Langton Capital – 2020-04-22 – PREMIUM – Fevertree, pub & restaurant state aid, New River, costs etc.:
Fevertree, pub & restaurant state aid, New River, costs etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Watching the news and various current affairs programmes has made me wish that I’d moved into the book-case industry just before the lockdown was announced because a large number of wannabe talking heads must have dashed out and ordered their shelving in anticipation of their prospective appearances.
Because tasteful shelves stacked with worthy books is the new black and, I’m beginning to think, mine needs a bit of a makeover.
Because there, Nietzsche, Dickens and the rest are missing.
And, though there are some classics (if you can call The Day of the Triffids, Lord of the Flies, and a Haynes manual for a 1973 VW Beetle etc classics) but they are heavily outnumbered by twenty-year old road atlases, 1970s Birdwatching for Children books, unread gardening and DIY manuals, a selection of grotty magazines & 40yr old comics, soft toys, a mysterious beer mug with a broken lid, decorative (and empty) beer cans along with flightless darts, a screwdriver and a deflated football.
Anyway, as many people have commented, we really only have a face for radio. On to the news:
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• Working capital – passing the parcel.
• Money hoarding and the implication for bad debts.
• Compensation (is for legit numbers)
• Beer company support
• Life on the other side
RISING BAD DEBTS: There may be a ‘have-money, keep money’ attitude out there. Indeed, it would be rather odd if there were not.
• One company’s money-hoarding is another company’s bad debt.
• Often debts will be paid to the most ‘important’ suppliers first.
• In extremis (that is in administration), the administrator is top of the list but in less extreme circumstance it will be 1) people and companies you want to deal with again, 2) people and companies that you would like to deal with again – but they are not in a position to complain and 3) others.
• No1 may include key staff, key (large and muscular) suppliers and key landlords.
• No2 is more interesting but less happy. They will be shift staff, smaller suppliers and landlords of secondary though not tertiary sites. Indeed, no2 will include ‘anyone weaker than you’.
• Hence big companies will bully small companies.
• The pub companies and the large managed pub operators will be larger than most of their suppliers (though not, of course, Diageo, Heineken, Carlsberg, AB InBev and some others).
• Hence small companies are likely to be disadvantaged.
• This is not a pretty picture as smaller companies may also be less well-capitalised and they, like their larger customers, rely on their cash flow in order to keep running.
• No3 is pretty much a lost cause. Unless or until the government pays for everything, they (the suppliers in no3) may not be paid by their customers.
• Of course, this won’t do much for future relationships.
• But it will all have been a misunderstanding, won’t it?
• Smaller suppliers that have gone out of business are an irrelevance to their customers (although they may have to re-source product) and those that remain in business can be told that the cheque was lost in the post, the staff responsible for paying the bill were furloughed etc.
• And, to a large extent, these smaller suppliers will have to suck it up.
• Occasionally, MPs will rally to their defence, as they did for some suppliers to Tesco etc., but, in the current environment, all of this will be lost in the noise.
COMPANIES ACTING STRICTLY ‘ABOVE BOARD’ WILL BE MORE ELIGIBLE FOR COMPENSATION THAN THOSE ON THE ‘FRINGES’.
• Is virtue necessarily its own reward? Might there be further compensations?
• It’ a little difficult to get across but perhaps a few examples.
• a) Heineken has said that it will collect, destroy and replace beer that has been sitting in cellars unsold and has gone out of date. But it will do this for its better customers.
• b) The furlough scheme applies to salaries paid properly, through the books.
• Under a), companies that have played fast and loose with suppliers will not be in such a good position. If they have been ringing around suppliers at the last minute to get deals on stock that has been returned by other customers and about to go out of date, there will be little compensation.
• With b), staff paid ‘under the counter’ will get nothing. The staff themselves may not have been at fault, but they will not be compensated. Their employer may have to let them go and his start-up costs will therefore be higher than those of an operator whose staff have only been furloughed.
• Also, re b) even tips are excluded. Even if they are managed via a tronc. This is borderline as tips are legit but one of the reasons that employers like to use the above is that it saves them employer’s NIC.
• The tips element of compensation will not be eligible for furlough pay-outs. This may be seen as harsh, but it is what it is. And it would have been rather hard to calculate.
