Langton Capital – 2020-04-16 – PREMIUM – Consumer spending, Escape Hunt, JD Wetherspoon, admins etc.:
Consumer spending, Escape Hunt, JD Wetherspoon, admins etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
We, the daughter and I, were discussing slow worms yesterday.
And we concluded that, whilst their name already insulted them twice, there was no redemption in their habits as they have no arms or legs, they have to slither around in the muck, and they eat slugs.
Hence, as various among us survey the wreckage that used to be our investment portfolio, it’s perhaps worth remembering that things could be worse. Follow us on @brumbymark for our intra-day musings. On to the news:
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DEAD MEN WALKING? The government is under fire regarding its reporting of Covid-19 deaths but, in the corporate world too, there may have already been more fatalities than the bare facts suggest. 16 April 2020.
Administrations to date:
• Drop us a line if we’ve missed anyone out but Benito’s Hat, Carluccio, Cath Kidson, Chiquito’s, Debenhams, Food & Fuel, Laura Ashley, Oasis and Warehouse have thus far called in administrators.
• This is hundreds of units and thousands of jobs but, as the Centre for Retail Research suggests that around 20,000 of the shops that have now been closed on the orders of the government may never open again, there could be more to follow.
Underreported death rate? The mechanics of the market have, in many cases, been suspended:
• The bodies that would ‘normally’ call in administrators – particularly the VAT man, the banks, certain creditors – are occupied elsewhere
• Either are not collecting debts on purpose (the VAT man), they have been browbeaten by the government into going easy on creditors (the banks) or they have many, many other things on their plates.
• Other creditors, business rates, utilities etc. are similarly occupied and, even if an administration were forced, how will any assets be sold in this market – indeed it will be interesting to see if Carluccio’s sites attract any serious bidders
Trading while knowingly insolvent:
• Under normal circumstances, directors, even non-executive directors, can be held personally liable for company debts if that company trades whilst knowingly insolvent
• Wrongful trading (above) is bad but fraudulent trading (which is a criminal offence) is worse
• Some wrongful trading provisions have been suspended (though the directors may still have to have a reasonable belief that the company can survive).
• The above means that directors have less of an incentive to bust their own company
Misery likes company. Slipping under the radar:
• It may also be that some companies, whose poor, indeed disastrous trading would otherwise have drawn attention, are having to join the queue when it comes to providing bad news
Going concern provisions:
• It is possible – indeed likely – that much of the hospitality industry would have, if candidly measured, have trouble persuading their auditors that they were a Going Concern
• But once again, misery likes company and there will be a large number of operations facing these sorts of dilemmas
• Indeed Wasabi, which we will cover tomorrow (unless it gets bumped by breaking news), has seen its auditors question its stature as a going concern and it is not deemed to be in any (or much) more trouble than its peers
• It is possible, indeed likely, that a lot of companies out there are dead already.
• It’s just that they either don’t know it – or they do know it but ‘what you gonna do?’
• As it’s easy to believe that there may be a capacity issue (either now or shortly) with regard to the country’s administrators.
• There may need to be a queuing process. The failed companies may not fall over until the crush of bodies around them eases and they have the space to collapse.
• Or it may be that we won’t notice.
• At least not straightaway because, at the end of the day, most companies out there (at least to outsiders) look to be in such a deep hibernation that it could be mistaken for death in any case
BARCLAYCARD MARCH CONSUMER SPENDING:
• Barclaycard has released its March consumer spending report saying that ‘spending at supermarkets rose 21.3 per cent and specialist food & drinks stores 30.5 per cent – with the latter up 80 per cent the week before social distancing measures were introduced.’
• Barclaycard says ‘travel fell by 40.5 per cent and fuel decreased by 4.2 per cent as Brits spent more time at home.’ It adds ‘online purchases rose 5.5 per cent while in-store transactions dropped 4.0 per cent.’
• Barclaycard says ‘confidence in the UK economy fell to 25 per cent yet more than half of shoppers chose to buy locally to support independent businesses.’ Consumer spending overall ‘dropped 6.0 per cent year-on-year in March as measures to tackle coronavirus were introduced.’ The card operator reports ‘spending on non-essentials was down 12.9 per cent, with many retailers impacted by the introduction of social distancing measures. Travel expenditure – which includes public transport – declined by 40.5 per cent, while restaurants and bars, pubs & clubs contracted 35.5 per cent and 22.2 per cent respectively.’ This will obviously have worsened in April.
