Langton Capital – 2020-06-24 – PREMIUM – 1m rule, reopening, JDW, Diageo, AG Barr, Premier Foods etc.:
1m rule, reopening, JDW, Diageo, AG Barr, Premier Foods etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
More hot weather due for the rest of this week & the pubs are gnashing their teeth.
Still, we have an opening day and, though the pub’s grass will need cutting and the bird muck has yet to be washed off the outdoor tables and parasols, that’s got to be something.
And talking about grass, there’s nothing like a drenching, a mini-heatwave and then another drenching to get it growing again meaning that, as seems to always be the case these days, it needs cutting again.
Follow us on Twitter at @brumbymark. On to the news:
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REOPENING ON 4 JULY. Other considerations. 24 June 2020:
We have got the ‘when’ but we’re working on the ‘how’:
• See also Pubs & Restaurants below. We have a firm date. And a firm distance. But much of the detail remains unknown as does the response of the consumer.
A few real-world considerations:
• Will all your staff come back? And do you want them all? And when do you decide how many to cut, when do you start the consultation process etc.?
• Kitchens will be physical pinch points. Do you reduce staffing, reduce menu breadth, perhaps strip food right back?
• How do you get real ale in time and how much do you order?
• Do you have a table-service app? And, if not, why not? Can you staff up for table service and what will that do to margins?
• Can you (and how will you) cope with the bottleneck of jobs that need doing now, at the same time, by every pub in Britain? These tasks include mundane bumph like cleaning, cutting the grass, tidying up the outside tables as well as all of the internal jobs that will need doing.
• Will all of your kit (mechanical and human) work again when you hit the ‘on’ switch?
• Will some busy-body customer grass you up to the cops if you breach GDPR rules? The police, thankfully, will not get involved in this area. Common sense should prevail. Nor will the police enforce distancing.
The reality of the situation:
• Operators will be checking their turnover in real time and analysts, journalists and shareholders may be asking them about it almost as frequently.
• But the fact remains that little might by gleaned from one day’s revenue as it will be impacted by whatever weather we have a week on Saturday, by local sporting fixtures and by the cabin-fever of their potential customers.
• Sport will be important. Fans can’t attend matches and, truth be told, the scientists would rather they didn’t attend communal gatherings (aka pubs) to watch them either. This may be addressed in the guidance
• If pubs are asked not to show sport, then they might lose custom to the off-trade as fans are likely to watch at home.
The betting on sales levels:
• Some units will not yet open. Smaller units, Young & Co & some others. These units will remain down 100% (or whatever smaller reduction is recorded after a smattering of delivery etc)
• Wet led units in residential areas may trade relatively well. They could be at three quarters or more of normal revenues.
• Food is less predictable.
• City centre units and bars will be down more. Just a guess but maybe down 50% or more.
• Nightclubs, gyms & some other units will be down 100%.
• Ironically, units catering to the youth market, which may be less concerned about coming out for a drink, may be unable to open as they are ‘intentionally crowded’
• Break even, again just a guess, may be around 55% to 60% at the unit level in terms of cash (EBITDA). Maybe 5% or 7% higher than that to contribute to head office costs if the operator is to break even, in EBITDA terms, at the corporate level
• In profit terms (post depreciation and interest and at the group level rather than the unit level), revenues may need to be up around 80% plus of normal level in order to break even
• It’s worth remembering that some operators, say crowd-funded grab n go outlets in their ‘build up’ phase, were not even break even at the EBITDA level before Covid-19 cut their revenues down by a third or more
• A fuller understanding of any conditions attached is needed.
• There is some trepidation re asking customers for details at the door.
• All indoor drinking must be seated. That will add cost and could be a bit of a passion-killer.
• The outlook re sport is uncertain.
• Larger, crowded venues with a lot of vertical drinking may consider it not worthwhile opening at present. However, they will be able to watch what happens elsewhere and make their decisions in due course.
• Ten days’ notice until reopening is not a long time. One operator says ‘we will crack on and this is a start. If the first few weeks go well, I’m sure there will be further relaxation and I look forward to our nightclubs, music venues and leisure spaces opening at full capacity soon.’
