Langton Capital – 2020-04-03 – PREMIUM – Fuller’s, coronavirus side effects, landlords, collapse & other:
Fuller’s, coronavirus side effects, landlords, collapse & other:
A DAY IN THE LIFE:
Do you remember weekends?
They used to come at the end of the ‘working week’ (what they?) and separate one week from another but, now, they’re all a bit of a mush.
Because, whilst Langton has found itself busy, the structure of life (daughter at school, Monday blues, Thursday creeping excitement, Friday pub etc.) is now under threat and it’s going to take a degree of willpower to keep it all on the rails.
Hence, as it’s apparently Saturday tomorrow, we’re going to cut the grass.
Or ‘mow the swamp’ as it were because, though it hasn’t rained in earnest for a few days, nobody has told the water table in the Vale of York which 1) is a vale and 2) is lined with clay, which is about as porous as the average milk bottle.
Anyway, keep your spirits up, it will soon all be over. Follow us on #brumbymark and have a good weekend. On to the news:
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COVID-19: SOME OF THE SIDE EFFECTS: We have been running a number of these on Twitter. There seems little doubt, at least when viewed from this side of the outbreak, that behaviour will be changed. 3 April 2020.
This isn’t flicking a switch. See Premium Email.
• UK Hospitality has written to the Government to ask for urgent support to protect businesses from punitive legal sanctions from commercial landlords. It calls for ‘an immediate extension of the forfeiture moratorium for 6 months and a widening of the scope to include broader debt enforcement measures, including winding-up orders, statutory demands and commercial rent arrears recovery.’
• We note below that Caravan Coffee Roasters is in receipt of a compulsory strike off notice.
• UKH has urged the Government ‘to ask landlords to use time to renegotiate terms with tenants.’ That would be nice.
• Langton note. Pubs, restaurants & cafes employ a large number of people. Landlords do not. It would not be unduly cynical to suggest that, in a time of crisis, the one might garner more political sympathy than the other.
• UKH CEO Kate Nicholls says ‘we urgently need action from the Government to provide legal protection for businesses. The moratorium on evictions of commercial tenants announced last week does not go far enough, we need a full rental debt enforcement moratorium.’
• Langton note. In descending order of what they will be willing to concede, landlords may go for 1) monthly rather than 3mthly payments, 2) a rent deferral until the June quarter is due, 3) a rent deferral until the end of the lease, 4) a rent holiday (a gift to the tenant – if this happens, the landlord, friendless at this stage in the crisis, may take its begging bowl to the government), 5) a holiday and then a lower rent going forward. This is less likely.
• UKH says ‘we have also been alerted to instances where funds have been withdrawn from deposits with top-ups demanded in order to avoid lease terms being broken.’
• UKH says, poignantly as it is likely to attract political attention / sympathy ‘this is an unprecedented medical, social and economic crisis for the country, with citizens pulling together. Millions of people’s livelihoods and job security depend on businesses working in harmony. Business as usual cannot apply at this stage. Yet, landlords are effectively signing a death sentence for many businesses that are just about keeping afloat.’
• Langton comment. Landlords, with some justification, are being fitted with the big, black hat that singles them out as, for the moment at least, the villain of this unfortunate piece.
• Philip Ross Solicitors has updated on the Lease Forfeiture Moratorium saying that landlords cannot ‘forfeit a lease, by proceedings or otherwise, for non-payment of rent between 25th March 2020 and 30th June 2020.’ The firm says ‘where proceedings were commenced prior to 25th March 2020 the Court will not make an order for possession for a date prior to 30th June 2020.’
Banks & Business Rates.
• UKH goes on to say in the MA that there has been ‘a near-constant stream of pressure on the Government, often, I am proud to say, spearheaded by UKH, but also in partnership with other bodies when appropriate.’
• This has ‘resulted in a package of support that is wide-ranging and will help many businesses survive the storm, will safeguard jobs and will, hopefully, put us in the best possible position to help rebuilding the economy in the future.’
