Langton Capital – 2020-03-17 – PREMIUM – Coronavirus, Tasty, Compass Group, City Pub Group, Brighton Pier etc.:
Coronavirus, Tasty, Compass Group, City Pub Group, Brighton Pier etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Although the pavements here in London were pretty empty and the journey into the office was that be less stressful this morning, we still find ourselves a bit busy this morning. We’d better move straight on to the news:
LANGTON 240-PAGE PREMIUM COMPENDIUM, £300 PLUS VAT:
Langton’s Premium Email launched around 12mths ago and, during its first year in operation, it has comprised a body of research & published opinion on a wide range of topics.
Here, we have curated a large number of those articles in order to logically sequence the major issues that are currently impacting the hospitality subsector or the wider leisure sector. The piece is available now. Please drop us a line.
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CURRENT TRADING: We have been asking about trading and have gathered the following. 17 +Mar 2020:
How is trading?
• Still worsening sequentially. Saturday and Sunday were poor. The rugby & football were cancelled. Drops in sales c20% to 30% in the suburbs, more in town centres. Some anecdotal comments re 50% to 60% down. Some travel hub sites were down by up to 90% on Sunday.
• St Patrick’s Day today; will there be much to celebrate? Mothers’ Day on Sunday. Now one of the biggest days of the year in food-led venues but will it actually happen? Some wet-led venues suggest it dampens drinking the previous evening.
• Some comments re down up to 40% last week with this week set to start less well than last. Forward bookings collapsed. Forecasts of up to 75% down in city centres & transport hubs could be worse. May not be worth opening venues at this scale of decline.
• Suburbs still better than city centres.
• Last week was perhaps 15 percentage points worse than the week before. Sequentially, this was getting worse as the week progressed (not helped by the absence of sport) – some operators believe that the latter was more important than Covid-19 concerns
Holding your breath underwater:
• This is understandably a major concern. Staff will have to be shed. Staff is costly to acquire, costly to train, costly to retain and costly to dispose of. And the individuals won’t just hang around waiting to be rehired in 2-3mths.
• Mass redundancies would / will be very disrupting. Staffing up again isn’t something that can be done at the flick of a switch.
• As a rule, staffing costs are sticky on the way down. Additionally, operators do not want to lose good staff.
• Crisis-modelling is the new thing. Alternatives are being considered that operators would not have thought possible in any other year in the last 20.
• Not paying the government in all its guises and delaying rental payments will help a little but there isn’t much fat in balance sheets out there. Discussions will need to be had with banks.
• This is happening now but, understandably, no operator wants to be the first to say it is ‘discussing its banking facilities’ (whilst every operator would be remiss if it were not).
• For the most part, landlords are not being proactive. They probably need to be approached. A plea for time to pay, monthly rather than quarterly bills or even an appeal for a rental holiday is unlikely to come as a surprise.
• The year end of companies is worth looking at. Any short term discussions with auditors will involve a consideration of the Going Concern principle. If accounts were to be prepared other than on the Going Concern basis, there would be very large write-downs.
• The credit agencies may need to be leant on by government. Any aggressive moves by the former could trigger unpleasant clauses in some loan agreements.
• The banks (like everyone else at present) have incomplete information. For the most part, they are not making firm commitments yet.
• Capex is mostly on hold, asset disposals are virtually impossible.
• Why no RNSs? Fair question but, at the end of the day, what would an operator say other than that they don’t know what is going to happen?
• Perversely, insurance cover may not extend to a voluntary closure but, if a site were to close due to staff there contracting Covi-19, it may be covered. This provides some perverse incentives.
• Some companies that have undertaken large deals recently may be under pressure re covenants.
• Breweries are still fairly strong in sales to the off-trade. The on-trade is weaker and here there may be a chance of bad debts.
Boris Johnson’s odd statement re pubs, clubs & restaurants:
• Though they’re hopefully not designed that way, the PM’s comments seem to be doing the most damage possible with the least admission of responsibility
• He is not ordering a shutdown – but is advising all customers not to go to pubs, clubs and restaurants
• Ordering a closure is a big step – but it has been taken elsewhere and may be only a few days away.
The mechanics of a shutdown:
• It’s worth remembering that, as pubs & restaurants work on negative working capital, any shutdown will involve paying suppliers’ bills long after revenue from the site in question has dried up. This isn’t helpful.
• In Ireland, the slope from ‘crowds not over 100 people’ to ‘shut all pubs’ took only a day or two. Staffing levels may have to go to almost zero on site.