• Elsewhere, landlords may favour good covenants, the HMRC is more likely to accept excuses from taxpayers with a hitherto clean record etc
PUB & RESTAURANT NEWS:
Government help: Please sir, I want some more:
• The trade has been making clear that, welcome though government help is, the industry would like some more of it.
• Industry bodies UKH and the BBPA have been making their views and those of their members known whilst London Union boss Jonathan Downey is carrying the torch ror a number of independent operators in asking for a 9mth rent free period.
• Research undertaken by KAM Media has found two-thirds of hospitality businesses saying they will not survive another three months of lockdown.
• KAM surveyed 211 hospitality companies ‘ranging from businesses operating pubs and bars to restaurants, cafes and street food venues’. MD Katy Moses says ‘so many hospitality businesses are at risk and we need help in navigating a pathway to safety. We need some fundamental interventions on rents and property, and on finance and loans, and it’s becoming clear that much of hospitality will require a much longer extension of the furlough scheme, given that businesses will not emerge fully from lockdown for some time.’
• Kate Nicholls of UKH says ‘the government has moved quickly to address some of the existential challenges that hospitality faces, brought by the crisis and lockdown, and as an industry we are extremely grateful. However, this research underscores the scale of the challenges, which is reflected in the current mood of the industry. We need far-reaching and continued support, and unprecedented intervention of the order of the proposed nine-month #NationalTimeOut idea or an equivalent concept of similar scale, in order for hospitality jobs and businesses to endure this crisis and to be there to drive the recovery.’
Trade body comments:
• UK Hospitality says ‘support for businesses hit by Covid-19 must be extended, enhanced and delivered swiftly if businesses are to recover from the Covid-19 crisis and jobs saved.’
• CEO Kate Nicholls, Chief Executive of UKHospitality, gave evidence to the House of Commons Treasury Committee yesterday and highlighted a number of areas ‘where Government support was not having the intended effect of supporting businesses, with many businesses struggling to access support and others excluded from schemes.’
• Specifically, seasonal workers, up to 350,000 of them, may have missed out on the furlough scheme.
• Hospitality businesses have found access to government supported loans problematic.
• 71% of UK hospitality business is ‘carried out in a venue with a rateable value of above 51,000 and therefore ineligible for a grant’ of either £10,000 for very small units or £25,000 for slightly larger sites.
• And the government has done nothing to head off the problems that could be faced by the industry when rents are next due at the end of June.
• Nicholls says ‘hospitality was the first sector to be hit hard by the crisis and it will be one of the last to make a recovery.’
• Meanwhile, the BBPA has written to business secretary Alok Sharma, pressing him to ‘take urgent action in tackling the gaps in support facing pubs and brewers over COVID-19.’
• The BBPA says ‘thousands of the UK’s much-loved pubs and hundreds of its breweries producing world class beer have been ineligible for much of the support.’
• The BBPA has called upon the government to extend the Job Retention Scheme beyond June and to improve access to the Coronavirus Business Interruption Loan Scheme by underwriting 100% of loans.
• It also asks the government to ensure that insurers are ‘fair and supportive when assessing insurance claims’.
• The BBPA also asks for grants for the 10,000 or so UK pubs with a rateable value of more than £51,000 and for beer duty payments to be deferred.
• The BBPA says ‘pubs may have to remain closed longer than any other business, so it is imperative the Government tackles the gaps in support facing our industry.’
Coming out the other side:
• Re-stocking pubs and restaurants could be an expensive and time-consuming process.
• The unit will need sprucing up, staff will need to partially re-trained, beer pipes and cellars will need preparing and suppliers may be unwilling to supply on pre-existing credit terms.
• Some units will need physical boarding taking down and they may be faced with low customer numbers for some time.
• And the biggest question and potential cost of all, is: ‘Will the customers still be there?’
• The temptation for the government may be to try to privatise the problem, remove support measures, and socialise their success.
• Jonathan Downey, see also below, says ‘I don’t think people realise how busy restaurants have to be to make money’. He says many are unprofitable and ‘a 20% revenue decline means almost all would be. Restaurant revenues are likely to be down 30% to 50% for a very long time.’
• Katy Moses of KAM Media says ‘we are very likely to see a much more cautious consumer coming out of this lockdown, at least in the short-term. Although there will be a proportion who will run straight to a pub for a cold pint, many will stick to essential only social gatherings in a bid to keep themselves safe.’
