Langton Capital – 2020-07-07 – PREMIUM – Whitbread, VAT cuts, reopening experiences, price rises, JDW etc.:
Whitbread, VAT cuts, reopening experiences, price rises, JDW etc.:
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A DAY IN THE LIFE:
A bit of a rush this morning. Follow us on Twitter at @brumbymark and let’s move on to the news:
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A VAT CUT TO BOOST SALES OF HOSPITALITY SERVICES? The chances are arguably higher now than they have ever been. 7 July 2020:
• Chancellor Rishi Sunak will speak to the country tomorrow.
• He will outline plans to boost the economy
• He is likely to leave revenue (i.e. tax) raising talk for another day.
• A cut in VAT is looking fairly likely. This may be targeted at employment-heavy industries such as leisure.
• A VAT cut could boost spending (or widen operator margins or both) and help the economy.
• It could ‘level the playing field’. at least regarding food, between hospitality and the supermarkets.
• Operators would doubtless keep some of the margin for themselves. It could protect jobs and the tax base going forward.
• Cutting VAT on services sourced and supplied in the UK would not boost imports in the same way that a cut in VAT on clothing or electrical goods would
• Lower hospitality VAT could boost domestic tourism
• It would be expensive. VAT is levied at 20% by almost all leisure businesses.
• It would increase public borrowing and may be hard to reverse
• The consumer may not feel the benefit if operators widened their margins
• Like many government policies of late, this one has been run up the flagpole and, as enough people seemed to salute it, it may be adopted
• It has been similarly flagged in the press
• Industry has been calling for a VAT reduction for many years. Simon Emeny wrote in the Daily Mail on Friday, the BBPA called for a VAT cut yesterday, Marston’s mentioned it with their figures etc.
• It fits the ‘think bold’ mantra. The results can be dealt with another day
• It would likely preserve jobs, see more hospitality units open than would otherwise be the case, etc.
• Odds are in favour of a tax cut
• It would be widely welcomed
• It might be a bandage on a more serious wound. But it would help in the short term
• To the extent that it subsidised failing businesses, it might only be delaying collapses in some areas
• Just how such a move could be reversed is unclear. There are precedents for example the motor vehicle scrappage grants post the financial crisis
• UKH said recently ‘for those businesses that have survived, the hard work begins now. We cannot assume that we are now in the clear just because our doors are open again. Many businesses have taken huge hits and hundreds of thousands of jobs are still in the balance.’
FEEDBACK ON RE-OPENING: It’s hard not to micro-analyse. Here a bit more feedback. 7 July 2020:
• Further feedback is suggesting that the Super Saturday was quieter than might have been hoped. Whilst the industry did not want to see reports of unrestrained drinking and socialising, there are some suggestions that sales, particularly in city centres, were below best hopes.
• This disappointment, if disappointment isn’t too strong a word, was most acute in city centres and for ‘intentionally crowded’ venues. Community pubs did well. Food was soft but not terrible.
• It may not be wise to micro-analyse but Sunday may have been a little quieter (vs a normal Sunday) than was Saturday vs a normal Saturday. The weather admittedly was a little worse. The fact that so many staff are furloughed or working from home, however, and may not have to get up quite so early, should have pulled trade up.
Feedback in context:
• There is also the possibility that better-performing operators will be quick to update whilst companies that performed perhaps less strongly, will report later. Or not at all if they have no requirement to do so.
• Caveats & observations re the above. This 1) may not be true or 2) it may mean that operators who said they would open in a slow and measured way got it right, or 3) it may be a sign that the operators reporting (who have traded relatively well) could be taking share from less strongly-performing peers. They will be reluctant to give this share of trade back.
• We also have to acknowledge that we are influenced by what we see (and hear). Wireless Social, for example, reports ‘the only English city which increased but at a smaller rate compared to other English cities was York.’ This is what it is. York is often busy as a result of inbound day visitors from Newcastle and the North East and there may have been a reluctance to use public transport.
• Wet-led pubs still ‘feel like pubs.’ The changes that food-led operators have had to bring in will be more obvious to customers.
• See other comments including observations on costs & margins in general email.
• Consumers will need be made aware that they do not necessarily have to book a table at all venues. Some will insist on this but others would welcome walk-in trade.
WHITBREAD – AGM & Q1 TRADING UPDATE: Whitbread has this morning updated on trading in its Q1 to date and our comments thereon are set out below.
Overview & reopening:
• Whitbread will tell its AGM later today that ‘over 270 UK hotels and 24 restaurants now reopened with the majority of the rest of the estate due to reopen throughout July’
• The company says ‘all 19 operational hotels now open in Germany, including 13 new hotels that were refurbished and rebranded as Premier Inn during lockdown’
• WTB adds ‘the operation of 39 hotels opened for key workers throughout the crisis has enabled us to thoroughly test new social distancing protocols and hygiene standards ahead of the wider opening of the estate.’
