Langton Capital – 2020-05-18 – PREMIUM – Compass, M&B, Intu, the 2m rule, CVAs etc.:
Compass, M&B, Intu, the 2m rule, CVAs etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, expanding on a tweet we sent out last week, how best should you use your time in lockdown?
That’s assuming you’re not self-employed, your staff are furloughed and you’re doing the work of three people for a reduced income, that is.
Do you 1) strategize, re-energise & ready yourself to burst back onto the scene. Or do you 2) keep vaguely up to speed, learn a language & do a bit of coding. Or are you a human being, do you 3) ruminate, vegetate & work hard on your beer-bottle top collection?
And, of course, you don’t want your beer bottle tops to be attached to full bottles of beer, do you, so drinking said product is part of the task at hand and that can take some serious man hours and involve elongated periods of gazing meaningfully into space.
We suggested results for the above would be around 3%, 7%, 90% but, as always, we are suffering from both a Familiarity Bias (that’s what we’re doing – or would like to do) and from an Availability Bias (it’s what we see, think or believe some others are doing).
Anyway, answers on a postcard to Langton and on to the news:
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• The CVA class of 2018. A number of companies that underwent CVAs in 2018 have subsequently gone into administration.
• Lost business or postponed business? Is business being permanently lost or are there grounds to hope that demand is being stored up?
CVAs – THE CLASS OF 2018: Several restaurant and retail brands underwent CVAs in 2018. A number of these have gone on to call in administrators. 18 May 2020:
2018 – The Year of the CVA:
• Lawyers FSP Law say ‘2018 has frequently been referred to as “the year of the CVA” due to the sheer number of retailers and restaurants seeking company voluntary arrangements to restructure their estates with the aim of avoiding insolvency.
• Official statistics show that there were 2,594 CVAs in 2018. The number dropped to a still-considerable 2,018 last year.
• Restaurant chains Carluccio, Benito’s Hat & Jamie’s Italian underwent CVAs in 2018. All have now gone into administration, the former two in recent weeks and Jamie’s almost a year ago.
• Gourmet Burger Kitchen underwent a CVA in 2018. Owner, Famous Brands, which bought GBK in 2016, has said that it will no longer financially support its subsidiary.
• Prezzo underwent a CVA in 2018. Sky recently reported that the company has called in advisors to ‘consider its post-coronavirus funding options.’ FRP is said to be advising the company
• Byron, which also underwent a CVA in 2018, has appointed KPMG to consider its financial options. The business is thought to be attempting an auction of its business. This is not what would normally be deemed an attractive market into which to be selling assets.
Did these CVAs cut too little, too late:
• Hindsight is a wonderful thing but yes, the cuts in site numbers and rent rolls were perhaps insufficient to guarantee survival
• Of course Covid-19 did come from left field. It was in nobody’s spreadsheet but we have said previously ‘companies are climbing up the funnel in a sinking ship. A CVA perhaps does little to stop the company from sinking further.’
• And Colliers International made claims before Covid-19 that since 2016, 13 out of 23 large businesses to have launched CVAs have gone on to file for administration.
• This number has risen since as Carluccio & Benito’s Hat, both of whom are in administration, underwent CVAs in 2018.
• Non-CVA companies Azzurri Group, which owns the Ask Italian and Zizzi chains of restaurants, and Vapiano are reported to have appointed KPMG and PwC respectively to help them assess their options.
Why didn’t the CVAs solve things?
• Covid-19, of course, has been a shock to everyone.
• But Jamie’s went bust before the virus struck and a number of other operators including perhaps Carluccio, GBK, Byron, Prezzo etc., have arguably been on the back foot since their 2008 CVAs
• We would suggest that Colliers’ comment above is correct – but it is a statement more of fact than it is an explanation as to why what happened, happened
• Some issues were no doubt dealt with during the CVAs. These will have included the jettisoning of some bottom-end sites and rent reductions
• These cost reductions would have been largely at the expense of landlords
• But, with hindsight, the cuts were perhaps not early enough and they were not deep enough
• And, perhaps more importantly, in some cases, they may not have addressed underlying problems such as a lack of differentiation, of sustainable high quality etc – or the operators may simply have been working in a market that was too crowded to sustain all the restaurants in that space
• Covid-19 has thus revealed a number of problems that may have been there already.
More to come?
• Using medical analogies is appropriate (and it is not meant to be distasteful) but some of these companies had been suffering from ‘comorbidity issues’ (such as high debt, low quality service or overcrowding in the marketplace) which have made them more vulnerable to shocks
• In the current environment, banks may be fire-fighting. There are big problems to be dealt with. ‘Smaller’ issues such as insolvent restaurant chains, may be dealt with later.
