Langton Capital – 2020-03-13 – PREMIUM – Shocks, JDW, Saga, food costs, TUI & other:
Shocks, JDW, Saga, food costs, TUI & other:
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A DAY IN THE LIFE:
As it’s getting lighter in the mornings, one would expect to see more people on the way into the office but, as there’s something of a move towards working at home underway at present, that’s not proving to be the case.
And the tubes are a bit emptier than usual, York & King’s Cross stations were a quieter than would normally be the case and those commuters that are still around seem to have taken seriously the suggestion that they should stand one metre apart and not linger in any one place where people might gather for any longer than is strictly necessary.
Which is all well and good but it’s not much help to the restaurants, coffee shops and grab n go food shops at travel hubs and SSP, WH Smith and others would seem to agree.
All of which is a bit unprecedented. Below, we have a quick think as to how the various players on the High Street and in travel hubs might react. This covers the operators, landlords and banks to both of the above alongside the government (a.k.a. the taxpayer) who ultimately stands behind them all. On to the news:
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MAJOR SHOCKS: By definition, 100yr events aren’t captured in 10yr data. They may not be in models but, as we’re seeing, they do happen. 13 Mar 2020:
Setting the scene:
• Many companies, analysts and governments take 10yr or 20yr data and use it to model the future.
• This is understandable but it won’t (or rather there is respectively a 10% and a 20% chance that it will) capture 100yr events.
• But they do, as we are seeing, happen.
• And telling a bumble bee that it shouldn’t be able to fly isn’t much help if the thing has just stung you
• Hence, using short data runs carries risk because, as Nassim Taleb points out, Black Swans probably come along more frequently than we would expect. Witness events such as the 1987 Crash, the Emerging Market debt crisis, 9/11, the Dotcom bubble, the Financial Crisis and now Covid-19.
Pubs, bars & casual dining:
• Fashion can be short. Some trend or other can blossom, bloom and whither in a decade. It may last longer. Even much longer but, even if the trend has legs, something can come from left field to upset optimistic calculations.
• Overcapacity (a macro issue) has impacted operators at the micro level but it would appear as though Covid-19 could be bigger.
• With that in mind, backward looking data is not very helpful and we do not have models of earlier events of this type because the data does not exist.
• 9/11 was a shock but, the interminable war in Afghanistan to one side, it seemed finite in scale.
• The Financial Crisis is still impacting us and, with PM Johnson’s government doing everything it can to ‘flatten the curve’ of Covid-19 in order to save the NHS from being overwhelmed, it feels as though the current problems could persist for some time.
Passing the buck:
• Capitalism doesn’t allow fat to accrue and few businesses have ‘rainy day’ funds that are large enough to cope with an ongoing lack of revenue
• Of course, the length and depth of the downturn in trade will be very important in calculating the financial hit
• But it could be large, and, in extremis, realpolitik will trump contracts. Some contracts will have ‘force majeure’ clauses and, even if they not, can’t pay, won’t pay may be invoked instead.
• Be the contracts in question relating to employment or property or bank debt, they may be up for discussion.
• Bad stuff (insert your own rude 4-letter word here) rolls or trickles downhill. Companies will seek to shed staff and not pay rent, rates and bank interest. This makes their problem everyone’s problem. The fact that they are breaching contracts may not be something that they can afford to worry about in the very short term
• Businesses => landlords & banks => banks => government => the taxpayer.
• That’s the way it is. Norwegian is laying off half its staff, TUI isn’t paying prepayments, various restaurants are making staff redundant etc. This will be done, where possible, legally but, if such behaviour isn’t in the respective contracts, then it may happen anyway.
• The government seems to get this. At least a bit as it has made changes to sick pay rules and the like. It may have to do much, much more.
• HMG may have to stand behind the banks and tell them, order them, not to bust UK PLC ‘just because the contract says they can’.
Looking through this:
• Because, at the moment, we are waiting for the wave to break.
• And it will break and nearly all of us along with all of the bricks and mortar, brand values and the rest will still be here and we will have to dust ourselves off and get on with life.
• Of course the contracts may say that, because of failures to pay this or that or breaches of the other, the owners of these assets could change
• But do we really want the banks owning all of the High Street, the retail parks, the restaurants, pubs, bars, clubs and a large number of other businesses?
• Because, not to put too fine a point of it, the banks couldn’t run a bath far less 1,000s of diverse corporate entities, it would be grossly inefficient.
