Langton Capital – 2020-03-31 – PREMIUM – Nichols, corporate collapses, balance sheet repair etc.:
Nichols, corporate collapses, balance sheet repair etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
It felt a lot quieter yesterday and, after the excitement of the first week of a lockdown, some 45 RNS statements from leisure companies etc., that was always likely to be the case.
Not that there isn’t an awful lot of work going on to bail out various ships at the moment, of course.
Still, the news flow, a flow of administrations notwithstanding, may be slower and it could be an idea to catch up on those TED Talks that you’d always wanted to watch.
Any suggestions would be gratefully received. We’ve just watched Bill Gates on epidemics (recorded 5yrs or more ago) and a Swedish professor on, well, relative perspectives, at least that’s what we’d call it in layman’s language.
The latter pointed out that, to a giant, everyone is small. Similarly, to a destitute person, everyone is ‘rich’ and to a person in the developed world, everyone who is ‘poor’ is the same – but there are many degrees of poverty.
Can you afford food, for example? Little else matters if you can’t but can you afford shoes? What about a bicycle? How about a moped, a dilapidated motor car etc and the same is true regarding the Covid-19 outbreak.
Everyone, I think we can agree, is in a mess but, when you look closely, some messes are much, much messier than others.
Follow news on #brumbymark and here’s today’s email:
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PRIVATE COMPANY ACCOUNTS – CASUAL DINING GROUP. CDG has reported full year numbers to 26 May 2019 to Companies’ House. 31 Mar 2020.
• CDG had 9mths to report its accounts and, even under normal circumstances, that means they would be a little historic.
• In today’s environment, with Covid-19 having changed the landscape completely for all operators, the period beginning in the first half of 2018 sees like a very long time ago.
• The accounts were signed on 14 October. Given the current trading environment, the auditors, notwithstanding government support to business, might have had a different view of the company’s prospects
The company’s comments:
• CDG says that ‘the Group is a multi-branded operator with strong diversification by target customer, type of location and geographical region in the UK.’
• It reminds readers that ‘the Group trades under the core operating brands of Bella Italia, Las Iguanas and Cafe Rouge as well as a number of sub brands and one-off concepts.’
• Re trading, it says ‘the Group has continued to operate in a challenging external environment and against a backdrop of tough conditions has outperformed in like for like sales growth the broader market.’
• It says that in this environment, ‘the performance has been driven by digital innovation, diversification and channel innovation, cost control and active engagement with consumers.’
• Re new openings, ‘the Group opened two new UK sites one in an airport and one under the Las Iguanas brand and disposed of a limited number of unprofitable sites during the year to 26 May 2019.’
• Financially, the company highlights that revenue was £330,5m and ‘the operating loss fell from £242.2m in FY18 to £47.2m in FY19.’
• EBITDA before exceptional items ‘increased to £16.8m from £14.5m in FY18. The Board have further analysed the underlying EBITDA of the business and consider a further £6.2m (FY18 £11.4m) to be non-recurring and one off in nature.’ It says ‘this results in a management adjusted EBITDA of £23.0m (FY18 £25.9m).’
• CDG says ‘on 15 August 2018 a refinancing of the Group was concluded with its existing shareholders and lenders. As a result of this refinancing £30m of new cash was received, £10m in June 2018 and £20m in August 2018.’
• It says ‘the Group’s term debt was reduced from £163.9m to £87.4m and the cash pay margin reduced from 8.25% to 7.25% per annum cutting the interest bill by more than half.’
Re the wider market (pre-Covid-19):
• CDG says ‘for the first time in a decade there was a net decline in the number of branded casual dining sites in the UK partially addressing the well publicised over supply in the sector.’
• It adds ‘the year saw a continuation of the well publicised significant external cost headwinds impacting the industry, such as increases to National Minimum Wage and rent increases, particularly in central London. The group has remained focused on managing those costs within its control and closed some loss making sites.’
• The company makes a number of industry-wide comments re access to labour post Brexit, the impact of higher wage costs and other issues, most of which are now away from the spotlight but which will return once Covid-19 is no longer consuming everyone’s attention
The numbers & debt position:
• Turnover did indeed rise by a little under 1% to £330.5m.
• The normalised operating loss was £6.9m (2018: loss £10.1m) but the reported loss before tax is £65.6m after a reported loss (after exceptional costs) of £272.2m in 2018.
• CDG has now lost some £629.2m since incorporation. It is very likely to be losing more money under the current trading (or rather non-trading) environment
• The group had negative net worth of £93.6m. This is a lower negative position than it was last year due to capital contributed during the period.