• Barclaycard says ‘more time at home led to digital content and subscription spend rising 17.4 per cent as people entertained themselves by playing digital games, watching boxsets and accessing streaming services.’ It says ‘Brits continue to be resolute about their own financial situation, with 68 per cent remaining positive about their household finances, broadly in line with last month. This could be attributed to the fact that 56 per cent said that they were saving money by avoiding the pub, eating out and commuting less.’
• Barclaycard concludes ‘the coronavirus pandemic continues to impact everyday life in the UK, and this is naturally reflected in where and how Brits are spending their money.’ It says ‘despite these turbulent times, it’s positive to see that many Brits remain resilient about their own household finances.’
PUB & RESTAURANT NEWS:
• A broker has suggested that JD Wetherspoon may need to raise up to £250m in new capital, some perhaps via equity at these low prices in order to shore up its balance sheet and ensure liquidity. Other companies may be going through the same thought process. Chairman Tim Martin was an opponent of the lockdown (pubs were asked to shut on 20 March) saying at the time that ‘there’s hardly been any transmission of the virus within pubs, and I think it’s over the top to shut them. That’s a commercial view, but also a common sense view.’
• Mr Martin also said on 20 March that he would take the opportunity to catch the coronavirus under the right conditions – again in defiance of public health messages. The company bought back 419,000 shares at an average price of £15.23 in its financial H1. The shares are currently trading at 822p having fallen 14% yesterday.
• Mr Martin said at the time of the company’s H1 results that it would be ‘over the top’ to close pubs (they were ordered to shut later that day) saying that keeping pubs open would make it much easier to get back to normal once the ‘health scare’ had passed.
• The company had earlier in the month said that ‘the government will make a tactical error in resorting to de facto lockdown.’ He suggests that it would be better to admit that most people will get the virus but take measures to protect the vulnerable. Chairman Mr Martin added that keeping pubs open ‘has the additional advantage of being in tune with the robust instincts of the nation. This is evidenced by Wetherspoon sales which have been positive in the last few weeks in spite of storms and health scares.’ He added the UK prime minister should not take ‘French leave of his senses by following the lockdown example of perfidious Emmanuel Macron.’
• Post the shutdown, the company said it would not pay suppliers or staff. It later agreed to pay staff for the work that they had already undertaken. Yesterday’s broker report says JDW ‘has withdrawn guidance, but our scenario analysis suggests that it may need to raise up to £250m to survive the liquidity crisis – not only to cope with closure but also potentially a sustained period of weak demand which does not suit its high-volume, high-cost, low-margin business model.’ The broker added that raising funds via equity might not be the ‘preferred route’.
• Moody’s comments on Diageo’s withdrawal of the guidance on organic net sales growth and organic operating profit growth for fiscal year ending next 30 June 2020 because of the effect of the coronavirus lockdown in many regions saying ‘the move suggests that the company’s key debt metrics will be weaker than it expected in the current fiscal year and, potentially, that the speed of a future recovery could be somewhat slow.’ It adds ‘more positively, Diageo also announced that it is taking measures to reduce costs and that it will suspend the ongoing up to £4.5 billion (£3.25 billion remaining) share buyback programme for the remainder of fiscal 2020. We view potentially weaker than expected debt metrics as temporary before returning to more normal levels over the next 12-24 months.’
• In the US, Jack in the Box has withdrawn its guidance for the fiscal year and says LfL sales should be down around 4.2% in the now-rather-historic Q1.
• The BRC says that retail sales declined at the worst rate on record last month.
• Burger King is to open some units for delivery only.
• Sky reports that ‘administrators to Carluccio’s are racing to find a buyer for the collapsed restaurant chain amid growing expectations that many of its rivals will fail to survive the coronavirus pandemic.’ FRP Advisory had asked bidders to table offers by 5pm yesterday.
• Germany has extended its lockdown but will allow the partial reopening of shops next week and schools from 4 May.
• Revolution Bars Group has reported that ‘it has now executed final documentation with its lending bank, Natwest to increase its revolving credit facility to £30.0m until 31 August 2020, as further detailed in the Group’s announcement of 14 April 2020.’