REOPENING CONFIRMED FOR 4 JULY:
Covid-19 issues – Reopening confirmed for 4 July:
• PM Boris Johnson has confirmed that pubs, bars & restaurants can reopen from 4 July. The government has also reduced its two-metre social distancing rule to ‘one-metre-plus’.
• The government says that all sensible mitigating actions should be taken such as face masks, screens between tables etc.
• Close proximity businesses such as nightclubs, indoor gyms, swimming pools and spas, will not be allowed to reopen.
• See also premium email.
Industry response in brief:
• Welcome news but show us the guidance and accept that we will need financial assistance for some time to come.
• We would like more help with costs (particularly staff and rent & rates), reduced VAT, less beer duty and a reformed rating system.
Industry response in detail:
• The BBPA has welcomed the news saying that 75% of UK pubs should now be able to reopen. The BBPA, in common with the rest of the industry, is awaiting the publication of additional guidance for its sector.
• The BBPA will ‘be advising its members on how they will follow guidance once published.’
• The BBPA has suggested that GDPR legislation could get in the way if pubs are asked to collect contact details from customers. CEO Emma McClarkin says ‘this is an important step for us but it is just the first step on what will be a very a long road to recovery for our sector.’
• CGA reports that the reduction in distancing from 2m to 1m will allow the hospitality industry in the UK to sell 145 million additional pints of beer. CGA says ‘more outlets are likely to open in July, as their businesses become viable at 70% capacity.’
• CGA says its ‘data suggests there is enough pent-up demand to max out sales at this level of supply, but many consumers are still cautious about returning to the trade and want to see precautions put in place to ensure their safety. It’s now down to operators to market their credentials as Covid-19 safe, and ensure that customers feel comfortable to visit their outlets.’
• UKH says the firm date is a relief. CEO Kate Nicholls comments ‘having confirmation of the reopening date is a real boon and affords businesses some time to make the necessary preparations. We are still awaiting the publication of guidance.’
• UKH says ‘while many venues will endeavour to reopen on 4th July, capacities will be constrained by social distancing and some may be unable to trade viably at all, so continued Government support will remain crucial.’
• UKH agrees that operators should be able to work at about 70% capacity with 1m social distancing.
• SIBA says the announcement is ‘what the nation has been waiting for.’ But it says ‘hundreds of brewers and thousands of pubs are still on the precipice. Many will struggle with table service only when ordering from a bar can be done safely.’
• SIBA says ‘beer sales will not return to normal levels anytime soon, so the UK’s brewers need a continued support package and a clear roadmap for how they will be financially supported. Government has failed to meet its own timetable and failed to support brewers in the same way the rest of hospitality has been. Whilst today’s news is a positive step, we have a lot more work to do yet.’
• The British Institute of Innkeeping has also welcomed confirmation that pubs can reopen from a week on Saturday saying also that ‘we look forward to the official Government guidance being published imminently.’
• The BII says ‘this is just the beginning of the next phase for our members.’ It says ‘1 in 10 pubs are still not able to open their doors until any restriction on distance is removed. Of those that can open, the majority will be trading at a loss for many months.’
• The BII points out there are ‘significant challenges ahead, including; providing table service where possible, the requirement of collection of data from visitors to pubs, the costs of bringing back teams from furlough, restocking cellars and physical changes to the layout of their pubs to allow for the 1m distance. All of these factors will require investment at a time where pubs have had no income for over 3 months and will be trading at a loss for the foreseeable future.’
• The BII calls for ‘ongoing business support’ saying this ‘will be critical and we have called on the Chancellor for the following; full furlough until October, additional grants including lifting of the barrier of £51k RV to allow grants for all, access to an extended bounce back loan and an extension to the business rates holiday until April 2022.’
• Oakman Inns says it is ‘delighted’. It says ‘there is substantial public enthusiasm for us to reopen and we have already taken over 3,000 bookings for July 4th with two of our 28 pubs already fully booked.’
• Oakman ‘has created a bespoke mobile app which allows customers to make reservations and then order drinks and food from their phone without leaving their table.’ This will allow the company to collect details for Track & Trace purposes.
