Langton Capital – 2020-03-10 – PREMIUM – Safestay, Cineworld, Coronavirus, calls for aid etc.:
Safestay, Cineworld, Coronavirus, calls for aid etc.:
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A DAY IN THE LIFE:
The dog, gazing lovingly at us as he does from time to time, has yet to realise that, if Covid-19 really does cause a major disruption to food deliveries, we’ll be sharing as much of our food with him going forward as he currently does his with us.
Because, not that we’d particularly like to participate of the roadkill and horse manure that he tucks into from time to time, he has never offered us any and, when he’s standing protectively over it before he munches down, I wouldn’t like to put his loyalty to the test too much when it comes to food.
So, our priorities are set. Us, then mowing the grass and getting out for a beer now and then, and then him. Hopefully for his sake he’s been burying bones around the garden. On to the news:
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COVID-19: In the general email (below) we look at some current developments. Here we have a quick look at human nature. 10 Mar 2020:
• It may be fine saying don’t panic buy essential products but, as with all panics, at the micro level, people instinctively know that it’s better to panic first rather than last.
• And there is a degree of justification because, if you may have to self-isolate, you need to get supplies in ahead of events.
• That said, see if you can reconcile #toiletpaperapocalypse and other Twitter hashtags on the subject with the suggestion that you should ‘love thy neighbour’.
• Over the medium term, panic buying brings forward consumption and it can changed behaviour going forward.
• All those tins of baked beans will need to be eaten. This may depress demand (both for eat in and eat out) when or if we get back to normal.
• Travel professionals say it’s safe to travel, the football league says it’s safe to attend matches, Cheltenham is going ahead etc.
• It’s almost as though these people had an agenda.
• As Charlie Munger says, show me the incentive and I’ll show you the outcome.
Babies and bathwater:
• Everything gets thrown out at once. The stock market markdown has not perhaps been as discriminating as it could have been.
• But this is normal practise.
• Over coming days & weeks, there may be a semblance of order.
• Younger people are less at risk from the virus. Venues catering to the young may see volumes less adversely impacted.
• 1970s style Bingo would be at the other end of the spectrum. Bowls clubs and the like may be suffering.
CORONAVIRUS FEEDBACK: Pubs, bars & restaurants:
There has been a certain lack of discrimination when it comes to share mark-downs:
• Leisure companies with pre-existing conditions are particularly vulnerable to Covid-19. Co-morbidity characteristics include high gearing, onerous leases, tired products, addiction to discounting etc
• See Pubs & Restaurants for details on current discount offers.
• Throw in exposure to tourists, airports, travel hubs, cinema locations, shopping centres & retail parks and the above will be particularly vulnerable. Better to offer EDLP products to younger, non-tourist, local consumers.
• It’s tempting to target high-spending, corporate customers but, as some events venues are finding out, they can be here today and gone tomorrow.
• High debt, onerous leases, poor cashflow.
• Undifferentiated products, little obvious raison d’etre and a reliance on vouchers.
• Sites on retail parks, leisure parks and in shopping centres, airports, travel hubs and/or in hotels.
• An older customer base.
• Almost by definition, conservatively financed operators with a decent, authentic product, located on the high street or in residential areas with a younger customer base, should perform relatively (repeat relatively) well.
In the short term:
• On the margin, people will have a reduced inclination to go out
• They will linger less in airports, by the train station in the evening etc.
• St Patrick’s Day on 17 March is unlikely to live up to pre-Covid-19 hopes.
• Mothers’ Day on 22 March could be poor. It might not be appropriate to take mothers, particularly elderly mothers, out for a meal and to meet people in the middle of a health scare
• Self-isolating could be patchy. It may depend on the generosity of employers. The fate of gig workers is uncertain
Trying to look through this whole thing.
• The epidemic could / should, for better or worse, have worked its way through by end-summer
• The billions of pounds worth of freehold & leasehold assets, fixtures & fittings & equipment will not have been destroyed.