What would help?
• A Sky TV rental subscription holiday.
• No rates. Time to pay other taxes.
• Government replacement of the working capital unwind.
• HMG guarantee of short-term funding, moratorium on foreclosures etc.
• HMG help with the payroll and rental bills.
• Last week got worse as it progressed & this week has tracked further down still.
• Travel hubs, city centres and London are worst hit.
• There is consternation, frustration and not a little anger at the government’s relatively hands off approach.
• It is hard not to agree with one contributor who said 20 years of work could be undone in 20 days unless someone gets a grip on this problem
CORONAVIRUS – AN EXISTENTIAL THREAT:
• After PM Boris Johnson told UK citizens to avoid pubs, clubs and restaurants – but stopped short of telling them to close or of offering financial support – the BBPA has written an open letter to Downing Street saying ‘the UK Pub Industry will be lost in days without immediate, decisive government action.’
• Tenants are asking their pub companies for help but the pub companies themselves will be in no position to render assistance if they have no income and no help from central government.
• The BBPA says ‘the UK pub and brewing industry is tonight facing an existential crisis as a direct result of the guidance issued by the government today. Thousands of pubs and hundreds of thousands of jobs will be lost in the very short term unless a proactive package creating cash and liquidity is provided immediately to the industry.’
• It says the government ‘did not provide any form of advice or clarity on how the industry should respond’ to its ‘avoid’ recommendation. The BBPA says ‘this is unhelpful in the extreme. At the same time the absence of any financial commitment to stand behind all businesses including small community pubs is creating panic with people being fearful that their livelihoods will be destroyed.’
• The BBPA says ‘pubs are the heart of the community and the social hub in all towns, villages and cities across the UK.’ They will be lost without help. The BBPA asks for the ‘cancellation of all business rates payments for a period of six months, as well as all HMRC tax payments, including PAYE, VAT and corporation tax for pubs/hospitality businesses.’ It further asks for the ‘cancellation of beer duty payments for a period of six months.’ Deferments won’t be sufficient.
• The government should also ‘ensure banks are encouraged to extend credit lines and favourable-terms loan payment holidays to keep businesses afloat/pay wages.’ There should be a temporary redundancy scheme set up that the government funds.
• Langton has said in its premium email that, in extremis, contracts mean very little – be they employment contracts, lease contracts or the small print associated with loans. This is simply reality.
• The BBPA asks for a VAT cut in the medium term and says it ‘cannot emphasise strongly enough how critical it is that action is taken now. Failure to do so will destroy the industry and measures taken to support these businesses should be seen as an investment in securing the future of urban and rural communities across the country as the British Pub remains at the heart of social cohesion.’
• Langton’s tweets yesterday were along the same lines though somewhat less diplomatic. 1) The Government may be right in its approach to C-19. But the judgement of the currency & bond markets appears to be negative. Sterling down, 10yr bond yields up. 2) Leisure hammered. Restaurant Group & Marston’s in the 20s. Dart & TUI down another 30% plus. No guidance or support from government. 3) No guidance from government. Will they, won’t they close leisure outlets? Will there be financial support? The banks will own everything at this rate. 4) Government’s gutless dithering leaves industry bereft of support. UK an outlier in response to C-19. World reaction has been to sell Sterling. Please wake up!! 5) Look at the carnage out there & then consider the sellers of EI Group and Greene King. Didn’t they do well??!!
• SIBA has said ‘government is right to follow the scientific advice to prevent the spread of this disease. But advising people to stay away from pubs, rather than ordering them to close is an ill thought through halfway house.’
• It says ‘pubs, and the small breweries that supply them now need direct Government help if they are to survive.’ It is speaking to number 10.
• Italy has approved €25bn of spending measures to help its economy. France, Norway & Denmark have already made commitments to help industry with its wage bill, access to capital etc.
• The FT reports ‘the British government is racing to piece together an economic rescue package after dire warnings from the leisure, transport and retails sectors that the coronavirus pandemic would lead to widespread business failures.’
• Industry is demanding billions of pounds in support but, just because the numbers are large, does not mean that they are wrong. Sure, taxes and borrowing will have to go up and GDP will go down but this would in almost any analysis be better than a complete meltdown of the country’s tax base.
• Carolyn Fairbairn of the CBI says ‘we do not want to look back and say we acted too late.’ Many other countries have already taken measures. Retailers, holiday companies and the airlines are in broadly the same position as the hospitality industry.