• Oakman says the sector will still need financial support from government for some time to come. It would like to see a cut in VAT and an overhaul of business rates.
• Hogs Back Brewery welcomes the news saying ‘we’re reopening our own Summer Bar at the brewery, and the “one metre plus” guidelines on social distancing will enable us to seat customers safely while still ensuring that they can enjoy a social drink and catch up with friends after the long lockdown.’
• It cautions ‘it’s also clear that some people will still be cautious, and it could well be a ‘beer and barbecue at home’ summer.’ It is hedging its bets saying that, for home BBQ beer lovers ‘we’re adding flexibility to our beer range with an expanded canned range alongside keg and cask to meet all those consumer needs.’
• OrderPay, the mobile ordering app, says ‘smart mobile technology will play a major role in facilitating table services to allow pubs and restaurants to reopen safely. OrderPay offers a seamless customer experience, allowing guests to order to their table and pay the bill via an app, without even needing to input a table number.’
• JDW is ahead of the game here as it has its own app. Others, such as OrderPay and Ordoo, have off-the-shelf systems in place.
• Many other operators, by far the majority, are too busy to comment. They are shifting furniture, ordering food & drink, calling staff back from furlough, cutting the grass in the beer garden, cleaning out rancid beer (if not done already), brushing the rust off various bits of equipment (including staff) and generally hoping that they can achieve 70% or 80% of normal revenues over the medium term.
The mitigating actions:
• Whilst more details are still awaited, there have been comments here. See those on GDPR above.
• Licensing solicitor John Gaunt points out that pubs and restaurants will be restricted to table service and encouraged to take a number of measures to mitigate potential transmission of COVID. It says ‘premises will be required to collect details of customers to assist with ‘track and trace’ efforts should outbreaks occurred.’
PUB & RESTAURANT NEWS:
• Q3 rental payments are due to be paid in advance today.
• Barclaycard Payments says that there are early signs of a pickup in spend. It says that by last week an additional 60% of Barclaycard’s customers had returned to trading and taking payments compared to the first week of April.
• Barclaycard records an 8% increase in the total number of transactions compared to the week commencing 7 June. It says ‘it’s extremely heartening to witness the spike in activity that took place last week, and with some retailers still to open some or all of their stores, we expect sales volumes to continue to rise over the coming weeks.’ It goes on to say ‘the ability of UK businesses to adapt and grow as they emerge from lockdown is a testament to how dedicated and resilient they are. It will be interesting to watch whether the measures they took to boost income during lockdown, such as turning to social media to increase sales, will become a permanent part of their business models from now on.’
• Internet use during the lockdown has hit record highs per Ofcom. It says that users are online for an average of 37 minutes per day more than they were in January. Ofcom says the most-trusted sites are BBC News and Sky News with TikTok, Facebook and YouTube the least trusted brands.
• Diageo is to establish a new global programme to ‘support pubs and bars to welcome customers back and recover following the COVID-19 pandemic.’ Its ‘Raising the Bar’ will be a two-year programme available from July 2020.
• The company says ‘through “Raising the Bar”, Diageo will provide $100 million to support the recovery of major hospitality centres, including: New York, London, Edinburgh, Dublin, Belfast, Mexico City, Sao Paulo, Shanghai, Delhi, Mumbai, Bangalore, Nairobi, Dar es Salaam, Kampala, Sydney and beyond. This $100 million programme includes the $20 million Community Fund announced in the United States on 12 June 2020.’
• Ivan Menezes, Chief Executive of Diageo commented: ‘Pubs and bars sit at the heart of every community. We have launched “Raising the Bar” as so many outlets have been impacted by this crisis and badly need help to open their doors again.’
• Wireless Social says footfall has been picking up. Not surprising considering shops are now allowed to open. It says last week ‘UK footfall was 65% down on February footfall levels, compared to 71% down the previous Sunday, and 82% down during the peak of lockdown, reflecting an 8.5% increase in footfall in just the past week.’
• Wireless Social says ‘London was only 58% down on February footfall levels this weekend, compared to 64% the weekend before, and 75% during the peak of lockdown. London footfall traffic has increased by 9.4% in just the past seven days.’
