Langton Capital – 2020-06-05 – PREMIUM – Revolution, Young & Co, lost causes, holidays, quarantine etc.
Revolution, Young & Co, lost causes, holidays, quarantine etc.
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
It’s been raining and ten to twelve degrees up North and the lawn is in shock.
It’s had a good dousing and, when it gets its wits back together, I’m sure the grass will start growing like a demented rabbit on crack meaning that, yes I’m sure, I prefer a brown lawn to a green one.
That because it takes little effort and, if accused of being lazy, you can hopefully point to all the other ignored gardens around you because, well, who’s got the time to water them through a drought?
Added to which, the logistics are a bit fearsome. I mean a centimetre of rain is, in a 30’ by 60’ garden, some 2,000 litres of water or 400 watering can’s worth. And who’s got the time or let’s be frank the inclination, to spend that long pouring water onto mud?
Anyway, time for the news. Have a good weekend everybody.
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• Young & Co updates on its reopening plans. The group yesterday hosted a webcast to analysts.
• Comments on the third of outlets that it might be difficult (or impossible) to save.
• ASK & Zizzi considering sale of business. More to say, so little time in which to say it.
YOUNG & CO – FULL YEAR ANALYST’S WEBINAR: The company commented on reopening plans, the 2m vs 1m argument, rival early openings, sales prices, margins and other.
• See below for more detail but among the key points were 1) the company is not going to rush to reopen units on 4 July, 2) it’s plans are based on a 1m distancing rule being in place by early August, 3) it has not reopened units to sell beer from hatches and open doors – there are toilet issues etc., 4) it does not intend to jack up prices, 5) its freehold estate has been useful in sourcing debt and it means that a larger proportion of costs are variable if demand is sluggish, 6) it expects to be completely back to normal for the year from 1 April 2021.
Group hopes to be completely back to normal in FY (to March) 2022:
• Covid-19 cost c£13m of revenues in the year reported and this fell through to perhaps £8m of lost profit. March is, traditionally, a good month.
• Cut costs & extended the rent free to tenants to a fourth month. Some 99% of staff are furloughed.
• Managed pubs performed well, tenanted a little less so (wet led and up against the World Cup the year before.
The future – pre-Covid-19:
• The group had been ‘very excited’ about the prospects for FY21. The existing estate and acquisitions were both set to contribute. There is an understandable degree of frustration.
The future – Covid-19:
• Young & Co will open all their pubs on 3 August. Later than some competitors. A lot could happen over that period. They hope and believe that the social distancing gap can be reduced from 2m to 1m. The UK government will have evidence back from Italy, France & Denmark by then.
• The above is assuming a 1m distance by August. If that does not happen, fewer pubs may open. Young & Co believes that 30% of pubs across the industry as a whole could operate profitably on 1m distancing (versus 70% on 2m distancing).
• Some bigger pubs with beer gardens may open sooner. But they need the pubs to be open in order to offer toilet facilities.
• They will have 207 sets of guidelines – one set for each pub. There is a lot of work involved. Hence the delay to 3 August.
• The year to March 2021 will unfortunately be a write-off – but the group hopes to get back to expansionary trends perhaps in early FY22.
• Young’s says year to March 21 could fall into 3 periods of 4mths. In terms of revenue, no1 is down 100%, no2 may be 50% of normal revenues and no3 could be around 70% of normal. YNGA hopes that the risks are on the upside.
• Some staff have been brought back in from furlough. Hopes that 1) the 1m rule will be in by early August and 2) that it will be a thing of the past by, say, October
• The firm has an improved liquidity profile with £285m of committed funds and facilities. Some £223m is currently drawn. The covenants have been replaced with liquidity tests.
• Adding back in the £13m of lost revenue & £8m of lost profit due to coronavirus would mean that FY20 would have been a good year. Events, however, panned out differently.
• Ram Pub Co profits were down 16%, profits on the much larger managed side only down 5%.
• Around £57m of acquisitions & development capex during last year. The group is stressing just how freehold rich its estate is.
• Prospects for acquisitions? Co will concentrate on cash flow and getting debt down.
• Any implications from the Marston’s Carlsberg deal? No. The company thinks it will work for both companies.
• Working capital? There was a £12m unwind as a result of the closure. The co isn’t expecting another outflow when the pubs reopen. Will there be an inflow? Not really in the short term.