• However, some, hopefully only a few, of the companies that currently operate them may have been
• Creaking balance sheets with patchy cash flows are the corporate equivalent of old age, diabetes, morbid obesity and a heavy smoking habit when it comes to Covid-19
A look at what the Italians have done:
• Northern Italy, an affluent region with an excellent healthcare system, over the weekend imposed a series of restrictions on travel, mass gatherings and the like. This has now been extended to the whole of the country. Here are a few of the orders:
o All schools and universities must be closed. Similarly, all museums and places of culture will be closed and all cultural, religious or festive events are suspended
o Cinemas, theatres, dance schools, game rooms, casinos, nightclubs and other similar places shall remain closed
o Swimming pools, sports halls, thermal baths, cultural centers and wellness centres must suspend their activities
o Interestingly, bars and restaurants can remain open from 8 a.m. to 6 p.m. provided they respect the safety distance of at least 1 meter between customers
o All sporting events and competitions are suspended & ski resorts are closed until further notice
o Shopping centres and department stores must remain closed on public holidays and the days preceding them
• If the above were imposed in the UK, it would be pretty tough for closed units. Pubs & restaurants would find their hours and capacities severely curtailed
CORONAVIRUS FEEDBACK: Holidays:
Setting the scene:
• Nobody wants to be stuck on a cruise ship or in a hotel or in an airport with a bunch of sick people.
• It would play havoc with your plans to get back to work, get the kids back to school etc and it might kill you.
• And when people are unwell, or fear that they may become unwell, they want to be at home.
• Covid-19, it’s safe to say therefore, is not likely to be a positive development for leisure travel.
• The main booking period for summer holidays is over by now but, if the lates market is soft (or non-existent), then the year can still very much be ruined.
Recent developments & feedback.
• Outbound holiday demand is weak. Some reports of bookings being down 50% LfL on the same period last year. All countries are impacted but Italy stands out as an area of particular concern.
• The US is telling older people with pre-existing conditions (an important demographic to the cruise industry) to think long and hard before taking a cruise
• A great deal of many tour operators’ profits are made on the margin
• Ireland’s largest hotel group says it has seen a “significant” rise in cancellations as a result of the coronavirus. There has also been a “significant reduction” in new bookings.
PUBS & RESTAURANTS:
• Leading trade body UK Hospitality has called for ‘wide-ranging business support to deal with the threat of the coronavirus.’ See Langton comment above re the clear and immediate threat to a number of businesses.
• UKH says ‘hospitality businesses need immediate and wide-ranging support to deal with the threat of the coronavirus/’ It says ‘hotel occupancy has fallen 15% while eating and drinking out has declined by 7%.’ Langton believes that, whilst these may be representative of the country as a whole, certain areas, such as central London and airport venues, are worse.
• UKH says that forward bookings across hotels, restaurants, pubs and bars has fallen by up to 50%. Operators have pointed out that the virus has not really struck yet. It remains to be seen whether the virus or simply the fear of it will have the greater impact on business.
• UKH asks for a 3mth moratorium on business rates and for an extension in the payment of VAT, PAYE and National Insurance. It also asks for a VAT cut. CEO Kate Nicholls says ‘hospitality businesses are on the front line, so to speak. There has been a significant impact on the sector. Bookings are down, footfall is down, and all signs point to it getting worse before it gets better.’ She continues ‘this is now an emergency for our sector. If Government doesn’t act to mitigate the impact and give us support, businesses are in danger. This means cash flow becomes a problem, venues are under threat and jobs at risk.’
• Discounts running at the moment. Bella Italia 30% off mains, Café Rouge 25% off food, ASK 40% off food, Prezzo 25% off food or 40% off mains, Pizza Express 25% off all food & drink, Frankie & Benny’s 25% off mains, Chiquito 20% off mains. Where is the road back to full price?
• City AM reports that The Devonshire Club, close to Liverpool Street station in the City, could collapse if a deal to take it over is not completed this week. A buyer has just pulled out.
• Starbucks is testing a prototype biodegradable cup in a number of its stores in London, New York, San Francisco, Seattle, and Vancouver.
• National Restaurant News reports that US businesses ‘are freezing travel and large conventions are being postponed or cancelled across the country, leaving restaurants to manage the fallout of lost bookings and dampened sales.’