• Hence the government should and may well have to step up and stop this inexorable process from happening
Some harsh truisms:
• All businesses can hold their breath underwater for a while. With no income some would last days, others months – but none of them can last forever
• Jonathan Downey suggests that some central London businesses have seen a 25% to 50% drop in LfL sales
• Contracts mean nothing when there is a gun to your head
• All costs are variable in extremis
• It’s not what the contract says, but what actually happens that matters
• The government is going to have to raise its game quickly
• Industry needs help. Sure, there will be freeloaders and chancers running already-failing businesses who’ll want help as well but, as with the TARP in the US, that can maybe be sorted out later (otherwise there may be no ‘later’)
PUBS & RESTAURANTS:
• JD Wetherspoons has LfL sales up 3.2% for the six weeks to 8 March 2020 with total sales up 2.9%. The company commented: ‘we estimate that sales have been more adversely affected by poor weather than by the health scare’. The group’s shares yesterday fell by 11%, broadly in line with the market.
• JD Wetherspoon has taken the advice of Investec and will present its H1 numbers next Friday via a conference call rather than a face to face meeting.
• The latest CGA Prestige Foodservice Price Index shows that the weather is impacting prices. It says ‘seven of the ten categories of the Index recorded year-on-year inflation in January 2020, with half also seeing month-on-month inflation.’
• Prestige Purchasing CEO Shaun Allen says ‘external influences such as weather and disease have been playing a key part in food and beverage pricing for some time. With Covid-19 now looking likely to have an effect on supply chains, it is more important than ever for buyers to be mapping their supply chains and seeking additional origins to manage the supply risk on products that come from identified problem areas.’
• Restaurant business intelligence & forecasting platform Tenzo has analysed returns from ‘136 typically high-performing food and beverage businesses’ that shows the coronavirus is having ‘a strong negative impact on sales for even the strongest UK hospitality business.’ The units are mostly in and around London.
• Tenzo says the companies that it tracks returned average year on year growth of 6.0% in November, 6.4% in December and 1.2% in January. However, it says that sales fell 0.7% in February and as much as 6.7% in the first week of March. Delivery orders are said to be higher.
• A number of operators drawing attention to the difference between central city (office-heavy) locations and suburbs. Pubs and restaurants. Some more residentially-located units showing positive numbers. Could help suburban pubs. One or two major city-centre and London-centric operators pointing to >10% declines, some hinting at 20%. Will be very interesting to see how Mothers’ Day on 22 March pans out.
• City AM says ‘City workers shun top dining spots amid Covid-19’. It says Coq d’Argent, Paternoster Chop House and others are reporting ‘empty rooms’. Smith & Wollensky says ‘we have seen an immediate and significant impact on our events and private dining business.’
• Some observers have suggested that pubs may be prevented from screening live sport if fans are banned from attending stadiums amid fears of ‘moving crowds from stadiums to pubs’ and continuing the spread of Covid-19.
• The government has said that the peak in the virus’s impact could be as much as 3mths away. Flattening the curve of infections should help the NHS cope with the situation but it puts a resolution that bit further away.
• WH Smith yesterday warned on profits as a result of Covid-19. The group’s shares fell by around 15% during the day. Profits could around halve with further downside possible on the back of Donald Trump’s European travel ban.
• Amazon workers will be allowed to take unlimited sick days this month although only those who test positive for the Covid-19 virus will be entitled to sick pay.
• The Casual Dining 2020 conference did a volte face yesterday. It first said: ‘the clear advice from the government and health secretary Matt Hancock is for people not to panic and for large gatherings to continue as normal, while the risk to individuals is low.’ It said: ‘Casual Dining is the most important event for our industry’ and ‘not running the event would have serious consequences for the industry as a whole.’ Later yesterday, it said it had ‘made the very difficult decision to postpone the event, due to the magnitude of the unanticipated public health and safety issues posed by the rapidly escalating COVID-19 outbreak.’
• Sport in Ireland is to be suspended until at least 28 March. As reported above, JDW says weather had more of an impact recently than the coronavirus. It is likely that the Ireland ban on indoor crowds of >100 will impact its Irish pubs. Football in The Netherlands has been suspended until the end of this month.
• The Coffer Peach Tracker LfLs were down 3.3% in Feb (see yesterday). But Feb this year was 29dys. If not accounted for, taking 28/29ths would give a drop of 6.6%.
• Londontheatre.co.uk offering 65% off some tickets.
• UKHospitality in Scotland has called on the Scottish Government to further support Scottish businesses following the measures to support the hospitality and tourism sectors announced in the Budget. UKHospitality Executive Director in Scotland, Willie Macleod commented: ‘The freezing of excise duties is welcome as is the announcement of a review of the Apprenticeship Levy and increased investment in infrastructure. However, a real opportunity was missed to reduce the rate of VAT on tourism and hospitality services to improve our competitiveness now that we are out of the EU and to help sorely pressed businesses to cope with the COVID-19 crisis’.