• The Business interruption loan scheme is to be tweaked. UKH says ‘changes from the Bank of England have accelerated funding with fewer strings attached. Generous grants have also been announced and UKH is currently pressing for this to apply per property and with a higher threshold to help more businesses.’
• Sky reports that chancellor Rishi Sunak is expected to overhaul his Coronavirus Business Interruption Loan Scheme because many small and medium-sized businesses were struggling to access funds. Several hurdles should be removed.
The overall state of play:
• VAT deferral. The March quarter doesn’t have to be paid for three months.
• New bank loans. These will be guaranteed, for the most part, by the taxpayer.
• Existing bank loans. Banks are under intense pressure not to pull the plug on business.
• Business rates. These don’t exist for this tax year. We tweeted yesterday ‘Covid ££ side effects #30. Business rates: Can you really bring them back? They are 1) hated and 2) gone. You wouldn’t reintroduce the cane at school, would you? Well, you might. Correlates strongly with which newspaper you read…’ See below Forthcoming Results for other tweets.
• Rents. These remain subject to commercial contracts – but there is a 3mth moratorium on evictions.
Facing two ways at once.
• Langton comment. A miserable & depressed face has to be turned towards the landlord (in order to secure concessions) but a more upbeat one has to be shown to the bank (as the latter is under no obligation to lend to companies that were not viable before the Covid-19 upheavals.
• See below Forthcoming Results for yesterday’s tweets. Follow us on #brumbymark for today’s
Other companies under intense pressure:
• Owner of Gourmet Burger Kitchen, Famous Brands, has said that it will cut funding to its struggling British burger operation. Famous Brands bought GBK in 2016. The parent company says ‘the board’s decision to withhold further financial support for GBK may result in an impairment of the full value of Famous Brands’ investment in GBK.’
• Famous Brands’ shares rose on the news. Analyst believe that the UK operation had never been profitable and that it has been a drag on its owner. It is not clear whether or not the subsidiary will be able to find funding, achieve profitability or stay in business in the current environment.
PUBS & RESTAURANTS:
• Fuller, Smith & Turner has updated further on Covid-19 today saying that most of its employees are in furlough with some retained ‘in key positions to maintain critical functions and deliver the year-end financial reporting process.’ The company says it is minimising costs in order to preserve cash. It has cut capex.
• Fuller’s says it has an ‘excellent relationship and open dialogue with its lending banks, and the Company is well financed with a healthy balance sheet and significant liquidity headroom.’ It says, however, that, as the current situation is uncertain, it ‘has taken the decision not to propose a final dividend on the Company’s ordinary shares for the year ended 28 March 2020, thereby preserving further cash.’
• Fuller’s CEO Simon Emeny says ‘we have implemented a wide range of measures that will impact all our stakeholders but will protect the business and ensure that we emerge in a strong position to build for the future. We are supporting our tenants by cancelling commercial rent payments, we will not be proposing a final dividend, we have placed over 95% of our team members in furlough and my Board colleagues and I have taken a 25% reduction in pay.’
• Hotel Chocolat yesterday said that it ‘has decided to cancel the proposed interim dividend, which was due to be paid on 15 April 2020 to shareholders on the register on 6 March 2020.’ The company says, in its opinion ‘it is more prudent to retain the cash in the business for deployment in service of long-term growth. The Board intends to reinstate payment of dividends when it is appropriate to do so.’
• Hotel Chocolat CEO Angus Thirlwell nonetheless says ‘we are committed to keeping the Hotel Chocolat family together during these challenging times. We also remain confident in the Company’s longer-term growth plans in the UK, the USA and Japan, and want to ensure that we maximise the resources available to the Group to leverage these opportunities, as well as others which may develop when we all emerge from the current crisis.’
Mexican food, too hot for some:
• Mexican restaurant chain Benito’s Hat has filed for administration saying that the impact of Covid-19 left it with ‘no option’ but to cease trading. Alongside Chiquito, that’s two operators that have left the stage in the last week.
• A couple of years ago, we identified Mexican food as one of two or three sub-sectors that had seen the most added capacity.