• Q at Young & Co conference call. Will customers’ behaviour change? Yes, a little. They may work from home a bit more. This could have some impact on the after-work trade. For Young & Co, it could gain business in suburbs and maybe lose some in the city centre
• Will rival pubs that have reopened early steal market share permanently? The co doesn’t think so. Rivals, usually independents, have had issues with neighbours, the police, toilet facilities etc. Toilets actually quite a big issue.
• Will there be a permanent drop in the number of brands offered, the breadth of menus etc.? Possibly but the co believes this is unlikely.
• Cash burn? Say £4m to £5m a month at present. Should move to a positive position in H2.
• With 1m social distancing, capacity across pubs might run at 70% of capacity. This is often only exceeded occasionally (on a Friday or Saturday). The other trading periods should be less affected.
• Are you assuming the wet / food mix remains unchanged? What impact on margins? Staffing will be ‘appropriate’. Group is ‘pretty confident’ that it can get back to historic margins.
• Will you get back to normal in FY22 if there is a recession? Will have to cross that bridge at that point. It would only materially impact things if the recession was worse than 2008/09.
• Other points. The co wants to get ‘everything back to normal’ in FY22. There has been more time for reflection. The co will not be introducing a Covid-19 surcharge. Prices in general ‘will not rise excessively’.
• There are clearly more unknowns that there are knowns but, as various questions are answered (when and how can pubs reopen), companies can begin to plan,
• Young & Co has to make assumptions as do all operators. It is assuming that 1m distancing will be in place by August, that there is no social distancing at all by October and that the year commencing 1 April 2021 will see normal trading.
• We hope, in common with the industry as a whole, that these assumptions prove to be well-founded. They could be correct. It would be a great relief if they were as the industry could begin to put this period behind it.
• Some key points. Having freeholds means that your costs are more variable with revenues. This increases optionality. Freeholds also give access to (hopefully temporary) debt.
Press comment etc.:
• A lot of bare-bones stories out there but the FT picks up the Young & Co will open a month later than it could. It says also that the company will not open all of its sites, even then, if the 2m rule is still in place.
COMMENTS ON REOPENING FROM LONDON UNION. Boss Jonathan Downey has been at the forefront when it comes to making proposals to government. Here he comments on the outlook for the industry as a whole. 5 June 2020.
• London Union boss Jonathan Downey has said that a large number of hospitality units now will fail – and there is nothing that can be done to save them
Setting the scene:
• Downey says ‘there has been some optimism lately from some operators, and people are itching to get back open.’ However, he says ‘we can’t ignore the complete devastation of a large part of our industry that, for thousands of businesses and probably as many as a million jobs, is now inevitable.’
• He says ‘no amount of 1m distancing, furlough or rates relief is going to save them.’
Companies by survival characteristics:
• Downey says a ‘third of sites will be fine.’ These have access to government loans and can force deals on landlords – if they have any. He says ‘look at Goldman Sachs and Travelodge for how that works.’
• A further ‘third of sites are gone no matter what. There is nothing we can do to save these businesses and these jobs.’
• And ‘there is a very important middle third that we must save and we need this Government to help us do that.’
What will save these companies?
• Downey reminds us June rents need paying soon and ‘there are just 27 days until 01 July when locks get changed and premises are repossessed as landlords land grab the prime sites with multi-million fit-outs or try and force tenants to cough up rent arrears.’
• The forfeiture moratorium may need to be extended.
• Downey says ‘a new ‘Code of Conduct’ won’t stop any of this.
• He calls for the moratorium to be extended for a further 91 days at least to 30 September. He says ‘this will force more landlords to the table, to be reasonable and amenable.’
• He also calls for a national Time Out but adds that government will need to support landlords. See our earlier comments on ‘Bad Stuff Rolls Downhill’.
ASK & ZIZZI OWNER SAID TO BE CONSIDERING SALE OF COMPANY. We have comments to make but have run out of time.
PUB & RESTAURANT NEWS:
Revolution to raise funds & move listing to AIM:
• Revolution Bars Group has announced that it is to raise up to £15m via a share placing. The group is also proposing that it de-list its shares from the main market and have them listed on AIM instead.