• And administrations have to be triggered by somebody. Either creditors, banks or landlords – or the VAT man – are usually the culprits and all of the above are concentrating their attentions elsewhere
• Recent administrations have been triggered by the management themselves.
• They are in a better position to understand the financial position of the company they work in and, if they can see no solution, the companies may be put on the conveyor belt of 1) appoint advisors, 2) look at financing options, 3) speak to creditors, 4) try to sell the business and ultimately 5) appoint the advisor as an administrator
IS THE BUSIENSS CURRENTLY BEING FOREGONE LOST OR POSTPONED? Covid-19 is a big shock. It’s more the former than the latter: 18 May 2020:
• In some cases, a major snow fall, volcanic ash etc., it is possible or indeed likely that ‘lost’ business is being postponed
• This is usually truer for a holiday than for a pizza
• But, in the current environment, it is likely that business has gone and will not be ‘caught up on’ by consumers
• Because 1) the consumers themselves haven’t been saving money while they haven’t been spending and 2) whole seasons (the summer for tour operators or Mothers’ Day, Easter, good-holiday Bank Holidays etc for the pubs) are being lost
• And 3) consumers have been scared to death by the largely successful calls by government to stay in their houses, not go out, not spend etc.
• Certainly, for some consumers there will be a relief or defiance bounce in spending.
• But this will be a numbers game. If more are frightened than are relieved, spending could be depressed overall for some time after restrictions are lifted
PUB & RESTAURANT NEWS:
• Pub operators have called on the government to consider halving the two-metre rule as they point out that World Health Organisation rules call only for one-metre spacing. The FT quotes Fuller’s CEO Simon Emeny as saying that he thinks ‘it’s really important that [the rules] are relaxed by the time pubs reopen.’ He points out that a one-metre rule would allow four times more customers.
• The latest weekly Hospitality Leaders’ Poll conducted by MCA and HIM has confirmed that a debt enforcement moratorium is still the main concern of industry leaders – particularly with regard to rental obligations. Some 88% of restaurant operators say they are yet to agree any favourable rental terms with their landlords.
• MCA says 54% of industry leaders say their landlord had refused to offer any concessions, with an additional 34% saying that negotiations were ongoing.’ It is widely hoped that government will discuss support on rent over the next couple of weeks. Q3 rent is payable on 24 June.
• Former chairman of Patisserie Valerie Luke Johnson has said on the BBC’s Question Time and in tweets that he believes 2m people could lose their jobs as a result of the lockdown and that deaths as a result of the lockdown could soon exceed those caused by Covid-19.
• The Daily Mail speculates that pubs, bars & cafes with outdoor seating could be allowed to reopen in June. The Telegraph is on to the same thing after government leaks. It says also ‘Boris Johnson is also understood to favour proposals to temporarily relax Sunday trading laws to help boost the economy and allow more time for key workers to shop while social distancing is in place.’
• The BBPA has said that as many as 70 million pints of British beer from UK pubs will have to be destroyed after they were forced to shut due to COVID-19. Beer will have been left between 20 March and 4 July at the very earliest.
• The BBPA says ‘it’s a great shame that so much great British beer that should have been enjoyed in community pubs up and down the country has gone to waste. People won’t have a chance to drink it as it will go off before pubs can re-open.’ The BBPA concludes ‘the Government needs to give our sector much more support.’
• The Caterer has voiced the belief of some operators, albeit those with an incentive to believe so, that workplace restaurants will be safer and more controlled than the high street when they reopen.
• Sky News suggests that companies accessing some of the government-backed loans on offer may be forced to withhold dividends to shareholders.
• Sky quotes Oakman Inns CEO Peter Borg Neal as saying that socially-distanced pubs could feature Perspex screens, disposable menus and frequent hand-washing opportunities. Table service, face masks for staff and no standing at the bar would all also be necessary.
• Bloomberg reports that Compass Group is considering a rights issue of new equity of up to £1.6bn. Bloomberg says ‘the world’s biggest catering services provider is speaking with advisers about a potential stock offering.’ It adds ‘Compass could announce the fundraising as soon as next week.’
• Compass has said ‘we continue to evaluate the merits of a range of options that would further increase our resilience through the current situation and enable us to continue to invest in the business.’
• M&B has updated on discussions with its lenders saying it ‘announces today that the temporary waiver it has been granted, as previously announced, against possible technical default due to enforced closure of the business has been extended to 8 June.’