• UKHospitality reports a sector wide drop in footfall over the last week, with some key areas of central London dropping by as much as 30%. CEO Kate Nicholls said ‘It’s as if somebody flipped a switch last week.’
• Pernod Ricard invests in Kyoto Dry Gin’s Ki No Bi ultra-premium gin brand. The Kyoto Distillery opened Japan’s first dedicated gin distillery in Kyoto in 2014.
• Grind partners with Soho House & Co to become the exclusive UK coffee supplier to the private members’ club.
• Domino’s Pizza Group has announced that it is to appoint Matt Shattock as a Director and Chairman with effect from 16 March 2020. Mr Shattock will also be a member of the Remuneration Committee and Chairman of the Nomination Committee. Mr Shattock is currently non-executive Chairman of Beam Suntory Inc. Prior to joining Beam, Matt held senior roles at Cadbury plc and Unilever.
• Bristol-based Psychompomp Microdistillery & Circumstance Distillery has pivoted from gin to hand sanitisers, making the latter out of ethanol and gin botanicals already on-hand at their facilities.
• Administrators at Oddbins and Wine Cellars Trading have said the businesses are facing closure if the sale purchase currently on the table does not complete by the end of March.
• In the US, El Pollo Loco is preparing to roll out a new prototype store at more than 300 restaurants over the next several years. For the quarter, the company posted a 3.9% increase in systemwide same store sales.
• UKHospitality warns that more than 200,000 job vacancies across the sector will be left unfilled if the Government’s new immigration bill is enforced in its current form.
• The BRC and KPMG report retail sales down 0.4% in February due to bad weather and the looming threat of coronavirus.
• Starbucks has closed a location in Seattle after a worker tested positive for coronavirus.
• In the US, delivery services DoorDash and Postmates are introducing new health and safety measures to combat the spread of COVID-19. Postmates has introduced a non-contact delivery option on its app for customers who prefer restaurant or merchant deliveries to be left at the door.
HOLIDAYS & LEISURE TRAVEL:
• Hostel operator Safestay has updated on trading saying that ‘the spread of the COVID-19 virus is having an impact on bookings across the hostel network.’ It says ‘we have experienced a material reduction in new bookings over the last week against our expectations and there have been a growing number of group bookings from schools and colleges which have been cancelled or postponed.’
• Safestay says ‘it is too early to say what the full impact from COVID-19 might be in the current financial year, as it is not known how long the virus will continue to impact travel and spending patterns in Europe and the UK.’ It says it ‘entered 2020 in a strong financial position’ and adds ‘the Board is confident that the business is well placed to weather the current challenges and return to growth as and when the travel market normalises.’
• Safestay says ‘in the meantime, the Company is reducing flexible costs where possible to offset the dip in bookings whilst strictly adhering to all health advice in order to help protect all of our staff and guests.’
• Public transport and schools could be shut down in the UK to contain the spread of coronavirus. Rory Stewart said the ‘short-term economic damage’ of shutting down Transport for London, for instance, would be worth it to ‘stave off a bigger spread’.
• Ryanair is further reducing the number of flights it operates to Italy and suspending all domestic routes in the country.
• Booking.com’s parent company, Booking Holdings, has seen its shares slide in recent days. Bloomberg points out that it’s revenues are ‘entirely reliant on travel.’
• The Foreign & Commonwealth Office has begun to advise against ‘all but essential’” travel to the whole of Italy. Yesterday, the advice had extended only to a number of regions in northern Italy.
• Railbookers and Amtrak Vacations have introduced a new cancellation and rescheduling policy to help agents and their customers deal with the ongoing coronavirus situation.
• Cineworld announced yesterday that its largest shareholder, Global City Theatres B.V., was to sell c.108 million ordinary shares in Cineworld, representing c.7.9% of Cineworld’s total issued share capital for c£116 million.’ CINE said that ‘following the sale, GCT will hold c.275 million ordinary shares in Cineworld (representing 20.0% of Cineworld’s issued share capital).’
• On Friday, Cineworld said ‘thus far, we have not observed any material impact on our movie theatre admissions due to COVID-19.’ It is hard to see how this will continue to be the case. The producers of the latest Bond movie, for example, seem to believe that the market will be better at the end of the year.