• RBG says three will be a placing and an open offer via an accelerated book-building process. It says ‘the proceeds of the Fundraising will be used by the Group to achieve an appropriate level of indebtedness and emerge from the COVID-19 pandemic in a position of strength.’ The fund raise will need to be approved by shareholders.
• RBG says it is proposing the ‘cancellation of the admission of the Company’s Ordinary Shares to listing on the FCA’s Official List and to trading on the London Stock Exchange’s Main Market and the Company’s Enlarged Issued Share Capital being admitted to trading on AIM.’
• A firm placing at 20p will comprise a part of the above. The placing price is a discount of c42% to yesterday’s closing share price. The Board is to put in £132k. RBG says ‘prior to the onset of the COVID-19 pandemic, the Group was demonstrating signs that the turnaround strategy put in place by the Board was successful, with the Group achieving growth in both like-for-like sales and Adjusted EBITDA and making significant progress on debt reduction.’
• It says ‘since the announcement made by the UK Government on 20 March 2020 requiring the closure of all bars, pubs and restaurants in the UK, the Group has taken significant actions to mitigate the impact of the closure of its bars and to preserve cash including the Board voluntarily reducing their salaries by 50 per cent. These measures have reduced the Group’s weekly running costs to approximately £0.4 million.’ The group has cut costs elsewhere and increased its debt facility with Nat West. These will be reduced somewhat post the share placing.
• RBG says when it reopens, under most of its assumptions, it intends to ‘re-commence the Group’s estate refurbishment programme and be in a good position to take advantage of growth opportunities post-COVID-19.’
Running up to reopening:
• The BBPA has called for ‘at least three weeks’ notice for brewers, to ensure fresh beer is available for pub re-openings, as new data shows beer sales fell by 24% in April.’
• We have suggested that brewers cannot operate on rumour, whispers and the like. The brewing process takes as long as it takes. If brewers aren’t relatively sure that pubs will be open on a certain date, they may not invest in the product and processes necessary to supply them with beer. See our various tweets. Pubs will also need to clean up and make sure that staff haven’t drifted off into the furlough fog.
• For pubs, it would be a dreadful shame if cask was not available. They may be able to manage for some time on bottled beers, wines, spirits, soft drinks and food.
• The BBPA says ‘pubs will need a minimum of three weeks – but ideally four weeks – notice to allow them sufficient time to prepare to re-open.’ It would like firm guidance by 13 June as to whether pubs will be opening on 4 July or not.
• Beer sales in the lockdown. The BBPA says ‘overall beer sales in the UK for the month of April fell 24% on the year before. Beer sales in pubs were down 100%. Although off-license beer sales from shops and supermarkets increased by 39% for the month on the year before, this was not enough to make up for the complete shutdown of the pub trade.’
• Lager performed more strongly than ales. The BBPA says a date needs to be firmed up. it says ‘our pubs and breweries are desperately in need of this clarity.’ Only the clearest guidance will ‘save pubs from permanent closure and protect the vital local jobs pubs and breweries support across the UK.’
• UKH has called on the Scottish Government to cut its social distancing guidance from two metres, hopefully to one. Guidance in Germany, Poland and the Netherlands is 1.5 metres. Only the UK, Switzerland and the US are still insisting on two metres.
• GfK has released the third of its COVID-19 flash report records for UK consumer confidence saying that it has dropped across key measures to minus 36, down on its last reading and ‘just three points shy of the historic low of minus 39 in July 2008.’
• GfK says ‘against a backdrop of falling house prices, soaring jobless claims, and with no sign of a rapid V-shaped bounce-back on the cards, consumers remain pessimistic about the state of their finances and the wider economic picture for the year to come. The only bright spark in the numbers is for the Major Purchase Index with a six-point fillip, pointing to latent demand among shoppers across the UK despite most outlets remaining shuttered.’
• This could be, as we have suggested before, that some large ticket purchases are being postponed rather than lost altogether. GfK says ‘as the lockdown eases, it will be interesting to see just how the consumer appetite for spending returns in a world of socially-distanced shopping and the seismic shift to online retailing – alongside worries of a fresh spike in COVID-19 cases as relaxations increase.’
• GfK says its overall measure fell two points over the last two weeks. Of its five measures, four decreased and one rose.
• London Union boss Jonathan Downey has said that a large number of hospitality units now will fail – and there is nothing that can be done to save them – See Premium Email
• A survey carried out by Brasserie Bar Co has found that nearly 90% of people are likely, or very likely, to dine out when restaurants re open. It says around 40% will dine out as soon as they can and around 60% said they would dine out when they feel it would be safe to do so.