• In October last year, we covered the sub-sector in a Premium piece, Mexican Food- Too Hot for Some. We concluded that, despite The Guardian’s comment in 2015 that the ‘UK is riding a Mexican culinary wave with burrito outlets now the fastest growing type of eatery on the high street’, there was little sign of any profits being made by the operators.
• We said ‘the gloss was beginning to rub off by 2019’ and we suggested that there were going to be ‘tears before bedtime’. We said ‘perhaps the CVA accountants and lawyers are winners’ and added that, ultimately, ‘busted chains reflect the failure of the market to supply what customers want at a price they are prepared to pay.’
• Clearly Covid-19 has been an accelerant, but Benito’s Hat has been in some trouble for years. We said last year Pico’s Ltd (t/a Benito’s Hat) lost c£490k in the year to July 2018 and had £3.1m in accumulated losses. The group undertook a CVA under the 1986 Insolvency Act with its creditors in August 2018 and it has gone on (alongside Carluccio already this week alone) to suggest that Colliers was right when it said that CVAs are ‘delaying’ failure.
• CVAs may look, move and behave like gravy trains but, when we bounced that idea off a big-four accountancy partner a in early 2019, he was having none of it.
• Re Benito’s Hat, Begbies Traynor suggests that the company’s four restaurants, all in London, have now permanently closed under prior owners, though they could re-open after a sale to a newly formed company incorporated specifically for the purpose of running the sites.
• The Chancellor is to tweak the Covid Business Interruption Loan Scheme after criticism that it did not work for smaller companies. The government is to stop lenders from demanding personal guarantees from directors for loans under £250,000. It will make further operational changes in order to speed up the lending process.
• The Chancellor says ‘we are making great progress on getting much-needed support out to businesses to help manage their cashflows during this difficult time – with millions of pounds of loans and finance being provided to hundreds of firms across the country.’ He continues ‘and now I am taking further action by extending our generous loan scheme so even more businesses can benefit. We have also listened to the concerns of some larger businesses affected by COVID-19 and are announcing new support so they can benefit too.’
• Stores data (see Nick Bubb) from BDO shows that Britain’s high streets have suffered their worst month on record. LfL sales fell by 17.9% for the month and instore sales dropped by 34.1%. The exit rate for the month must have been far worse than the average.
• Shake Shack has put a hold on expansion, cut 20% of its corporate New York City-based staff and reported that LfL sales fell by 29% in March. Shake Shack is now not allowing guests inside its restaurants. It had initially closed dine-in but left its restaurants open for carry-out meals.
• Sir Philip Green has furloughed around 14,500 of his 16,000 employees.
• High Speed Training has reported that circa three quarters of Britons saw deliveries and takeaways from local pubs & restaurants as an ‘essential service’ during the current Covid-19 pandemic.
• Sandpiper CI Group has terminated its acquisition of the Guernsey Pub Company, the owner of Randalls of Guernsey.
• Punch Pubs has continued the suspension of rent collections from its pubs.
• The BII has announced that Katy Moses, Managing Director of KAM Media, has joined their board of trustees.
• Tappers Gin on the Wirral is now making hand sanitiser.
• Government guidance continues to suggest that furloughed workers will not receive the 6.2% increase in the NLW.
• Companies House reports that Caravan Coffee Roasters is in receipt of a first Gazette notice for compulsory strike-off. The document has not yet been made available and, strangely, is dated 7 April. The company is not late in filing its accounts.
• EI Group has deferred the collection of rent and fees from its licensees for the whole of this month.
• Major share price movements in leisure yesterday were mostly on the downside, despite the market rising slightly. We saw Carnival off another 22% to 605p (was £36.50 in January). GVC was off 13%, Saga off 9% and JD Wetherspoon finished the day some 6% lower.
HOLIDAYS & LEISURE TRAVEL:
• Accor has withdrawn the dividend that had been proposed from its 2019 earnings and has furloughed around 75% of its staff. Some two thirds of its hotels are to be closed.
• Airbnb is reported to have cut its internal valuation by 16% to $26bn.
• Some New York hotels are to be converted into hospital space.