• Ms Moses continues ‘while we fully expect operators to respond with well-executed and communicated social distancing, and health and safety measures, it means that many will operate on drastically reduced capacity and this will place significant economic pressure on swathes of the industry.’
• The FT also suggests that yesterday’s sales models may be different in tomorrow’s market. Pret’s Pano Christou says ‘Pret will be a very different operator. He says that after the coronavirus outbreak has abated, footfall in its UK outlets would be ‘a considerable step down’.
• The FT says ‘many hospitality businesses are already making efforts to prepare for a new normal, by introducing extra space, regular cleaning, protections for staff and technology that limits customers’ interactions with workers.’ This will come at a cost. Some operators of larger pub units have suggested that reopening costs could run to £30,000 per unit.
• Fevertree has reported full year numbers to end-December showing revenues up 10% at £260.5m with profit after tax down 5% at £58.5m and diluted EPS down 6% at 50.26p. The company has increased its total dividend to 15.08p (up 4%). The company maintains that it has seen ‘double digit revenue growth, driven largely by strong US growth.’
• Fevertree says it experienced ‘challenging UK market lapping exceptional comparators, especially in the Off-Trade, resulting in a 1% decline in revenue.’ The company says it has a ‘very strong balance sheet [is] debt free with net cash at year end of £128.3m (2018: £83.6m).’
• Fevertree says it made a ‘solid start to the new financial year, with Group trading in the first two months in line with the Board’s expectations.’ It adds ‘while COVID-19 will have a material impact on FY20 trading, the Group is financially strong and has well balanced revenue streams diversified across regions, channels and customers.’ CEO Tim Warrillow says ‘clearly the scale and impact of COVID-19 has posed some significant challenges across our regions.’
• Warrilow says ‘we are determined to come out the other side as an even stronger business but also one that has made a difference during the crisis.’ He says ‘while the On-Trade sector is facing an extremely challenging period, we have seen strong sales in the Off-Trade in many of our markets both from the initial buying ahead of lockdown but also in recent weeks as at home consumption has remained robust.’
• Warrilow says ‘while we will not be unaffected by the current situation, especially in the On-Trade, Fever-Tree is well positioned to manage our way through this situation.’ He concludes ‘the wider long-term trend towards premium spirits and premium long mixed drinks continues and we are confident the Group will be well placed once the current period of disruption and uncertainty ends.’
• REIT New River has said that ‘its Board of Directors will be waiving 20% of their base salaries or fees for three months effective from 1 May 2020, which will be donated to NewRiver’s corporate charity partner, the Trussell Trust.’
• There is a concerted move, led by London Union’s Jonathan Downey, to push government to enforce a 9 month rent-free period in order to give larger & leasehold venues the space to survive during the lockdown and to recover thereafter
• Mr Downey says that the above need not cost the taxpayer anything if leases were extended and the current nine months were added onto the end.
• Landlords would, however, be without cashflow for the nine months that the moratorium was in force.
• Kate Nicholls to the Treasury Select Committee ‘…it will be a bloodbath come June when we have the next quarter rent due.’
• Nicholls: ‘A third of the sector is at risk.’
• Burger King UK boss Alasdair Murdoch to the BBC he ‘could not see the firm paying [rents] for some time to come.’
• The Morning Advertiser reports Wellington Pub Company licensees as saying that they have had little or no contact with their landlord since the shutdown.
• The NRA in the US says the US restaurant industry has lost over eight million employees since the crisis hit.
• Every little helps. Admiral, one of the largest motor insurance companies in the UK, is to give a £25 refund to customers as car usage, accidents and claims have all fallen.
• D&D has pledged over 2,000 free meals a day to key workers across the UK.
• Crussh juice bars has joined the #FeedHNS campaign.
• The Guardian quotes market analysts IRI as saying that sales of baking ingredients, frozen vegetables and alcohol are rising sharply as people cook (and drink) at home. Plant nurseries and newspapers are said to have taken a hit.
• Amazon is set to launch a new “Ultra Fast Fresh” delivery service
• The latest IHS Markit UK Household Finance Index, which was compiled during the first week of April, shows that ‘financial conditions deteriorated sharply when compared to the previous month and at a rate not seen since November 2011.’