• JD Wetherspoon has updated reminding investors that it tapped equity for £141m in April and has had a further £48.3 million loan through the Coronavirus Large Business Interruption scheme approved.
• JDW says ‘the company’s pubs in England are due to reopen on 4 July 2020, in line with the government’s guidance. Following consultation with employees, resulting in over 3,000 suggestions, the company has created the ‘Wetherspoon COVID-19 Secure Operating Plan’, which sets out how we intend to safely operate pubs when we reopen.’
• JDW will not start any new pub development projects in the next 12 months. It says ‘a small number of projects that were “on site” when pubs closed will be completed in due course.’ It says the majority of its employees are ready to return to work. Full year numbers will be announced on 9 October 2020.
• Naked Wines plc has reported full year numbers to 30 March 2020 saying that they were ‘marginally ahead of expectations’. It says revenue of £203m was up 14% year on year with the adjusted EBIT loss cut by 50% to £1.4m. Re current trading, the company says it has had an ‘encouraging start to the year, with 81% revenue growth in the first two months of FY21.’
• The company is ‘not providing full financial guidance due to uncertainty as to how long current trading conditions will persist.’ CEO Nick Devlin says ‘whilst predictions are harder than ever this year, I am excited about our plans for growth and confident that the mission of Naked to connect everyday wine drinkers to the world’s best winemakers is more relevant than ever. I believe the enduring impact of COVID-19 will be to accelerate trends towards direct, online models in categories like wine and that Naked is well positioned to deliver the combination of quality, value and community customers are looking for.’
• Fuller Smith & Turner is to delay the reporting of its full year numbers from tomorrow to 3 July.
• Diageo is to delay the publication of its results to give auditor PwC more time and to deal with the ‘practical challenges of remote working.’
• Stonegate is to issue high yield debt in order to finance the purchase of EI Group reports Reuters.
• JD Sports has bought back Go Outdoors for £56.5m in a pre-pack administration. Peter Cowgill, executive chairman of JD Sports, had said: “As a consequence of Covid-19, Go Outdoors was no longer viable as previously structured and would have absorbed capital at an unsustainable rate for the foreseeable future.”
• Naked Wines recently said the same thing. It reported numbers today.
• AG Barr says it has received notice of the termination of its sale & distribution contract with Rockstar Inc. It says the contract ‘will terminate on 23 August 2020 but it is anticipated that the Group will continue to manufacture, sell and distribute Rockstar energy drinks, which contributed approximately 8% of the Group’s sales volumes in the prior financial year, up to 1 November 2020.
• AG Barr says ‘in accordance with the terms of the contract, a one-off compensation payment will be paid to the Group, to be calculated post the contract termination date.’
• AG Barr also updates on the Covid-19 situation saying it has conserved cash etc. It says ‘trading continues to be adversely impacted by the COVID-19 lock-down measures introduced on 23 March 2020, with trends affecting our major retail, impulse and hospitality channels continuing as previously indicated. At the current time it remains difficult to predict how the balance of the financial year will evolve, with the easing of lock-down restrictions and resulting impact on consumer purchasing patterns.’ AG Barr updates on trading on 28 July.
• Bids are reportedly due this week from potential buyers for the 300-strong Azzurri Group, which trades as ASK and Zizzi. KPMG is handling the transaction.
• Shoe Zone is to close 20 stores.
• The MCA says that ‘a weakened economy in the medium term will lead to heightened appreciation of value for money savviness, price sensitivity and promotional incentives.’ It says ‘operator resilience will be determined by channel, location and resources’.
• IHS Markit reports that UK households remain negative about their financial prospects but at a less depressed level than they were in April and May. Over 9m workers are currently furloughed and a number of them may be beginning to suspect that they will not have a job to go back to.
PREMIER FOODS: Backward looking figures, forward looking outlook:
• PFD is one of the few companies that has seen a boost to revenue and profits as a result of the Covid-19 outbreak.
• The numbers reported are for the historic year to end-March but the outlook is very interesting.
• Revenues are currently tracking plus 20%. Debt is down sharply and the pension fund surplus (even after tax) is nearly £1bn.