• Some restaurants in the US have begun to add a COVID-19 surcharge onto their bills. There has been some pushback from customers who have also suffered as a result of the virus.
• Intu has updated on discussions with its lenders saying that ‘significant market uncertainty remains regarding the impact of Covid-19 on the operations of intu’s centres which, with the exception of essential stores, remain semi-closed until at least 1 June 2020.’ It says ‘the resulting impact on rental collections and valuations at the end of June is likely to result in breaches of covenants or material liquidity requirements if any such breaches are to be cured in accordance with the financing documents at that time.’
• Intu adds ‘this market backdrop, where the investment market is effectively closed, also creates material uncertainty for any asset disposal or additional funding process which Intu might pursue to address these covenant issues.’ It is therefore pursuing standstill agreements with its lenders. It says ‘these standstill arrangements would seek relief from financial covenant testing, debt amortisation and facility maturity payments for a period through to no later than 31 December 2021.’
• Intu says ‘there can of course be no certainty as to whether any standstill can be achieved with all or some of the group’s creditors, or as to the terms. Whilst the standstill is the primary focus, it is possible that earlier individual breaches, under certain of the group’s financings, could occur over the coming weeks and the group will seek to address such instances as part of the wider discussions.’ The group says that it will keep the market updated.
• The FT reports that coffee giant JAB Holdings, which owns the Pret chain across the world amongst other investments, plans to raise as much as €2bn from the Amsterdam listing of its JDE Peet’s coffee business. The FT says the IPO comes at a time when many companies across Europe and in particular in the UK have been seizing on their depressed share prices to raise capital from investors.
• Starbucks in the US is reported to have paid its landlords in full. It has, however, asked landlords to provide it with some relief from no until summer next year. COO Roz Brewer tells landlords ‘Starbucks will require concessions to support modified operations and adjustments to lease terms and base rent structures, so we can withstand this uncertainty together.’
• East London brewer Forest Road Brewing is delivering beer via its white van, known as its ‘tactical beer response unit’.
• Street food venue operator Kerb has told The Caterer that street food could bounce back quickly after the lockdown. All of its markets are currently closed.
• Franco Manca, GBK, KFC and Nando’s have become the latest operators to reopen more sites.
• CGA has undertaken research in China saying that consumer attitudes there are polarised in that it is split 50/50 between consumers that have been out to eat and drink since Covid-19 struck and those that have not. CGA says that two thirds of those yet to go out are also not planning to in the next month. A number of venues that have reopened have subsequently been obliged to close again due to secondary outbreaks of the disease.
• CGA says ‘with so many variables and unknown factors in markets yet to fully re-open, navigating a path to recovery and building a strategy is an undoubted challenge. However, understanding a consumer perspective from an advanced market provides a glimpse into the future and allows for insight into how target consumers will react and, therefore how strategies can be tweaked for success.’
• Farmers have called on British consumers to eat more strawberries as there may be a berry glut.
• CNBC in the US reports that grocery shoppers have passed on from panic buying to trading down in terms of brands. It says they are increasingly favouring supermarkets’ own label products over branded items.
• British Cycling has suggested that up to 14m Britons may take to bicycles to commute. That seems like a very high number. If anything like true, it would change the after-work drinks market somewhat.
HOLIDAYS & LEISURE TRAVEL:
• The 14-day quarantine proposed by the government continues to confuse operators who say that there have been few details. Travel Weekly quotes a ‘senior aviation industry source’ as saying ‘we still don’t have a date. We still don’t have the exceptions.’
• The British government would appear to have gone back on an earlier commitment to exclude travellers from France from the proposed 14dy quarantine.
• Such uncertainty isn’t going to do much to spur holiday bookings.
• Indeed, John Lewis reports that sales of holiday items such as paddling pools and plastic slides are running sharply up. Would-be holiday makers may have to DIY this year.
• Travel Weekly suggests that ministers are considering exemptions from the quarantine for some business travellers and road hauliers. The Daily Telegraph reports that details may be announced this week.
• Italy has said it will reopen for tourism in early June. It will not impose a quarantine. It isn’t clear whether, if Britons visit the country, they will have to go into quarantine in the UK for a fortnight when they come back. It might work for those who can work from home. For a brickie or a nurse or a bus driver etc., not so much.
• The FT quotes operators as saying that, although supply may be turned back on, demand may remain a problem as consumers have been thoroughly frightened by (largely effective) campaigns to persuade them to keep to their own houses. This may not be as easy to unwind as it was to put in place.