• The Brasserie Bar Co survey found that only 13% of would-be customers believed that wearing a face mask would make them feel safer. Raymond Blanc says ‘the hospitality sector has been hit particularly hard and on both a personal and professional level, telling staff that we would have to close our doors indefinitely was very difficult indeed. It now feels like we’re starting to turn a corner with re-opening on the horizon. This survey shows a new confidence about eating out which feels promising. We’re looking forward to welcoming customers back safely as soon as we can.’
• Property agent Fleuret’s says ‘operators are already sitting on depleted working capital, which is being eroded with every passing day of lockdown, and face the significant and expensive task of re-stocking, re-modelling and re-opening sites in a COVID-19 safe environment, with little more than a “fag packet” projection of how trading capacities might look.’
• It says ‘whilst it is easy to see landlord’s as the enemy sitting in their ivory…this is far from the case as most assets have significant leverage or face exposure to the nation’s pension provision or return-hungry shareholders.’
• Fleuret’s reminds operators it Q3’s rents will be due in less than three weeks’ time.
• Fleuret’s says ‘the stark reality is that many tenants in the SME space (i.e. 3-25 sites) are accruing unsustainable debts…and lower levels of turnover could result in a situation later down the line where the tenant has no choice other than default.’
• Langton has commented at some length that optics are politically important and that a material number of the 8.5m workers currently furloughed will not have jobs to go back to.
• The MCA quotes Uber Eats as saying that its operators saw a double digit growth in delivery after volumes recovered.
• Sky News reports that Azzurri Group, the owner of the ASK Italian and Zizzi restaurant brands, ‘is exploring a sale of the company as Britain’s hospitality industry battles to survive the effects of the coronavirus pandemic.’
• Azzurri is owned by PE house Bridgepoint. Sky says the process is ‘at an early stage, and is said to be only one of the options.’ See also Premium Email.
• Adnam’s yesterday reported at its virtual AGM that these are ‘hugely challenging circumstances’ and it says ‘our half year result will inevitably show a substantial loss.’
• Gregg’s is to open all of its shops on 18 June.
• Gap in the US reported a c$1bn loss on the back of Covid-19 closures.
• E-Bay has raised its current-quarter revenue and profit forecasts on the back of booming sales. Sales volumes are up by between 23% and 26% across a number of categories.
• No10 is reported to have ‘left open the door to Britain allowing imports of US chlorine-dipped chicken to secure a trade deal with Washington.’
• Molson Coors has signed an exclusive distribution partnership with Bodega Bay to support further roll-out in UK stores from June of the company’s hard seltzer product.
• OrderPay has said the more major restaurant and pub groups are signing onto its platform in order to ‘reopen safely amid huge social distancing challenge.’
• Germany is to give families €300 for every child in order to boost spending.
• Cheesecake Factory in the US is to expand its dine-in operation to a quarter of its units.
• Debenhams is to commence reopening shops in Northern Ireland next Monday and in the UK the week after. The company collapsed into administration in April.
• New Look is reported to have begun discussions with landlords in an attempt to have at least some properties moved to a turnover-based rent.
HOLIDAYS & LEISURE TRAVEL:
• The government has confirmed that it will review the 14dy quarantine rule, due in on 8 June, on 29 June.
• This plays to the belief it will be softened by month end. A degree of what is going on may be political optics. Travel Weekly quotes industry leaders as saying there is still a risk that the quarantine requirement will put more than 1.2 million UK travel and tourism jobs at risk.
• Republic of Ireland ski operator Highlife has ceased trading. A note on its website says ‘notice to all customers of Highlife Adventures Limited, trading as Highlife Ski & Snowboard. Highlife has ceased to trade from the 29th May 2020.’
• Incite points to Cabinbookers research saying 90% of holidaymakers want to take a UK holiday this year. The Economist says that demand for UK product is picking up. It is not clear where all of these new holidaymakers will stay.
• Spain has said it wants to let UK holidaymakers, and their money, into the country as soon as possible.
• Travel Weekly quotes Business Travel Association boss Clive Warren as saying that, if the quarantine won’t be lifted, the UK needs ‘air corridors’ agreeing with some countries immediately.