FY20 (to March):
• Premier Foods reports full year numbers to 28 March today saying that it has been a ‘year of substantial progress’. It says in the year just started, it will ‘exceed current expectations’. The company reports revenue for FY20 to March up 2.8% at £847.1m with trading profits up 3.2% at £132.6m and EPS up 5.4% at 8.9p per share.
• PFD has reduced debt by £61.8m to £408.1m. CEO Alex Whitehouse says ‘this has been a period of considerable progress for the Company. We recently concluded our strategic review with a landmark pensions agreement which has the potential to significantly reduce future funding requirements for the Group. This year we delivered Trading profit at the top end of market expectations, reduced our Net debt by £62m, and in so doing lowered our Net debt/EBITDA ratio to 2.7x, beating our previous 3.0x target. In the UK, our brands grew ahead of their categories, and our UK business has now delivered 11 consecutive quarters of revenue growth.’
• Mr Whitehouse continues ‘we have now grown Group revenues, Trading profit and adjusted earnings for each of the last three years.’ The company says ‘as we look to the coming financial year, we anticipate making further progress, with increased consumer marketing investment planned.’
• Debt as noted is down sharply. The group has an accounting pension fund surplus, after deferred tax, of £996.6m (up from a surplus of £309.7m). The pension funds are extremely large for a company of this size but the current accounting surplus equates to a positive benefit of more than 117p per share.
• PFD says ‘revenues in the first quarter of FY20/21 are expected to be approximately 20% ahead of the same quarter a year ago reflecting continued strong demand for the Group’s product ranges, particularly in our Grocery business. Consequently, we expect to exceed current expectations for FY20/21 Revenue and Trading profit despite incurring some additional operating costs in our supply chain. Our options for cash deployment and capital allocation will improve as a result of expected further Net debt reduction in FY20/21.’
• PFD says ‘the Group expects to make further progress this year, employing its successful branded growth model which has been instrumental in delivering eleven successive quarters of UK revenue growth. Additionally, a new international strategy is being implemented with the objective of delivering sustainable profitable growth.’
• Re current trading, the co says ‘the first quarter of FY20/21 has seen particularly strong trading, with Group revenues set to increase approximately 20% compared to the prior year, as it continues to see elevated levels of demand for its Grocery brands during the COVID-19 pandemic.’
• PFD says ‘the Group recognises it is at an early stage of its financial year, and that it also remains unclear as to how consumers’ eating habits may change as lockdown measures ease over the coming weeks.’ However, it concludes that it should beat estimates this year and reduce debt further.
HOLIDAYS & LEISURE TRAVEL:
• The government has announced that, from 4 July, people in England will be free to stay overnight in self-contained accommodation, including hotels, B&Bs and campsites.
• There is some concern that there will not be enough accommodation available to satisfy demand. The Independent Cottages website says that traffic in the past week has been 150% up on the same time last year.
• Malta is lifting flight restrictions from the UK from 15 July.
• Le Shuttle has seen bookings up 49% this week on last.
• The Business Travel Association warns that up to a half of all jobs in business travel could be lost if the UK’s 14dy quarantine requirement remains in place.
• Brittany Ferries is to recommence some passenger services from June 29.
• Leger Holidays has acquired the Shearings Holidays name, website and customer database for an undisclosed sum
• Escape Hunt announces that it has launched remote versions of its escape room experiences Doctor Who: Worlds Collide and The Fourth Samurai via remote platforms.’ ESC says ‘initial trials of the games have been extremely successful and it is fantastic that now, using technology, we can give people the opportunity to play our popular physical escape rooms in their own homes.’
FINANCE & ECONOMICS:
• Some accountants have suggested that inheritance taxes could increase in order to pay for Covid-19 measures.
• The ONS has said that property sales in the UK were down around a half in May this year versus last. Sales were up 16% in May versus April.
• The Bank of England has said that it needed to provide emergency help for the government to pay its bills during the Covid-19 pandemic.
• The Triple Lock on pensions in the UK (the higher of inflation, average earnings or 2.5%) may need to be suspended as unaffordable. The Treasury Committee says ‘a way forward might be to temporarily suspend the wages element of the lock.’