• Mind Gym warns on profits due to the coronavirus outbreak. The workplace training provider said a spike in cancellations and a reduction in bookings is impacting revenue.
FINANCE & ECONOMICS:
• The FTSE100 recorded its fifth largest fall ever yesterday (down 7.7%) and its largest fall since 2008. It is set to open up more than 200pts this morning. Donald Trump has said he will take “major” steps to guard the US economy.
• Sterling little changed at $1.3045 and €1.1485. Oil up markedly (from a low base) at $37.12. UK 10yr gilt yield sharply lower (down 7bps) on recession fears at 0.17%. World markets lower yesterday but Far East bouncing in Tuesday trade.
• Brexit & politics:
• Bloomberg suggests the coronavirus could make the 31 December 2020 deadline for agreement of a deal with the EU impossible.
• PM Boris Johnson being investigate re his free holiday in the West Indies over the New Year.
• We like experts now. PM says ‘our scientists think containment is extremely unlikely to work on its own and that is why we are making extensive preparations for a move to the delay phase.’
START THE DAY WITH A SONG:
Yesterday’s song was Super Massive Black Holes by Muse. Today, who sang:
The needle tears a hole,
The old familiar sting,
Try to kill it all away,
But I remember everything
RETAIL WITH NICK BUBB:
• BRC Retail Sales for February (the 4 weeks to Feb 29th): Despite the bullish noises about recent Food sales, the BRC survey for February, which came out overnight, was disappointingly subdued, with overall LFL sales down by 0.4%. The key Food/Non-Food split is buried within the 3-month moving averages, but it looks to us as if Food sales were over 1% up LFL, helped by a bit of coronavirus panic buying at the end of the month, which means that Non-Food sales must have been the best part of 2% down LFL overall. The overall weak Non-Food performance did mask, however, decent pockets of growth in sub-sectors like White Goods, Furniture and Computing, albeit sales of Clothing and Footwear were poor. And total Online Non-Food sales growth in February was again disappointing, at 3.6%, after just 2.5% growth in January (although the BRC sample is thought to exclude some of the faster growing
• DFS: The furniture retailer DFS has never knowingly hidden its light under a bushel, as they say, and yet it is amazing that in today’s belated interims (for the 26 weeks to Dec 29th) it can’t bring itself to admit that underlying PBT crashed from £38.0m to £20.5m, by substituting the absolute fall of £17.5m for the 46% percentage fall in the percentage change column…and the outlook statement is not exactly clear-cut: “At present we believe our supply chain position should normalise before the financial year end, and it is only in very recent days that we have observed any change in consumer footfall to our showrooms. While any disruption to order intake over the key trading periods of Easter and the May Bank Holidays is likely to impact our financial year 2020 results, it is reasonable to believe this may ultimately be transitory in nature; following periods of subdued demand we
• Today’s Press and News: The front page headline in the FT today is “Oil price plunge sends tremors through battered global markets”, but despite the 7.6% crash on Wall Street last night, the collapse in the oil price and the further draconian crackdowns in Italy, the Nikkei index in Japan closed 0.9% up overnight and so the UK stockmarket is expected to rally this morning, with the FTSE 100 index expected to open c180 points up…
• TIPS Watch (1): The great 4-day Cheltenham Festival jumps racing starts today and our alter ego, “Honest Nick”, will be bringing you his each-way Tips each day. Now, the wet weather will mean the going will start soft, which should suit the Irish horses and although the Irish surely won’t win every race, we suspect they will win the first two races, the 1.30pm and the 2.10pm. The big race at 3.30pm, the Champion Hurdle, looks relatively open and at the likely odds of 16-1 we’ll take a chance on the outsider Call Me Lord running into a place. So, as our “Three to Follow”, we’re going with Captain Guinness e/w in the 1.30, Cash Back e/w in the 2.10 and Call Me Lord e/w in the 3.30.
• News Flow This Week: As well as the Budget tomorrow lunchtime, tomorrow also brings the Dignity finals and the Lookers finals. On Thursday we get the delayed Intu Properties finals and the prestigious annual “Retail Week” Awards are announced on Thursday evening.