PUBS & RESTAURANTS:
• The government has warned the public that it should not be gathering in confined indoor spaces such as pubs or restaurants. It has stopped short of ordering a closure of such sites and it has offered no financial assistance to impacted venues.
• The prime minister advised people, where possible, to work from home. This could have potentially helped suburban pubs but any positive interpretation was more than outweighed by the suggestion that people should not gather in any numbers in indoor spaces.
• This will be for a ‘prolonged period’.
• Pub & restaurant shares finished sharply lower yesterday as the government continued to tread a fine line in attempting to persuade people not to visit them whilst not actually giving the venues any financial support. See premium email.
• JDW shares fell 23%, Revolution Bar Group was 24% lower, M&B was down 32%, Marston’s was 45% lower and Restaurant Group’s shares were down by 46% at just 26p.
• The government says that London is ahead of the rest of the UK when it comes to the spread of Covid-19.
• Ei Group warns its publicans that their existing insurance policies will not cover them for ‘loss of trade’ due to the outbreak of Covid-19. A letter sent to publicans is reported to have said ‘It has been confirmed Zurich is not including Covid-19 in its notifiable diseases section.’
• City centre venues. Many employers have already sent staff home. After the PM’s words last night, this move could accelerate. The advice not to congregate ‘in pubs, clubs, theatres’ etc., which the government advised, may take the shine off as far as suburban pubs are concerned. Some may shut for the foreseeable future. City centre pubs could make the move earlier. London is ahead of the rest of the country.
• The Licensees Association has suggested that many tenants’ insurance policies will not cover business interruption because of Covid-19. The Licensees Association would like the property owners to shoulder much of the cost. It says:
o ‘If a site shuts it should be commercial rent free for the period of closure’
o It adds ‘following re-opening it should have a negotiated rent for an agreed period to allow for a re-build of conﬁdence’
o It says ‘if evidence of a severe downturn in business can be shown year on year, increased discounts should be made available to ease pressure’
• In a world in which money was no object, this might be reasonable. Indeed, if the tenant is a straw man, then it may rapidly become reality whatever the lease contract says. In some other situations, the property owner my look to the tenant to cover the costs of closure. Overall, it will be the subject of negotiation.
• It is natural to attempt to pass the buck but, at the end of the day, it has to stop somewhere.
• City Pub Group reports that ‘for the first 11 weeks to 15 March 2020, total turnover is up 11% against the same period last year. LFL sales for the same period were down 4.5%.’ This will have been getting worse as the period progressed. City says ‘recent trading has been impacted by COVID-19 and its wider effects, particularly on sport, and certain sites have witnessed noticeable reductions in trade as a result. However, other of our more prominent local community pubs have been more resilient.’
• City Pub Group cannon ‘accurately assess’ the extent to which COVID-19 could impact our trading and financial performance but it sees ‘a material reduction to our expectations for 2020.’ The company is cutting staff & other variable costs, directors have taken a 25% pay cut and it is looking at trading hours. It is talking to its landlords and says its bankers, Barclays, remain supportive.
• City Pub Group says ‘the Board is confident the Company has sufficient working capital to maintain its operations for at least another six months without further capital, even in the event the Government extends its current guidance and mandates a temporary closure of all pubs and bars.’
• Tasty has reported full year numbers saying that revenue fell by 6% in the year to 29 December to £44.6m with company adjusted EBITDA of £1.1m (2018: £1.6m). The company has exited three sites and sub-let two more and says ‘the Group continues to review the estate but no further disposals in 2020 are currently planned.’
• Regarding current trading, Tasty says ‘following a positive Christmas trading period, the start to 2020 has generally been encouraging. The Group is planning a modest investment in the existing estate and the infrastructure of the business to sustain its recovery. We continue to monitor closely the rapidly evolving COVID-19 outbreak with its attendant risks to the business and will make further announcements as and when appropriate. Despite the challenging and uncertain trading environment we hope 2020 will be a year in which trading will continue to improve.’ This statement could be shortly overtaken by events.
• Brighton Pier Group has reported H1 numbers to 29 December saying that revenue was £17.3m (2018: £16.5m) with adjusted EBITDA of £4.2m vs £3.0m last year. Profit is £1.8m vs £1.9m and adjusted EPS is 4.1p vs 4.2p last year. The company says ‘despite the current concerns, in the medium to long term the Company’s pier, bars and golf businesses remain well invested, strongly cash generative and well positioned for future growth.’