• Pernod Ricard has acquired the Italian bergamot-infused aperitivo brand for an undisclosed sum.
• Lidl has filed for an application to open its first pub in one of its stores.
• Deliveroo has confirmed that restaurants that use their service will be provided with extra packaging and stickers to ensure delivery bags are sealed properly.
• A new micro Scotch whisky distillery, visitor centre and bonded warehouse is set open in John O’Groats in 2021.
• Commenting on the Chancellor’s announcement to freeze alcohol duty, Alistair Morrell, CEO of the Cider Is Wine trade alliance said: ‘Whilst the decision to refrain from increasing alcohol duties is to be celebrated, it maintains the status quo in terms of an unequal system, and a missed opportunity to assert its global leadership’.
• Black gin brand Scapegrace Black is launching in the UK and will be distributed by Hi-Spirits.
• Amazon plans to open its first UK cashier-less supermarket in Notting Hill Gate, in west London.
• Brakspear has purchased the Egypt Mill in Nailsworth, near Stroud. It says ‘the historic pub with dining, accommodation and a thriving wedding and functions business takes Brakspear’s managed estate up to 16 sites.’
• In the US, Starbucks announced it would start expanding catastrophe pay for employees affected by coronavirus. CEO Kevin Johnson said that precautionary policies will be enacted on a ‘store-by-store and community-by-community basis’ regarding the spread of COVID-19.
HOLIDAYS & LEISURE TRAVEL:
• Saga has updated on holidays today saying it ‘notes the updated travel advice from the Government which advises people aged 70 and over and those with pre-existing health conditions against cruise ship travel at this time.’ It says ‘demand for our Cruises has been very positive, with bookings of around 80% of the full year revenue target. While cancellations had increased in recent weeks, as of 11 March 2020, the average booked load factor for the remaining five Cruise departures in March was 79% and the average booked load factor for five April departures was 85%.’
• Saga says ‘it is estimated that a cessation of Cruise trading for the next 6 weeks will reduce Cruise profit before tax by between £10m and £15m. Related advance customer receipts for this period are £22m.’ The group adds ‘while the travel environment remains uncertain, the Group continues to have significant available liquidity, underpinned by a £100m undrawn revolving credit facility, £33m of cash at the end of February and the strong cash generation of the Insurance business.’ It adds ‘there are a range of further mitigating actions the Group will take including additional cost efficiencies and reducing discretionary spend.’
• TUI is reported to by freezing pre-payments and suspending contracts with some of its hotels in order to conserve cash. It is invoking “force majeure” clauses in a number of contracts in order to temporarily stop payments. TUI says ‘we are in close contact with our hotel partners worldwide, jointly reviewing options for capacity management, to mitigate the impact for both TUI and its partners.’
• The WTTC says the global coronavirus outbreak could put millions of travel and tourism jobs at risk.
• Uber, which makes its money from the travel of others, has sent out an email saying ‘please cancel all non-essential travel to our offices, and host personal meetings via video call.’
• The FT reports that the IPO of Airbnb could be under threat.
• Do you wonder why we’re hearing from travel companies it’s safe to travel, conference companies it’s safe to conference etc.? Sometimes the obvious answer is the right one. See link on tweet yesterday.
• Princess Cruises has cancelled all sailings across its entire fleet of 18 ships for the next two months amid the coronavirus outbreak. Carnival, the owner of Princess, saw its shares fall by 18% yesterday.
• Viking Cruises is suspending all ocean and river operations for more than a month due to ‘travel complications’ caused by the spread of coronavirus.
• MSC Cruises has been forced to cancel and adjust itineraries on eight ships due to the coronavirus outbreak.
• Virgin Voyages has also suspended sailings, in its case until August 7, amid the coronavirus pandemic.
• PM Boris Johnson has suggested that Britons who are aged over 70 or those with underlying health conditions should not go on cruises.
• The Cruise Lines International Association reports ‘with a heavy heart that we must postpone this year’s conference until further notice.’ It says ‘the team at Clia deeply regrets these circumstances however, as always, our number one priority is health and safety.’ It had said last week than any advice to its customers not to take cruises was ‘unwarranted’.
• Accor reports a ‘strong acceleration of the decline in the activity across Europe’ as a result of the COVID-19 outbreak. The comments were made as the company reported that it had completed both the sale of an 85.8% stake in Orbis and the sale of Mövenpick hotels’ lease portfolio.
• Chancellor Sunak has delayed a review into the UK’s domestic Air Passenger Duty (APD) that was promised as part of a bid to save Flybe before its collapse, angering officials in the travel industry.’
• Norwegian Air is to lay off half its staff,
• UK citizens are not now allowed to enter the Czech Republic.