• The government has announced that its 80% furlough scheme will be extended to include employees that were taken on right up to the day before the scheme was announced, that is 19 March. This is thought to benefit around 200,000 people.
• UK Hospitality has welcomed this extension saying ‘this is great news for the sector and a welcome sign that the Government has listened to our concerns and those of the workforce.’ It continues ‘this will provide some very valuable peace of mind for employees who had missed the previous deadline, and it will give businesses some breathing-room knowing that they will be in a stronger situation once they are in a position to reopen.’
• Regulator the Pub Governing Body chairman Sir Peter Luff has said that ‘the PGB in conjunction with the PGB of Scotland has agreed with the pub companies who follow the Tenanted and Leased codes of practice and self-regulation that all rent review negotiations will be suspended while pubs remain closed during the coronavirus epidemic.’
• That’s one fewer thing to be worrying about. The PGB says ‘this quick and flexible response to the current crisis shows how voluntary regulation brings real benefits to pubs and we hope it will be welcomed.’
• EI Group operating company the Craft Union Pub Company has created a virtual community, called the Crafty Squad and run on Facebook, in order to ‘keep spirits high and reinforce positive mental health’.
• This is no small matter as the lockdown drags on. Craft Union says ‘operators have also been sharing a range of different activities and ideas detailing how they’ve been supporting the communities in which they serve. ‘
• Just Eat is to extend its 25% discount for NHS workers after saying that a million meals had been ordered by NHS staff in the first two weeks that the offer was open.
• EI Group has announced that it is to continue the suspension of rent and ancillary charges until further notice reports the Morning Advertiser.
• Pret a Manger is to reopen 10 London stores from today following requests from a number of NHS workers.
• Nielsen reports that consumers across Europe have differing views as to how long their respective lockdowns will last. Nielsen says ‘consumers in Greece, Russia, France and Spain are more optimistic that things will rebalance in less than three months, while consumers in Germany, the Netherlands, U.K., Turkey and Ireland aren’t so sure.’
• Nielsen says that some changes to habits may last beyond the period of lockdown. It says ‘homebound Europeans may become more habitual online shoppers’ and home-cooking may build upon its forced revival.
• The Independent pushes the need for more of a bold intervention on the part of the government to save the hospitality industry. Money just isn’t flowing as quickly as it should. It is around 3wks since the chancellor promised £330bn of government supported banking help for industry. Around £1bn is thought to have been committed so far.
• The BBPA has released guidance on how beer should be destroyed in pubs in accordance with HMRC rules. It says ‘the change in rules allows for duty paid on unsold beer to be recovered, and for the brewer to pass that reclaimed duty back to their pub customer, so long as they follow the protocol.’ Every little helps.
• The Daily Mail reports that Wasabi is having some difficulty persuading its auditors that it should be treated as a going concern. The group has refuted any such suggestion in the trade press. See tomorrow’s Premium Email.
• Italian drinks producer Campari has arranged a medium-term loan for up to €750 million with a consortium of banks.
• The Food & Drink Federation says that there is a material risk that calls for protectionism will grow as a result of the coronavirus crisis. The FDF says ‘Covid-19 is the biggest threat this country has faced in decades, and all over the world we are seeing its devastating impact.’ The FDF maintains that diminishing world trade would leave us all the poorer.
• Former Patisserie Holdings boss Luke Johnson has tweeted that commercial rent may need to fall by 50%. He says he is open for investment opportunities. He says he is willing to invest £500k to £5m and can move quickly ‘if the terms are realistic’.
• The Scottish Beer & Pub Association has commented on the Scottish Government’s extension of the grant scheme to multiple premises saying ‘this is a hugely welcome announcement from the Cabinet Secretary and one that the SBPA has been pushing the government repeatedly on over the last few weeks.’
• The SBPA says ‘this gives Pubs and other hospitality businesses the extra cashflow needed to survive at this time and will also allow more businesses to reopen once the pandemic is over. There remain areas where further support is still needed; pubs with rateable values of over £51,000 will still receive no grant support and is something we’re pushing both UK and Scottish Government’s for more action.’