• It says the Q1 total sales decline ‘reflects the fact that the vast majority of the UK and German estate were closed from the end of March.’
• Although Q1 (the three months to end-May) were almost entirely impacted by the Covid-19 shutdown, WTB gives numbers
• It says that its LfL sales were down by 79.0% in accommodation and down by 80.1% in food & drink
• Total LfL sales were down by 79.4%. Sales must have been down in the run-up to UK lockdown on 23 March and they have fallen to virtually zero since
• CEO Alison Brittain says ‘we are very pleased to have commenced the reopening of our hotel and restaurant estates, which are now able to welcome all business and leisure guests.’
• She says it ‘is still very early days and therefore too early to draw any conclusions from our booking trajectory, especially as there has been volatility in hotel performance in other countries that relaxed controls before the UK.’
• There is hope for staycations. Ms Brittain says ‘in traditional regional tourist destinations, we are seeing good demand for the summer months, whilst the rest of the regions and metropolitan areas, including London, remain subdued.’
• The company says ‘our value pricing and our superior network will ensure that our leading customer proposition is maintained.’
• Regarding its fund-raising, the company says ‘the successful completion of the £1bn rights issue on 10 June will enable us to maintain our competitive advantage and financial flexibility, as we have both strengthened our balance sheet and secured the business so it can withstand a long period of low revenues.’
• It adds ‘our strong balance sheet, alongside both our leading operating model and the power of our brands, means that we are in the best possible position to take advantage of enhanced structural opportunities that we expect to become available in both the UK and Germany.’
• The company concludes ‘this will mean that we are in a position of strength to continue to invest, increase market share, and over-time create significant value for shareholders.’
• There is little that WTB can realistically say about trading at this stage. Its comments on forward bookings, as far as they go, are positive.
• Staycations will be big this year. The group is still under-represented in London, though it has been opening space rapidly there, and that market looks set to remain tough. There are no workable earnings estimates at this stage.
• As mentioned earlier, the Rights Issue should, perhaps be seen as 1) precautionary and 2) potentially predatory. There will be opportunities to make acquisitions in the coming months and years.
• WTB has pulled all the levers available to it in order to preserve cash and wishes to put itself in a better position than its competitors. Over the longer term, the group has proved itself an effective builder of estates of largely-freehold based leisure assets
• These are not normal times but we have to make at least the tentative assumption that they will normalise at some point. With that in mind, WTB will be better positioned, with a largely freehold estate and its Rights Issue cash in the bank 1) than it would be otherwise and 2) than many of its competitors
PUB & RESTAURANT NEWS:
Covid-19 reopening – see Premium Email for further comment:
• CGA suggests that around 45% of those bars and restaurants that could have opened for business last Saturday actually did so. Numbers across the casual diners, coffee shops with indoor seating etc will be on top of that.
• The 45% ‘provides a baseline from which CGA will continue to track the recovery of the sector.’ It says ‘the fact that 45% of England’s pubs and bars opened over the first weekend post-lockdown, reflects the phased reopening that many businesses in the sector have been planning for. We know more will be opening their doors during the coming week, and the market as a whole will be learning from the successes and occasional teething problems of their colleagues over the last couple of days to ensure the public can safely enjoy the pub and bar experience in the weeks to come.’
• Analyst Peter Backman suggests that 20% of chain pubs and 70% of independents opened on day one. More will be opening this week and thereafter. It is possible that part of the boost received by units on Saturday and Sunday was due to the absence of competition.
• Foodservice analyst Peter Backman writes that trading over the past weekend has been ‘underwhelming’. He says ‘that is my take on the flow of business into the restaurant and food pub business on Discovery Day – 4 July.’
• Backman says anecdotal evidence suggests around a half of the UK’s on-trade units opened on Saturday. He says the half of units that were opened had occupancy levels of around 25% suggesting that hospitality income was about 13% of what it would have been on a typical Saturday.
• Backman concedes that the weather was not helpful and that foreign visitors are absent. But there remains a note of caution. He says ‘bookings on OpenTable increased on Saturday but they certainly don’t reflect comments from some quarters about a surge in bookings during the week. Restaurants still have a mountain to climb.’
• Canary Wharf. As we tweeted yesterday, Canary Wharf has only around 7k of its 120k workers currently back in the office. This speaks to the expected level of revenue for the surrounding sandwich shops, coffee shops and the like.