• Looking for winners in the coronavirus wilderness, The Sun suggests, with some reason, that caravanning holidays in the UK could do well this summer due to them being ‘naturally socially distanced’ holidays. Camping trips, it suggests, may ‘still be a no-go until next year.’
• Even if caravan holidays gain in popularity, communal areas such as cafes, swimming pools and bars may well remain closed or only partially open.
• Tour & school specialist On Tour Travel has ceased trading.
• Airlines UK has suggested that ministers are ‘telling people they can no longer travel for the foreseeable future and airlines will respond by grounding their operations.’ BA has said it would do no or ‘very little’ flying under a quarantine system.
• Travel Counsellors says that two thirds of current holiday bookings are for 2021 rather than 2020. The current season may be a complete miss.
• TUI, nonetheless, has said that it is ready to resume operations from Germany as soon as borders reopen. TUI says ‘in 2022, at the latest, we will see a full recovery of tourism.’
• Air fares are reported to have risen in all regions. Europe-Asia routes have seen the largest increases.
• Landlords have threatened Travelodge with court action if it pushes ahead with an attempt to restructure its rents. The Sunday Times reports that landlord group Combined Property Control Group, which owns five Travelodge sites ‘has accused the hotel chain of penalising property owners while benefiting from government support. Travelodge, owned by hedge funds GoldenTree Asset Management and Avenue Capital, and the investment bank Goldman Sachs, has furloughed staff and has been granted business rates relief.’
• CPCG says ‘the changes the government made were not meant to allow people who have pulled tens of millions a year . . . leaving it with little cash, to plead poverty and tear up leases using strong-arm tactics.’
• Hotstats has been researching the occupancy levels necessary for hotel companies to break even. It suggests that the greatest correlation is across the range of hotel quality levels rather than geographically. It says luxury hotels can break even at around 35% occupancy whilst for full service hotels as a whole, it is around 39%.
• Heathrow Airport has said that curbs on flights from and to ‘low-risk’ countries should be eased.
• More commuter trains could be put on in and around major cities in order to prevent crowding.
• Disney World in Florida is to partially reopen.
FINANCE & ECONOMICS:
• The OBR has said that the cost of coronavirus support measures has pushed government borrowing up to a little below £300bn for this financial year. PM Boris Johnson has said that he will not allow a return to austerity. Putting taxes up would be politically unpopular. A huge, and potentially ring-fenced Covid bond issue is possible.
• Michael Gove has said he still believes a trade deal with the EU can EU can be struck before the end of the year.
• US Fed Chairman Jerome Powell has said that the US economy could contract by 20% to 30% as a result of the Covid-19 outbreak. He told CBS that the downturn could last until late next year.
• Japan is officially in recession as the economy there contracted by 3.4% in Q1 this year. It had declined in Q4 last year as well.
• Sterling weaker at £1.2094 and €1.1176. Oil up at $33.54. UK 10yr gilt yield up 1bp at 0.23%. World markets up on Friday, Far East up today & London set to open up around 85pts (as at 6.30am)
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front page headlines in the Saturday papers were dominated by the health and safety row about the reopening of skools: the Daily Telegraph went with “”Squabbling” unions told to get back to school” and the Times ran with “Schools to defy unions and reopen next month”, but the Guardian flagged that “Reopening schools on June 1 is too dangerous, say doctors”, whilst the FT went with “Teachers and Downing Street face off over back-to-school timetable”. The FT also had a front-page story headlined “Brits urged to binge on strawberries as lack of summer events sparks glut fears”.
• Saturday’s Press and News (2): In terms of Retail news, the FT had an interesting feature article on how restaurants and shops in the UK and the US are planning to reassure customers about the health and safety aspects of dining out and shopping, despite polling results showing that most of the public are not keen on visiting restaurants, shopping centres or cinemas in the next month…Otherwise, Marks & Spencer was in the spotlight, ahead of its results next week, with the Times noting that the focus will be on how M&S is going to deal with its clothing stock mountain and the reliance of its Food business on travel locations and office workers. The Guardian had a feature on its News pages on how M&S has started its clothing Sale Online, dressing up the price cuts as a “Rainbow Sale” to help NHS charities, amidst concern about how easy it will be to clear the stock mountain
• Saturday’s Press and News (3): In other news, the Times had a feature interview with the boss of the Italian luxury group Bulgari, highlighting his belief that jewellery is the most defensive corner of the market (“Jeweller scented an opportunity and turned its hand to making sanitiser”). The stockmarket reports noted, variously, the further dip in the WH Smith share price on Friday (the FT), the resilient performance of Boohoo after the big placing (the Daily Mail) and the unexpected rally in the embattled Hammerson (the Times). Finally, given that WH Smith blamed the poor trading at its acquired US airport business InMotion on “tough comps” on Apple AirPods, it was interesting that Lex column in the FT highlighted how Apple has prospered from the fact that AirPods are so easy to lose and have to be replaced (“use ‘em and lose ‘em”).