• As at the end of May last year, now a long time ago, CDG had some £159m of borrowing and £9.8m of cash
• Some £104m of the debt was owed to banks and £57m was owed to group undertakings.
• CDG says that its Senior Facilities Agreement (its bank debt) ‘is used for general business purposes and the availability of the Facility is subject to the Group being in compliance with covenants with respect minimum pro forma EBITDA levels as defined by the SFA.’
• These, as will most companies at present, will be under pressure.
• CDG says ‘the Group was in compliance with these covenants at 26 May 2019. There were no breaches or defaults during the period. The debt is secured by a fixed and floating charge over certain Group assets.’
• CDG says the ‘amounts due to group undertakings in the current year represents a loan due to Dining (Cayman) Holdco 2 Limited on which interest is charged at 11.5% per annum. The loan is due for repayment in December 2022 and is secured by a fixed and floating charge over certain Group assets.’
Going concern and other issues:
• The director report that they ‘have compared the forecast future performance of the Group and anticipated cash flows with the available financing facilities and covenants contained in the Group’s current financing arrangements and have stress tested these with plausible but pessimistic changes in assumptions.’
• They say ‘as a result of this review, the directors are confident that the Group has sufficient resources to continue as a going concern for at least 12 months from the date of signing these financial statements.’
• The auditors (Price Waterhouse) say it has considered whether ‘the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate’ and says ‘we have nothing to report in respect of the above matters.’
• They do add ‘however, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s and company’s ability to continue as a going concern.’
• They say ‘for example, the terms on which the United Kingdom may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the group’s trade, customers, suppliers and the wider economy.’ Nobody could have foreseen the current coronavirus disruption
PUBS & RESTAURANTS:
• Nichols has this morning updated on trading under current circumstances saying that ‘trading in the first two months of the financial year was in line with management’s expectations.’ The group adds ‘however, as a result of the COVID-19 pandemic and the restriction of movement of people worldwide, the Board now expects a significant impact on the Group’s financial performance in 2020.’
• Nichols says ‘given the level of global uncertainty, the Board is not currently able to provide financial guidance for the year ended 31 December 2020.’ It adds that it had a strong balance sheet at the beginning of this year but says it is cancelling its final dividend for last year of 28p per share.
• Nichols says ‘the Board and management team continue to plan for multiple scenarios and explore various ways to mitigate the impact of reduced demand on the business for a potentially sustained period.’ It says it ‘is taking steps to remove cost, including the re-evaluation of its marketing spend given the changed circumstances, postponing non-essential recruitment and suspending non-critical capital expenditure from the business.’
• Chairman John Nichols says ‘with a heritage of 112 years, Nichols has successfully weathered significant challenges and changes across global markets before. Driven by the strength of the Group’s brands, robust balance sheet and diversified business model, the Board remains absolutely confident in Nichols’ ability to both manage the near term pressures impacting the global economy and emerge from this unprecedented period well-placed to continue to deliver the Group’s long-term growth plans.’
• Yum Brands, the operator of the KFC, Taco Bell and Pizza Hut brands, has raised new fresh capital from bond investors in a deal that will net the company some $600m. The group is bolstering its cash position ahead of what may be a prolonged economic shutdown in the US and worldwide. The brand owner has more than 50,000 outlets globally, nearly all of them operated by independent franchisees and licensees.
• YUM’s CEO, Greg Creed, is to forego his 2020 salary and donate it to employees. He did earn nearly $14m last year and probably isn’t short of a bob or two.
Administrations – Carluccio & Bright House gone into administration.
• Carluccio yesterday called in FRP as administrators to the firm. The company says that it had been facing ‘challenging trading conditions’ for some time. The coronavirus shutdown pushed it over the edge and FRP is ‘urgently looking at options’ regarding the business.
• Carluccio’s administrator is to make use of the CJRS (coronavirus job retention scheme) whereby it can pay its workers 80% of their former salary (at the government’s expense) in order to keep its options open. Some 2,000 jobs will be at risk.
• FR says ‘we are operating in unprecedented times and the issues currently facing the hospitality sector following the onset of Covid-19 are well documented. In the absence of being able to continue to trade Carluccio’s, in the short term, we are urgently focused on the options available to preserve the future of the business and protect its employees.’
• Staff at Carluccio were paid 50% of their salary for work completed this month. CEO Mark Jones gave up his salary for the month but additional funds were not forthcoming and a potential merger with Byron Burger did not get off the ground.
