 10yr gilt yield down 2bps at 0.39%. World markets: UK & Europe higher yesterday but US lower. Far East mixed in Wednesday trade.
START THE DAY WITH A SONG:
Yesterday’s song was Rock the Casbah by The Clash. Today, who sang?
And now you dare to look me in the eye,
Those crocodile tears are what you cry
RETAIL WITH NICK BUBB:
Intu Properties: The embattled shopping centre business Intu Properties was expected to publish its finals tomorrow, along with news on the rescue rights issue, but it has instead issued a detailed trading update today and postponed the results until March 12th. Needless to say, it has not been possible to raise the massive £1.3bn of new equity demanded by the banks (although discussions continue) and with property values plunging by 22% at year-end, the debt to asset ratio has soared to 65%, even after the recent Spanish sales. Discussions with the banks about covenant breaches continue…There is a conference call with analysts at 8.30am and by then the share price is likely to have dropped into “penny stock” territory (it closed at 10.6p last night).
Grocery Market Share Watch: Yesterday’s the latest Nielsen grocery sales figures (for the 4 weeks to Feb 22nd) showed that overall supermarket industry sales growth remained at 0.7%, but the rival Kantar survey yesterday reported that sales were up 1.4% for a similar 4 week period (to Feb 23rd), on a “Till Roll” basis, albeit that was still only a little above the 0.9% level of food price inflation. However, on a pure “Grocery” basis (ex-Non Food) overall sales were as much as 1.7% up, according to Kantar, boosted by Aldi/Lidl growth of 7.6% combined. Morrisons was the worst of the “Big 4” on this basis, with gross sales 0.7% down, whilst Tesco was 0.5% down gross, but Sainsbury was up by 2.1% gross and Asda was up 0.6% gross. And M&S Food was up by 4.7% gross.
John Lewis Partnership Trading Watch: In the absence of the usual weekly JLP sales figures, we have been flagging every Wednesday that it’s easy enough to look back at the John Lewis and Waitrose sales figures from a year ago and make an educated guess as to what the outcome would be this year, but John Lewis has apparently been doing surprisingly well in recent weeks, helped by weak comps and better Online growth. In w/e Feb 29th, the national footfall figures were again pretty weak (particularly on the High Street), but Online growth should have helped to offset poor Store sales. The comp last week was much tougher on the face of it (as much as +9% LFL a year ago), but that was mainly because of the “Beast from the East” cold weather 2 years ago (remember that?) and the spring-like weather a year ago and we think that LFL sales this year should have been only slightly down at John
News Flow This Week: This evening brings the latest quarterly FTSE index review, based on last night’s closing prices (with Kingfisher now more at risk of ejection from the FTSE 100 index than Morrisons). Tomorrow then brings the John Lewis Partnership finals and Bonus announcement.