• Brighton Pier says ‘the Group is also acutely aware of the threat posed by the coronavirus pandemic to trading at all three divisions and to the leisure and tourist sector generally over the coming months.’ It says ‘it is difficult to assess with confidence either the length or scale of the financial impact on the Group’ but adds ‘the Group continues to monitor the situation closely and to prepare to take mitigating actions as appropriate.’
• Compass Group has updated on the Covid-19 situation saying that sales in its Business & Industry division are ‘being severely impacted.’ It says H1 revenue growth should still be ‘between 0-2%’. The group has a March half-year end. CPG says ‘we are working to protect our cash flow and are pro-actively managing our capital expenditure and working capital.’ The group concludes ‘we continue to monitor the situation closely and will provide a further update with our 2020 Half Year results announcement on 13 May 2020.’
• Anheuser-Busch InBev is reported to have drawn down all of a $9bn loan facility from global banks. It is clearly securing its liquidity in the short term.
• Amazon has said it will hire 100,000 extra full and part-time staff globally to handle the surge in demand caused by Covid-19.
• Lloyds bank is sending emails out to customers telling them that it is prepared to work with them if they get into financial difficulties. It can organise ‘payment holidays on mortgages and loans’ and ‘emergency access to savings in fixed term accounts without charge’.
• New York will shut down its restaurants and bars on 17 March at 9:00am. Mayor de Blasio said ‘This is not a decision I make lightly. These places are part of the heart and soul of our city. They are part of what it means to be a New Yorker. But our city is facing an unprecedented threat, and we must respond with a wartime mentality’.
• Restaurants and bars in Illinois, Ohio and California have been ordered to shut down or restrict capacity by their respective governors. The CDC recommended that gatherings of 50 or more people be prohibited for the next eight weeks.
• Justin Gilbert, Papa John’s UK business development manager, says he has relished his first few months in the role as the pizza chain bids to expand its presence in the UK market.
• Giggling Squid will launch its first dark kitchen site next week located in Wandsworth, London.
• The Inn Collection Group has purchased The Swan in Grasmere, adding to the companies ‘pubs with rooms’ portfolio.
• Azure Hospitality will launch Pali Hill, a restaurant and cocktail bar, on Mortimer Street in Fitzrovia.
• LVMH and Pernod Ricard-owned Absolut Vodka both pledge to produce hand sanitiser as shops face shortages.
• Cider is Wine has negotiated a distribution set-up with Alliance Wines for three of its cider producer members.
• Laura Ashley could collapse if it does not secure £15m of emergency cash by the end of the month, putting 2,700 jobs at risk.
• The Scottish Deposit Return Scheme (DRS) has had its final regulations laid down, with SIBA CEO James Calder saying ‘In a time of great uncertainty for the industry with Coronavirus and Brexit, small breweries will feel the brunt of these new requirements in Scotland…As it stands it will impose unsustainable costs on small breweries and reduce the choice and availability of independent craft beer in Scotland’.
• In the US, government officials are urging restaurants to move to off-premise only services with dozens of quick-service and fast-casual chains across the U.S. are complying by pivoting to carryout, drive-thru and delivery-only.
• In the US, Uber Eats has announced it will begin offering daily payouts to restaurants of all sizes. Therese Lime, head of restaurant product at Uber Eats, said ‘We’ve heard from restaurants that they’re worried about what the health crisis will do to sales, and its impact on cash flow and their ability to pay suppliers or employees’.
• McDonald’s had closed its dining rooms in the US due to coronavirus, saying ‘company-owned restaurants will close seating areas, including the use of self-service beverage bars and kiosks, and shift our focus to serving customers through drive-thru, walk-in take-out and McDelivery.’
• City AM reports Walmart is close to selling ASDA.
• H&M is shutting stores temporarily across Europe. Car plants are shutting down.
HOLIDAYS & LEISURE TRAVEL:
• The CAA has warned of the ‘threat to the survival of some businesses’ with CEO Richard Moriarty saying ‘This is the most challenging period for aviation and package holiday businesses we have witnessed…They will need to take very difficult actions to secure sufficient liquidity.’
• Holiday company shares were also sharply lower yesterday. TUI was off by 13%, Carnival, which had fallen substantially already was off by 3.5% and Dart Group shares were down by 40%.
• STR reports that London hotel occupancy slipped sharply earlier this month. It will have fallen much further in the second and third weeks of March. In February, STR says occupancy was down 2.3% to 76.3% with rate up 0.3% and REVPAR down 2.1%. Things changed dramatically in March with the first week showing occupancy down 21.0% at 65.5% and room rates down by 8.5%. REVPAR is down by some 27.7% and it is likely to have worsened in week two.