• President Trump is reported to be considering grounding some flights in the US. The US now has the largest number of Covid-19 confirmed cases in the world, around twice that of Italy.
• Saga’s former head of Tour Operations Jeanette Linfoot has told Travel Weekly that furloughed travel industry employees should use their time to hone their skills.
• IATA says that demand for air travel in February this year fell by 14% compared with last year. March will be a horror show.
• STR reports that occupancy across the US hotel industry fell by 67.5pps to 22.6% in the week to 28 March. Average rates fell by 39.4% and REVPAR was down by 80.3%.
• Hotel occupancy in mainland China has recovered from a low of 7.4% to 31.8% per STR.
• RCL chairman & CEO Richard Fain is to forego his base salary for the whole of this year.
• Holiday tiddler Minoan has reported this morning saying that deals that it had in train will be delayed. It says ‘currently the Group’s cash resources are constrained and it is managing its working capital position carefully. The Group is in constructive dialogue with its loan provider and others regarding the extension or settlement and restatement of the loan due to be repaid on 9 April and will provide an update in the near future.’ It says that a long-running legal action has been dismissed.
• Nielsen reports that, over the past four weeks, the number of minutes spent streaming TV and movies has risen 36% per customer.
• Premier League footballers are reported to be pushing back against calls to cut their wages. Club bosses are pushing for cuts. Sky says ‘some senior figures connected to the world’s richest domestic football league want the Premier League’s 20 clubs to agree to a blanket reduction in players’ salaries of up to 25%.’
• CVC is reported to have cut the price is is prepared to pay for gaming company Leyou Technologies Holdings.
FINANCE & ECONOMICS:
• The IMF has suggested that governments should buy businesses that collapse to stop workers losing jobs.
• Business secretary Alok Sharma has said it would be ‘completely unacceptable’ for banks to refuse funds to companies in financial difficulty. Meanwhile, in the real world, commercial decisions have to be made.
• Former Bank of England governor Mervyn King has said that an indefinite Covid-19 shutdown is unrealistic. That is true.
• The IFS says millions of people risk failing to benefit from the wage support schemes put in place by the government
• The BCC says most companies have only 3mths of cash reserves.
• PM Boris Johnson has said that the UK will ramp up testing.
• The EU has urged insurance companies (in addition to banks) not to pay dividends or buy their shares back in the market.
• Sterling level vs dollar at $1.2382 but up vs Euro at €1.1416. Oil higher at $28.53. UK 10yr gilt yield up 2bps at 0.33%. World markets up yesterday but Far East down in Friday trade & London market set to open down around 55pts.
• The number of people signing on to unemployment benefit in the US rose by 6m last week. It was 3.3m in the week before. Some 10m Americans have lost their jobs in the last fortnight.
• The Nationwide says that ‘annual house price growth increased to 3% in March, up from 2.3% the previous month.’
START THE DAY WITH A SONG:
Yesterday’s song was the very worthy This Woman’s Work by Ms Kate Bush. Today, who sang the following Friday lyrics?
Hey hey, I got some money, I just got paid,
Got some money and I can’t wait for 6 O’Clock,
I’m outta’ heeeere
RETAIL WITH NICK BUBB:
• Today’s News: There is still no sign of an update from AO.com, but the embattled Joules fashion chain has announced that it has raised £15m in new equity to prop up its balance sheet (via an overnight placing at 80p, a small discount to last night’s close of just 86p). And after hours last night, the discount shoe chain Shoe Zone announced that it was cancelling its already agreed final dividend of £4m to save cash, as trading had quickly deteriorated. The most startling news, however, is the revelation in the Q2 results from the US drugstore giant Walgreen yesterday that Boots sales have collapsed, despite its dominance of the UK pharmacy market: “In March, our UK sales declined by around 8%. Mid single-digit growth in pharmacy did not offset a mid-teens decline in retail sales. But it is the exit trends that are concerning. Retail sales declined by 65% over the last 10 days of March
• BDO High Street Sales Tracker: We highlighted on Wednesday that last week’s John Lewis sales figures should have again been helped by strong Electricals sales, but the BDO High Street Sales Tracker for medium-sized Non-Food chains does not include any significant Electricals retailers…and with Online sales failing to compensate for the collapse in Store sales as a result of the store closures ordered by the Government to control the coronavirus pandemic, today’s survey flags that Fashion sales slumped by 70% LFL last week (with in-Store Fashion sales down by as much as 99%)…In w/e Sunday March 29th, Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were down by 63% (down 96% in Store sales, but up by c5% in Online sales).