• Rent to own business Bright House has also called in administrators. It had been struggling for some time. See our comments on ‘co-morbidity’ in earlier emails and also in tweets, below Forthcoming Figures.
• The Restaurant Group’s Chiquito and Food & Fuel operations are likely to go into administration in the near future.
Passing the parcel:
• Some landlords are playing hardball. The FT quotes chains Pho, Escape Hunt and Caffè Concerto as among those that have been threatened with legal action for non-payment of rent.
• The FT points to Sykes Capital and Criterion Capital as taking a firm stance. Criterion says ‘the government at no time has said that commercial tenants should receive a rental holiday, yet many, but not all, are choosing to withhold rent. Such action is jeopardising our obligation to meet our commitments to lenders.’
• It is fair to say (see earlier emails) that landlords have financial obligations, debt, staff and all the rest as well,
• Some landlords suggest that operators should look to the government’s helicopter money (£10,000 per site for very small sites and £25,000 for somewhat bigger units) as a source from which to pay their rents. This may work for some operators in the medium term but 1) in the short term the money has not arrived yet (and nor has the 80% of wages promised for staff) and 2) none of the money will be forthcoming for sites with a rental value of more than £51,000.
• A number of landlords are offering rent deferrals and / or one month payments rather than quarterly. Various operators have said that this is not ‘enough’ as the revenue that they are currently foregoing has been lost, not delayed. They unsympathetic would say that the rents remain legally enforceable.
Has the industry been too thinly capitalised?
• Well the easy answer is ‘yes’ but being wise after the event isn’t particularly useful and we are where we are.
• The issue would have been much worse if the coronavirus had struck in 2007 or 2008 as, post the credit crunch, most companies have taken measures (never enough, with hindsight) to shore up their balance sheets.
Too little, too late?
• The government’s promised aid may not be too little but it could easily be too late.
• Because companies that cannot pay their March, let alone their April wage bills, and cannot pay their rent or supplier bills into the bargain, are effectively insolvent and they are unlikely to remain in existence for very long.
• Indeed, it will be hard enough for solvent operators to keep staff and a core team from which to build.
• The Guardian says ‘the coronavirus pandemic is expected to lead to the demise of thousands of restaurants, pubs, shopping chains and other high street businesses, despite the government offering unprecedented financial support and changing insolvency rules to give companies more time to pay debts.’
• Politicians and civil servants, bless them, may be trying hard but they do not exist in the world of business and may not fully understand the options facing business people now – how can we justify putting more money into a situation on the back of a completely unproven government promise when we are completely unsure as to the end game?
• The Guardian quotes Monsoon as amongst a number of operators considering their options.
• The National Living Wage rises by 6.4% tomorrow. This is not an April Fool’s joke.
• Boxpark has shut completely. Delivery had hitherto been available.
• On the other hand, Itsu is to reopen two of its restaurants in order to provide meals to London hospitals.
• The Casual Dining 2020 exhibition, which had re-booked itself from March to July, has finally given up the ghost. See our ‘Doing the Obvious Thing for the Wrong Reason’. Casual Dining 2020 had 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’. We said a fortnight (i.e. a lifetime) ago ‘it is our sincere wish that that does not prove to be optimistic.’
• In the US, the Cheesecake Factory Inc. is furloughing 41,000 hourly workers & reducing the pay of its executive officers by 20%. It is also warning landlords it will not make lease payments for April because of the coronavirus pandemic reports NRN.
• Rockfish & The Seahorse says it is ‘preparing to press pause, or ‘mothball’ our restaurants until the environment has changed and we can be in a position to press ‘play’ and be ready to thrive again.’ The operator says ‘we have paid our staff 100% of their wages for March and by using the support of the Government’s Job Retention Scheme have been able to preserve all of the jobs at Rockfish and the Seahorse, with the exception of a handful of brand new joiners who we are advising on what support they may receive.’
• Bibendum Wines has launched a new app: LOCAL, which ‘helps restaurants, pubs, bars and independent merchants offer Home Delivery or Click & Collect, with zero set-up costs or up-front charges.’ Bibendum says ‘with the hospitality industry’s landscape changing dramatically in the last month, the distributor wanted to offer their customers in the UK a way to adapt and to keep going, without expensive set-up fees.’
• M&S is selling food boxes online for £30 containing 20 essential items such as pasta, rice, curry, cooking sauces and Percy Pig sweets.