• STR reports US hotel industry occupancy down 7.3% to 61.8% for the week ending 7 March, with ADR down 4.6% to $126.01 and RevPAR down 11.6% to $77.82.
• TravelSupermarket reports ‘significant jumps’ in online searches for countries which have so far remained free of coronavirus.
• Analysts say the estimated $113bn cost of the coronavirus outbreak to the airline industry will grow substantially due to the US travel ban.
• Cineworld shares lost a quarter of their already-depressed value yesterday on debt breach concerns. See our earlier comments on cinemas & yesterday’s on Cineworld.
• Betway has been fined £11.6m for failing to verify the source of its customer’s betting money as well as being socially irresponsible towards some punters.
FINANCE & ECONOMICS:
• Chancellor Rishi Sunak has said that it is ‘the right economic thing to do’ to borrow more money now.
• Institute for Fiscal Studies says budget spending measures are not sustainable.
• Sterling sharply lower on concerns that the UK is not taking similar steps to those of other countries re Covid-19. Trading at $1.2542 and €1.1196. Oil down at $33.52. UK 10yr gilt yield unchanged at 0.28%.
• World markets lower yesterday and Far East down in Friday trade. UK had its largest drop since the 1987 crash yesterday. UK market set to open up by around 200pts this morning.
• First round of trade talks with EU scrapped.
START THE DAY WITH A SONG:
Yesterday’s song was Good Golly, Miss Molly by Little Richard. Today, who sang:
They say our love won’t pay the rent,
Before it’s earned, our money’s all been spent
I guess that’s so, we don’t have a pot
But at least I’m sure of all the things we got
RETAIL WITH NICK BUBB:
• WH Smith: There was so much else going on yesterday morning that we missed the profit warning from WH Smith, which issued a trading update at 7am that was written before the US President imposed punitive restrictions on travel from Europe to the US…With an August y/e, WH Smith said that the first half results will be in line with expectations, with Travel LFL up 2% and High Street LFL down 4%, but it warned that the last 2 weeks had begun to see a material reduction in airport passenger traffic. And it went further and said that it was assuming a 35% fall in UK Travel revenue in March/April and a fall of 15% in UK Travel over the second half as a whole, with the US and Overseas Travel businesses down 20%. On that basis, it warned of an overall loss of revenue of between £100 and £130m in revenue and a £30m to £40m hit to profits in the next 6 months. The City was impressed with WH
• BDO High Street Sales Tracker: We highlighted on Wednesday that last week’s John Lewis sales figures should have been helped by strong Online sales growth and today’s BDO High Street Sales Tracker for medium-sized Non-Food chains (which has been reporting surprisingly/suspiciously good progress in recent months) tells the same story, despite continued weak High Street footfall figures…In w/e Sunday March 8th, Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were up by 0.6% (down 8.2% in Store sales, but up by 20.9% in Online sales).
• “Retail Week” Awards Watch: Despite the coronavirus outbreak, the prestigious annual “Retail Week” Awards were held last night at The Grosvenor in the West End and, unaccountably, Tim Steiner of Ocado was chosen as “Retail Leader of the Year”, rather than Peter Cowgill of JD Sports. Even more bafflingly, Pets At Home in Stockport won “Store of the Year”, rather than Primark in Birmingham. Less controversially, Dave Lewis, the retiring CEO of Tesco, won the “Outstanding Contribution to Retail” Award, whilst John Roberts, the Founder & CEO of AO.com, won the new “Retail Activist” Award.
• News Flow Next Week: After a disastrous week for Retailers on the stockmarket, there is plenty of scheduled news from companies next week for investors to focus on, kicking off with the ScS interims on Tuesday. Wednesday then brings the Morrisons finals and the Pendragon finals, whilst the much-awaited Next finals and the Ocado Q1 update are on Thursday. And, given the WH Smith profit warning yesterday, we are mindful that there could be some “unscheduled” news from companies as well next week…
• TIPS Watch (4): The great 4-day Cheltenham Festival jumps racing concludes today and our alter ego, “Honest Nick”, is still bringing you his each-way Tips each day, despite other distractions… Yesterday was another great day for the Irish horses, but the one that “Honest Nick” recommended, Relegate, could only finish 5th in the 2.10, whilst Itchy Feet fell in the 1.30 and Frodon was outpaced in the 2.50. Today could well end up being another good day for the Irish horses, but we think an English horse will win the first race, the Triumph Hurdle, whilst Clan des Obeaux and Bristol de Mai are worth following in the big race at 3.30pm today, the Gold Cup. As our “Three to Follow” today, however, we’re going with Solo (e/w) in the 1.30, Adjali (e/w) in the 2.10 and Fury Road (e/w) in the 2.50.