• News Flow Next Week: Ahead of the long Easter weekend, there is not much company news scheduled next week, particularly with the Tesco finals postponed (as per the FCA guidelines). But Tuesday should still bring the ASOS interims and the Motorpoint pre-close, followed by the Dunelm Q3 update on Wednesday.
• Finally, there is no live sport to watch on TV…but we are looking forward to the “Virtual Grand National “ on ITV at 5pm tomorrow: the amazing Irish horse Tiger Roll is favourite, but “Honest Nick” will be rooting for Bristol de Mai (with e/w savers on Definitily Red and Kilidisart).
TRADING STATEMENTS & EVENTS:
Upcoming results are set out below:
• 2 Apr 20 Covid-19 updates: Saga, Hollywood Bowl, Gear4Music, Hotel Chocolat
• 3 Apr 20 Covid-19 updates: Fuller’s, Minoan
• 3 Apr 20 Constellation Brands numbers
• 23 Apr 20 Gear 4 Music FY numbers
• 23 Apr 20 Domino’s (US) Q1 numbers
• 28 Apr 20 Pepsi Co Q1 numbers
• 29 Apr 20 YUM Brands Q1 numbers
• 7 May 20 Intercontinental Hotels Q1 numbers
• 12 May 20 On the Beach H1
• 13 May 20 Marston’s H1 numbers
• 13 May 20 Stock Spirits H1
• 13 May 20 Compass Group H1
• 13 May 20 C&C full year numbers
• 14 May 20 Flutter AGM
• 21 May 20 Young & Co full year numbers
• 11 Jun 20 Fuller’s FY numbers
• Covid ££ side effects #28. What about re-opening costs? Companies struggling to pay wages & rent with no income & no gov support (yet) & then they have to stump up to reopen? Take hoarding down, re-order stock, a thorough clean, re-boot staff etc. How’s that gonna happen?
• Covid ££ side effects #29. Permanent changes? Cookery programmes shooting the lights out atm. Will customers flood back to restaurants? When they’ve boned up on cooking & have 1,000 tins of baked beans to eat?
• Covid ££ side effects #30. Business rates: Can you really bring them back? They are 1) hated and 2) gone. You wouldn’t reintroduce the cane at school, would you? Well, you might. Correlates strongly with which newspaper you read…
• Covid ££ side effects #31. Will we be the same after this? Probably not. Consumers may – deep thinking alert – reflect on their own mortality. They will have to repair their own balance sheets, save a bit more & perhaps spend a bit less.
• Covid ££ side effects #32. What is all this noise crowding out? No bandwidth to think about much else. Will Pizza Express still need to refi? Other walking wounded? What about the Pat Val criminal trial? And any civil action? And Mr Johnson’s divorce? Etc. Etc.
• COVID Qs #7. Calling a spade an effing shovel. How can gov ‘privatise’ this problem? 1) take the lockdown off, keep ‘social distancing’ in place, drop job support & let private sector take the hit or 2) watch Italy / Spain & copy them. Low political risk is 2. Reality might be 1.
• COVID Qs #8. People to Govt. Eff business, we don’t need experts, that one. Could you even run a bath? Rabbit, headlights & we had China, Italy to copy. And saying current gov is ‘better than the other lot’ is a) unproven but b) possibly true & c) deeply, deeply depressing.
• Industry to Govt: where’s the cash? No, really, where’s the cash? Saying to a drowning man you can breathe again tomorrow is no use to man n’beast
• Destroy the economy or let 200k vulnerable people die? It’s a dreadful, dreadful choice and well above our pay grade. But one thing we do know. Don’t, whatever you do, do both.
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