• Sterling up v dollar at $1.2516 but lower v Euro at €1.1057. Oil down at $42.54 and UK 10yr gilt yield up 2bps at 0.21%. World markets. UK, Europe & US higher yesterday but Far East down in Wednesday trade. London set to open down around 35pts (as at 7am).
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• JD Sports: After hours last night JD Sports confirmed the controversial deal to re-acquire its troubled Go Outdoors sports chain in a pre-pack administration for c£57m, keeping all 67 stores for the time being and maintaining jobs but targeting store rental costs, with Peter Cowgill claiming that “Go Outdoors was no longer viable as previously structured and would have absorbed capital at an unsustainable rate for the foreseeable future…We look forward to having positive conversations with landlords and agreeing new flexible lease contracts which reflect the widely reported challenges of reduced consumer footfall”.
• Today’s News: The delayed Naked Wines finals (for y/e March) have been released today, with the company able to announce eye-catching growth in sales over the last 2 months of no less than 81%. Nick Devlin, the Group CEO, says: “I’m delighted to report a strong set of results to conclude a year of transition for Naked Wines. We are ending the year with great momentum behind our growth plans and a simplified, well-capitalised online pureplay model that is ideally suited to the current climate”. Naked Wines has also said that the CFO James Crawford is stepping up to take on the UK MD role on a permanent basis. And ahead of next week’s AGM, the embattled car dealer Lookers has announced a shake-up of its non-exec Directors.
• Retail Sales Watch: The Retail Sales month of June (the 4 weeks to June 27th) is nearly over, but we haven’t seen the final word yet on how good May was on the High Street, given the modest easing of the coronavirus lockdown of non-essential shops that began back on March 23rd…The Office of National Statistics (ie the ONS or what we mockingly call the “Planet ONS”) reported on Friday that non-seasonally adjusted total Retail Sales by value were down by 9.2% last month (ex-petrol), which was surprisingly worse than the BRC-KPMG measure of gross sales, which was down by 5.9% in gross terms. So, who was right? Well, the Retailing consultancy group, Retail Economics (RE), which was founded by Richard Lim (who used to run the monthly BRC-KPMG Retail Sales survey), has just come out with its own detailed overview of May (the 4 weeks to May 30th) and their estimate is that gross Retail sales
• Grocery Market Share Watch (Part 2): Moving on to Food sales in June…we flagged yesterday that the latest monthly Kantar grocery sales figures (for the 4 weeks to June 14th) were up by a heady 18.9% on an overall “Till Roll” basis, but the growth was flattered by the collapse in the “on-the-go” food market and in the “food away from the home” market (as well as by the largely fine weather and by the 4% growth in food price inflation). However, on a pure “Grocery” basis (excluding Non-Food) overall Kantar sales were as much as 19.8% up, with Aldi/Lidl lagging a bit with growth of “only” 19.0% combined (handicapped by their lack of Online presence). Morrisons was the best of the “Big 4” on this basis, with gross sales 23.7% up, whilst Sainsbury was up 22.0%, Tesco was 19.8% up and Asda was up 14.6% gross. And M&S Food “at home” sales were up by 17.4% gross, notwithstanding the loss
• Today’s Press: The easing of lockdown restrictions in England to be announced today leads the front pages of most of the papers today: the Guardian headline is “Museums, cinemas and pubs to reopen in major lockdown easing”, the Times runs with “Art galleries, museums and cinemas will reopen” and the Telegraph goes with the same high-brow theme: “Galleries to reopen in return of cultural life”. The FT, however, goes with “Japan warns of limited trade deal as it sets 6-week deadline for talks”. In terms of Retail news, the FT highlights that JD Sports is preparing for a possible pre-pack administration of Go Outdoors and the Business editorial in the Times sticks the boot in on JD, noting the “Shabby treatment of Go Outdoors staff” and asking “Is that really the behaviour you’d expect from a FTSE 100 group?”.xxx
• News Flow This Week: The highlight of this week for UK investors in the sector is the Tesco Q1 and AGM on Friday, but for UK landlords and retailers today is Quarterly Rent Day, whilst the Nike Q4 is out in the US tomorrow.