• Some sharp share price movements in leisure yesterday, unfortunately mostly on the downside. Fevertree & Restaurant Group were up by 4% each whilst all other large movement were down. Cineworld off 21%, JD Wetherspoon 14% lower, DART Group down 14%, M&B 13% lower and TUI 10% off. Saga & SSP were 8% down, 888 was off by 9%, Revolution Bars by 7% and Carnival was 6% lower.
HOLIDAYS & LEISURE TRAVEL:
• Virgin Atlantic is continuing its calls for £500m in state aid.
• The Telegraph says that 10,000 B&B premises could go bust if they miss the summer.
• The government has given the go-ahead to HS2. The government says ‘we cannot delay work on our long-term plan.’ The Adam Smith Institute says that the government is ‘tone deaf’.
• Marriot International says REVPAR fell by 23% in Q1. Q2 will be worse. Currently, around a quarter of the company’s flagged hotels are shut. Occupancy in Europe is currently under ten percent, with 79% closed.
• Cruise company Seabourn has extended its suspension of sailings until 30 June.
• Escape Hunt has updated on further mitigating actions taken in response to the COVID-19 pandemic saying that the company ‘expects to receive UK Government support through several of the schemes announced’. These include the job retention scheme, business rates relief and grants of £25k for around a half of its sites.
• ESC (in common with other operators) will also defer its VAT payment. It adds that ‘many of our landlords have been incredibly supportive giving consent to defer rent payments and, in some cases, service charge payments.’ The company adds that ‘all staff who have not been furloughed have accepted temporary pay reductions, with senior management accepting a 25% pay reduction and the non-executive Directors waiving all fees whilst the lock-down conditions persist.’
• ESC says ‘the majority of our third party expenditure, including marketing spend has ceased’ and adds ‘capital expenditure has been put on hold.’ It says ‘in aggregate, the initiatives taken have reduced the Group’s monthly cash costs by approximately 70%. Approximately 15% of this is deferred expenditure and will need to be caught up in future.’ It says ‘the measures above will allow the Group to quickly re-open sites once permitted.’
• ESC says that ‘activity has continued in areas where we can continue to make progress.’ It is working on new games and formats but concludes ‘we still have no visibility on when sites will be able to reopen nor how quickly business will return.’ The company says it will announce unaudited preliminary results in May and says ‘the Board continues to monitor closely the Company’s cash position and liquidity and will continue to proactively explore all options available.’
FINANCE & ECONOMICS:
• Sky reports that only £1.1bn has so far been handed over to businesses under a government-backed emergency loan scheme announced three weeks ago. A figure of £330bn was trumpeted.
• Some 1.4m people in Britain have made new claims for benefits as a result of unemployment.
• G20 nations are reported to be suspending some debt payments due to them from poorer countries.
• Sterling lower at $1.2478 and €1.1468. Oil price down to $27.85. UK 10yr gilt yield down 3bps at 0.30%. World markets lower yesterday and Far East down this morning. UK market set to open down by around a handful of point at 8am.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• BRC Retail Sales for March (the 5 weeks to April 4th): We thought that today’s figures, which came out overnight, would look reasonably strong overall because of the temporary boost to Food retailers from the stockpiling surge in mid-March, but we clearly over-estimated the strength of recent Food sales and may have under-estimated the hit to Non-Food sales, with overall LFL sales down by a hefty 3.5%…It was, of course, a month of two halves, with the BRC flagging that gross sales in the first 3 weeks were actually as much as 12% up, before slumping by 27% in the last 2 weeks, as store closures took effect (as illustrated by a chart of the weekly trends). The dramatic Food/Non-Food split is buried within the 3-month moving averages (of +4.9% and -6.7% respectively), but it looks to us as if Food sales were no more than c13% up LFL over the month as a whole, despite all the panic
• Today’s News: There is still no news from AO.com on recent trading, but Dunelm has announced that it has re-started its Online operation and that it is now fully operational, “with the exception of some 2-man delivery products, which we anticipate will begin next week once we finalise a safe and workable delivery solution”. Dunelm has also said that it is confident that the group has access to sufficient liquidity, even in the event of a prolonged store closure period. CEO Nick Wilkinson says “Whilst many uncertainties remain, we have ensured that Dunelm and its many stakeholders will be well-supported through this difficult period and are confident that we will emerge from this crisis as a stronger business ready to return to sustainable and profitable growth”.