• Coca-Cola’s sales volumes are running down by around a quarter this month. The company says it will prioritise its dividend, which it has increased for 57 consecutive years. It is cutting costs elsewhere.
• Chipotle Mexican Grill reported a 3.3% increase in LfL sales in Q1. Sales will be rather lower now.
• The FT reports that farmers are destroying food in the US due to lower demand and to problems in getting products to market.
• Cath Kidson is to close all of its stores in the UK. Some 900 staff will lose their jobs.
• A negative day for leisure stocks yesterday with no 5% plus gains and a raft of losers. Dart, Compass, JDW & Wm Hill were down 4%, Carnival, Rank & SSP were down 5%, M&B was off 9%, Marston’s & Cineworld were 10% lower, Revolution Bars Group 11% and Lounger’s was off by 13%.
HOLIDAYS & LEISURE TRAVEL:
• Travel Weekly has reported travel industry lawyer Jo Kolatsis as saying that there will be redundancies in Travel when the furlough scheme ends.
• Princess Cruises has said that passengers due on a cruise in July can now cancel up to 48 hours prior to departure.
• STR reports that the UK hotel industry registered a 51.9% drop in REVPAR in the month of March versus the same month last year. Occupancy was down by 42.3% and room rates were 16.5% lower.
• The FT says that there will be changes in the post Covid-19 world. It quotes Vue as saying the company’s IT teams ‘were retooling online booking systems to stagger seats.’ Attendance is likely to be lower.
• Netflix has added 15.8m subscribers in Q1 – and more may follow in Q2 – as would-be customers find themselves at home and at a loose end. It was the biggest three-month jump in the company’s history.
• Facebook has takend a $5.7bn stake in Indian company Reliance Jio.
FINANCE & ECONOMICS:
• Accountant Deloitte has reported there is currently an “astonishingly weak” economic backdrop against which businesses have to trade.
• Speaking at a Covid-19 webinar organised by the big four accountancy firms, Deloitte suggested that business should ‘respond, recover and thrive’. The questions have to be how, how and how?
• The ONS has reported a record level of employment in the UK in the 3mths to February. Unemployment was up slightly at 4%. Things will have changed markedly since.
• Average weekly earnings rose by 2.9% in the year to February.
• The price of a barrel of crude fell to 25yr lows yesterday.
• Sterling lower at $1.228 and €1.1319. Oil very sharply lower to hit c25yr lows at $16.21. UK 10yr gilt yield down 3bps at 0.30%. World markets lower yesterday, Far East down today but UK set to open up around 43pts (as at 7am).
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Boohoo: Today’s finals (for y/e Feb) from mighty Boohoo are strong, with adjusted PBT up by 42% to £108m, on the back of a 44% increase in revenues to £1.235bn, but all the focus is on the current trading overview, in the light of the COVID-19 outbreak. And, although forward guidance has been withdrawn, investors should be reassured to hear that after a marked decrease in year-on-year sales growth in the second half of March, “performance has improved in more recent weeks and we are now seeing improved year-on-year growth of group sales during April”. And having stress-tested various scenarios, Boohoo say that “we are comfortable that the group has sufficient financial headroom, benefitting from its largely variable cost base, low cash burn rate and strong balance sheet with £241m of net cash at year end”.
• Today’s News: As well as the Boohoo finals today, it’s worth noting that poor old Moss Bros is in trouble, after the Brigadier consortium has asked permission from the Takeover Panel to revoke the 22p cash offer made back in happier times, on March 12th…
• John Lewis Partnership Trading Watch: In the absence of the much-missed JLP weekly sales figures since the end of January, we would normally be guessing today what they would have reported yesterday for last week…but we have been saved doing that by the fact that JLP came out with a trading update yesterday morning, on the back of the publication of its Annual Report & Accounts. And, thanks to an 84% spike in Online sales, John Lewis sales were only down by 17% overall in the 5 weeks to April 18th, which is not as bad as we’d feared, albeit sales have been weighted to lower margin products (“We are buying more Scrabble but fewer sofas”). However, JLP’s worst case scenario for the full year (y/e Jan) assumes significant sales decline between April and June, and weak sales thereafter, which over the course of the full year would result in a sales decline of around 35%, around double
• News Flow This Week: There is no more Retail company news scheduled this week, but the belated ONS Retail Sales figures for March will be out first thing on Friday (at 7am).