• Restaurant Brands International, owner of the Burger King, Tim Hortons and Popeyes brands, is offering 14 days of paid sick leave for workers in company-owned locations diagnosed with COVID-19 or deemed in need of isolation, and advancing cash payments and rebates to restaurant owners.
HOLIDAYS & LEISURE TRAVEL:
• Tourism numbers could drop by 30% this year reports the WTO.
• EasyJet has now laid up all of its planes for an indefinite period.
• STR is predicting that the US hotel industry will see a 50% decline in REVPAR this year. As most of Q1 was relatively buoyant, the remainder of the year must be very poor. The exit rate, i.e. how the industry is doing in Q4, will be critical.
• MSC Cruises has extended the suspension of its sailings until end-May.
• Hull Trains has become the first UK train operator to halt all its services.
• The UK government is to spend around £75m bringing stranded Britons back from overseas.
• P&O Cruises and Cunard are extending their suspension in operations for a month until May 15
• Airbnb is to pay around $250m to cover some coronavirus cancellation costs
• MGM Resorts International in the US has said the coronavirus will ‘undoubtedly have a significant negative effect on our business in the near term.’ It says, however, that ‘we are well-positioned to emerge from the current crisis in light of our strong liquidity position and valuable asset portfolio.’
• The Gym Group has announced ‘the launch of an exciting new on-demand fitness product for its members.’ It says it has ‘also made a small investment in Fiit [a fitness app company], in early February this year’
• Gym Group CEO Richard Darwin says ‘the launch of this innovative new product enhances and delivers a best in class fitness offer for our members. Even before the outbreak of COVID-19 we had recognised the unique service that Fiit provides, both at home and in our gyms.’
• Bob Iger at Walt Disney is to take a 50% pay cut. Other directors will lose between 20% and 50% of their salaries
• Aston Martin has taken on a new $100m credit line
FINANCE & ECONOMICS:
• The Centre for Economics & Business Research has suggested that UK GDP could fall by 15% in Q2. This is by far the worst three-month period since its records began.
• YouGov reports that around a fifth of UK consumers fear an economic depression as a result of the Covid-19 disruption. Some 51% expect a recession.
• The St Louis Fed says the coronavirus fallout cost 47 million jobs in the US and drive the unemployment rate past 32%
• Banks in the UK are likely to be told to cancel £7.5bn of dividend payments due to shareholders (including the UK government via its holding in RBS)
• Sterling down vs dollar at $1.2336 but up vs Euro at €1.1196. Oil price lower at $22.96, UK 10yr gilt yield down 2bps at 0.33%. World markets higher yesterday with Far East mostly up in Tuesday trade
START THE DAY WITH A SONG:
Yesterday’s song was Hit me with your Rhythm Stick by the late Mr Ian Dury. Today, who sang?
In the silence of your room,
In the darkness of your dreams,
You must only think of me,
There can be no in between
RETAIL WITH NICK BUBB:
Consumer Confidence Watch: The stockmarkets have been very gloomy over the last month about the devastating impact of the coronavirus on global economic activity, so today’s widely followed monthly GFK Consumer Confidence survey should catch the headlines, but we flagged yesterday that polling will have been done in the first half of the month (March 2nd-13th to be exact), before the pandemic began to get a grip, so it shouldn’t be interpreted as an up-to-date reading on all the coronavirus worries. Even so, it is surprising that the overall index has only dipped slightly, from -7 to -9, despite a steep eight-point fall in the Major Purchase Index. Joe Staton, Client Strategy Director at GfK says: “While we have a long way to drop before we match the devastating numbers seen in July 2008, when the Overall Index Score crashed to -39 points, we are likely to suffer further deterioration
Retail Sales Watch: The Retail Sales month of March (the 5 weeks to April 4th) is nearly over, but we haven’t seen the final word yet on how bad February was on the High Street, given the wet weather…The 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 a mere 2.3% last month (ex-petrol). But the BRC-KPMG unadjusted measure of gross sales was only up by 0.1% in gross terms (down 0.4% 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 February and their estimate is that gross Retail sales rose in value by 1.3% last month, year-on-year (non-seasonally adjusted,
News Flow This Week: The latest monthly Kantar/Nielsen grocery market share figures (for the 4 weeks to March 21st/22nd) come out at c8am this morning. There is no more UK Retail company news scheduled this week (although we expect AO.com to give an update soon), but out in the US, it will be interesting to hear on Thursday what Walgreen Boots say about the outlook with their Q2 results (for the period ending Feb 29th).