• The Foreign & Commonwealth Office has advised against all but unavoidable travel to South Africa, Cyprus & the US as well as parts of Italy. This guidance may be rendered irrelevant as there are few planes available.
• Virgin, EasyJet, Norwegian, Ryanair, SAS and American Airlines are amongst a number of airlines cutting their flights by up to 100%. Up to 90% of staff are being asked to take unpaid leave.
• Mauritius has banned British tourists. The EU is talking about preventing travel across borders within the EU and into the EU from outside.
• Carnival yesterday reminded the market that it had ‘announced a voluntary and temporary pause of its fleet cruise operations by its continental Europe and North American brands.’ It says it has now ‘implemented a temporary pause of its global fleet cruise operations across all brands.’
• CCL says ‘the Corporation believes the ongoing effects of COVID-19 on its operations and global bookings will have a material negative impact on its financial results and liquidity.’ It cannot quantify this yet but says ‘we expect results of operations for the fiscal year ending November 30, 2020 to result in a net loss.’
• As much of the above was already known or feared, CCL’s shares fell by only 3.5% and outperformed a week market.
• Virgin Atlantic staff will be asked to take eight weeks of unpaid leave over the next three months. The company said the cost would be spread over six months’ salary to ‘drastically reduce costs without job losses’.
• This week, Best Western Great Britain will discuss with its members the possibility of turning its hotels into temporary hospitals if the NHS needs additional bed space.
• John Holland-Kaye, CEO of Heathrow, will forego his salary for the next three months as coronavirus weighs on air travel.
• easyHotel reports it is now experiencing a reduction to its forward bookings for the next three months and expects occupancy levels to fall at hotels across the UK and Europe.
• US airlines want a bailout of more than $50bn from the government.
• Dnata Travel has begun a “widespread review” of its business, saying ‘like most travel businesses we’re now scrutinising our plans very carefully to prioritise the activities and investments which have the greatest likelihood of a strong ROI.’
• Gym Group has shifted its results meeting (Thurs) online. Morrison’s will be online on Wednesday and JD Wetherspoon, which last Thursday said that the weather had a bigger impact on its trading than health scares, reports online on Friday.
• Gambling groups Flutter Entertainment, GVC and William Hill all issued profit warnings yesterday as sport in the UK (and globally) continued to grind to a halt. William Hill has suspended its dividend.
• Betting shop shares fell yesterday. The lack of football will clearly be a negative and horse racing meets, though not banned, will not be going ahead. Flutter (Paddy Power) fell by 11%, GVC (Ladbrokes) by 23% and William Hill shares ended yesterday down by 26%.
• UEFA is set to postpone this summer’s Euro 2020 Championships later today.
FINANCE & ECONOMICS:
• Sterling lower again on concerns that the UK is not reacting to Covid-19 appropriately at $1.225 and €1.0955. Oil lower at $30.68. UK 10yr gilt yield unchanged at 0.42. Markets down yesterday but Far East broadly unchanged in Tuesday trade. UK set to open up perhaps 60pts.
START THE DAY WITH A SONG:
Yesterday’s song was Dirty Paws by Monsters of Men. Today, who sang:
“Burn my sweet effigy, I’m a road runner
Spill my guts on a wheel, I wanna taste uh-huh”
RETAIL WITH NICK BUBB:
• Today’s News: The FTSE 100 index is expected to show some “Blitz spirit” this morning (according to the Proactive private investor website) and open usefully up this morning, despite the big late slump on Wall Street last night (ending a painful 12.9% down), as Asia’s main markets were steady overnight. In terms of Retail news, the formal ScS interims today have been postponed (while the management discuss the outlook with their auditors, after the semi-lockdown announced by the Government yesterday evening), but ScS have set out all the key P&L figures, which look OK, and said that recent trading has been quite good (with LFL sales orders up by 3.3% in the last 7 weeks). The discount shoe chain Shoe Zone has, however, announced, that it is suspending the planned final dividend payment, in the light of the pandemic situation. And, most amazingly, Dixons Carphone has chosen today of
• News Flow This Week: Tomorrow brings the Morrisons finals and the Pendragon finals, whilst the much-awaited Next finals and the Ocado Q1 update are on Thursday. But, given the recent WH Smith, Primark and Kingfisher warnings about the impact of the coronavirus, there could be more “unscheduled” news from companies this week…