• Sunday’s Press and News (1): The front pages of the Sunday papers were pretty mixed: the Sunday Telegraph went with “Drugs to thin blood can prevent virus deaths” and the Sunday Times ran with its annual Rich List, headed by James Dyson this year (“ Super-rich lose billions to virus”), but the Observer flagged “Revolt over easing of lockdown spreads as poll slump hits PM”.
• Sunday’s Press and News (2): In terms of Retail news, Marks & Spencer remained in the spotlight: the main Business article in the Mail on Sunday was headlined “M&S piles up spring stock in hibernation”, highlighting that M&S is trying to carry over as much seasonal clothing stock as possible and store it in empty warehouses etc. Ahead of the M&S results next week, the Sunday Telegraph had a big feature on how Archie Norman and Steve Rowe (“Chalk and cheese: two very different men with huge task”) hope to use the crisis to accelerate their plans to transform M&S: “M&S duo aim to fashion a future after lockdown”. But the “Inside the City” column in the Sunday Times looked at the problems of M&S with a more sceptical eye (“M&S lost in the bargain basement”) and said the shares are a “Sell”.
• Sunday’s Press and News (3): In other news, the Mail on Sunday flagged that the Chairman of Debenhams, Mark Gifford, is furious with the deal that Hammerson struck with Next over its Beauty Hall space behind its back and has grabbed back at least two of the stores, in tense legal negotiations. The “Prufrock” gossip column in the Sunday Times also noted the row between Debenhams and Hammerson, whilst, talking of embattled shopping centre landlords, the Sunday Times also had a feature on the problems of Intu Properties and its main shareholder, John Whittaker, and how he may struggle to regain control of his prized asset, the Trafford centre in Manchester (“How Trafford Centre tycoon went from boom to bust”). The Sunday Times also noted that Burberry will upset its shareholders by cutting its dividend with its delayed final results next week, whilst the Mail on Sunday flagged that
• Sunday’s Press and News (4): In terms of all the comment columns in the Sunday papers, we would, as usual, highlight the thoughtful column by the Sunday Times Economics correspondent David Smith (“There’s no need for tax rises now, and maybe not later”), as well as the columns by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“We should use Covid to woo China, not to demonise it”) and the Business Editor of the Sunday Times, Oliver Shah (“Go big and go early”), in which noted that investors have been surprisingly keen to help companies raise new equity.
• Sunday’s Press and News (5): Finally, to return to the Sunday Times’ annual Rich List, we always look first at the fanciful valuation it puts on the fortune of the beleaguered Philip Green and were a little disappointed that he is still thought to be worth as much as £930m (only £20m less than last year, despite the collapse of his Arcadia fashion empire), given what’s left of the infamous £1.2bn dividend he took out of the business in 2005. However, it is a sign of the times that that sum put him at only 154th on the List and that the Sunday Times gave more space to the young sportswear tycoon, Ben Francis of Gymshark. Tom Kirkby, the founder of Games Workshop, was a surprising member of the “Ones to Watch” List. And we noted that plenty of retailers featured in the “Ones we have lost” List of those who have dropped out of the Rich List, including Ray Kelvin, Nick
• Today’s News: The embattled and beleaguered shopping centre operator Intu Properties has announced that, with covenant breaches looming large at the end of June, it is seeking standstill arrangements with its creditors, to provide stability until the property markets settle down. It notes, however, that “There can of course be no certainty as to whether any standstill can be achieved with all or some of the group’s creditors, or as to the terms”…
• News Flow This Week: Tomorrow brings the Homeserve finals, the Topps Tiles interims and the Walmart/Asda Q1 results. On Wednesday we get the Marks & Spencer finals. Thursday then brings the Pets at Home finals, the Inchcape AGM update and the Pendragon AGM, whilst the delayed Burberry finals and the ONS Retail Sales for April are on Friday. After today’s update from Intu Properties, there are also a couple of interesting Property company results this week, with Great Portland (the London office and retail landlord) announcing finals on Wednesday and New River (the community shopping centre and pub landlord) announcing finals on Thursday. And in the US, as well as the Walmart Q1, there are also the Q1 results from the DIY rivals Home Depot and Lowes to look out for, on Tuesday and Wednesday respectively.