• Whitbread has announced the reopening of 35 construction sites for new hotels across England and Wales
• STR reports that the US hotel industry improved slightly in the week to 30 May. It says REVPAR was nonetheless down by 62% on the same week a year ago.
• Rocco Forte is to reopen a number of its hotels this summer.
• City Airport is to reopen from the end of June. British Airways has told staff unions that it is burning £178m per week and that redundancies are inescapable. Virgin Atlantic is to resume flying on 20 July.
• The US is to bar Chinese airlines from flying to the United States from 16 June
• The Telegraph reports that ‘the owner of Odeon cinemas has issued a stark warning over its future as the firm’s finances come under massive pressure from closures around the world.’ AMC Entertainment has said any delays to reopening cinemas or slippage in film releases would raise “substantial doubt” about its future.
• AMC says ‘if we do not recommence operations within our estimated timeline, we will require additional capital and may also require additional financing if, for example, our operations do not generate the expected revenues or a recurrence of Covid-19 were to cause another suspension of operations.’
• Warner Music shares rose 8% on their US stock market debut.
• Ticket specialist 365 Tickets has ceased trading
• UK zoos have been told they must stay closed even after other leisure operators have been allowed to reopen. Chester Zoo says that it is spending £465k per month keeping its animals fed.
FINANCE & ECONOMICS:
• The Guardian quotes three former Chancellors of the Exchequer, Alistair Darling, George Osborne and Philip Hammond, as saying that major job losses are to be expected over the coming months.
• Sterling higher vs dollar at $1.2613 but down vs Euro at €1.1113. Oil higher at $40.19. UK 10yr gilt yield up 2bps at 0.31%. World markets mixed yesterday but Far East higher in Friday trade. London set to open up around 37pts.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Consumer Confidence Watch: Ahead of today’s latest “flash” GFK Consumer Confidence report, we flagged yesterday that the record -39 index low seen in July 2008 has not been tested so far in the current crisis, but it is getting closer…The overall index slipped to -36 in the second half of May, from -34 in the first two weeks, and that is the lowest since January 2009. GfK’s Client Strategy Director Joe Staton said: “With no sign of a rapid V-shaped bounce-back on the cards, consumers remain pessimistic about the state of their finances and the wider economic picture for the year to come”. The one positive note from the survey came from an odd six-point rise in the measure of how willing consumers are to make major purchases, pointing to some latent demand amongst shoppers.
• BDO High Street Sales Tracker: The BDO High Street Sales Tracker today for medium-sized Non-Food chains flags that in w/e Sunday May 31st, Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were down by c21% (down c92% in Store sales, but up by c126% in Online sales).
• Trade Press (1): Retail Week magazine has been published this week and the front cover is a photo of the former Sainsbury’s boss Mike Coupe, to flag up his final interview (“Leaving in lockdown”). RW also have features on the outlook for Ted Baker, Seven Tech innovations to help run stores in a post-coronavirus world, the outlook for M&S and the Death of the Retail Head Office. In his column, the Editor looks back at Mike Coupe’s time at Sainsbury’s and looks ahead to the re-opening of non-food stores on June 15th, noting that “June 15th merely marks the end of the beginning for retailers as they navigate the coronavirus crisis” and thundering that “The months ahead will define retailers’ future”.
• Trade Press (2): Drapers magazine has also been published today and the front cover, a graphic of a crystal ball called “The Future of Sourcing”, flags up an investigation into the future of the fashion retail supply chain, which appears to have been broken by the coronavirus pandemic: to overcome sourcing problems, many brands and retailers are looking to UK manufacturing, with “Making in Britain” in fashion again. The main News story is that fashion retailers will shun reopening Sales on June 15th for fear of causing “stampedes” of customers. Drapers also flag that Debenhams is in disarray after the CEO exited and HQ jobs were cut. And it has a feature on the Cost of Reopening Retail, noting that Covid-security compliance is estimated to cost as much as £75,000 a year per store and that some retailers are wondering how they will cover their operating costs with reduced footfall under
• News Flow Next Week: First thing on Tuesday we get the BRC-KPMG Retail Sales survey for May, followed later by the Signet Q1 results in the US. Wednesday brings the interims from the West End landlord Shaftesbury, whilst on Thursday we get the B&M finals, as well as the Morrisons AGM and the Dignity AGM.