• Bets as to the number of units closed for good are still coming in. Comments from Pret (see below), Carluccio, Restaurant Group, Casual Dining Group etc are beginning to allow us a clearer (though still very clouded) picture. CGA says that two thirds of employers in our corner of leisure will lay off staff. Peter Backman says 10% to 20% of units may not reopen.
Re-opening – the near-term future:
• Monday bookings should have been good. A large part of this may have been the more general swing to booking tables full stop. It would not be surprising to hear that walk-ins are down. This may be particularly acute in town centres and anywhere that usually benefits from commuter trade.
• There is a clear desire across the sector for a growth path over the coming weeks. It remains true, however, that you don’t always get what you wish for.
• M&B commented at its H1 numbers that its experience re Alex in Germany was that trade began at 50% of normal and built to around 70% over the first month. Observers have pointed out that Alex is a restaurant chain rather than a chain of pubs.
• There is similarly a desire that price rises stick. However, as more units open, price increases will also be tested.
Potential VAT changes:
• Chancellor Rishi Sunak speaks tomorrow. He may cut VAT on hospitality sales. This would clearly be beneficial as operators could either cut prices or pad margins or do both. More comment in Premium Email.
• Wireless Social reported, perhaps not surprisingly, that ‘the footfall over the weekend is highest it has been since lockdown commenced, with the UK Saturday footfall being 55% below average February levels and Sunday being 63% behind this base.’
• Various observers have again unsurprisingly reported that footfall after 5pm was more sharply increased than it was during normal shop opening hours. Wireless Social say ‘whilst there were talks of it being a ‘Super Saturday’, the numbers indicate that people are still wary of coming out too soon and the weekend was quieter than anticipated. There is a phased reopening of pubs and bars as well, which will be impacting people going out, the full story will unfold over the next few weeks.’
• We shouldn’t lose sight of the fact that a large number of units will not be reopening in the near future (or at all). This will benefit competitors’ ‘share of stomach.’ SSP, for example, has said that only 20% of its stores will be open by August and Casual Dining Group, Carluccio, Frankie & Benny’s, Chiquito’s and several other operators will be making substantial cuts to outlet numbers.
Reopening – Industry comments:
• London Union’s Jonathan Downey has commented ‘after the excitement and extraordinary effort to re-open on Saturday, we’ve woken up to the reality of an extremely disappointing weekend of sales (for almost everyone). Combine this with all the additional costs we’re required to incur, and the losses are significant.’
• Downey says ‘business levels will be like this for months. It’s a long road back and many won’t make it. The Chancellor’s stimulus this week will help but we should be doing much more to get people back out again.’
Covid-19 – other news:
• The BBPA has reiterated its calls for VAT, Business Rates and Beer Duty cuts ‘to secure 350,000 jobs and unleash British enterprise.’
• Chancellor Rishi Sunak speaks tomorrow. A cut in VAT is a distinct possibility. The BBPA is specifically calling for a cut to 5%. It says ‘a cut to 5% in the rate of VAT on food, drink and accommodation in hospitality would boost pubs and the brewers that supply them, and signal to consumers that the sector is open for business. The BBPA believes that the near-term demand stimulus of cutting VAT to 5% would bring an immediate boost to the sector helping to secure hundreds of thousands of at-risk jobs.’
• The BBPA says this would particularly help ‘the 43% of the 600,000 directly employed in pubs by the sector that are under 25 years old, ensuring their life chances are not permanently disadvantaged as a result of the COVID-19 lockdown.’
• Calls for a permanent overhaul of business rates may be ignored in the short term but the BBPA point out that ‘per pound of turnover, pubs pay more in rates than any other sector.’ This does look a little unfair when compared with, say, Amazon and is taken alongside the impact that the shutdown has had on the latter compared with he hospitality industry.
• The BBPA, which is asking for quite a lot, says in addition that a 25% reduction in beer duty, which is higher in the UK than in most other European countries, would ‘signify a vote of confidence in a major domestic industry.’ BBPA CEO Emma McClarkin says ‘the measures we have put forward are bold, but they are key to the future of communities across the UK and important British businesses. They are an investment for the future, not a cost.’
• Some larger moves in the sector yesterday. Against a generally very strong market, pub & restaurant operators JD Wetherspoon, M&B and Restaurant Group saw their shares slide by 4%, 7% and 14% respectively. Perhaps better to journey than arrive. Cineworld was down 4% with Gym Group, Hollywood Bowl and Saga up by 6%, 7% and 7% respectively.
• Pret A Manger is to permanently close 30 shops and cut 1,000 jobs. Pret currently has 339 of its 410 UK shops open but footfall, particularly in office-heavy and commuter-sensitive environments, remains low.
• Langton has commented on a number of occasions that operators will be counting backwards from the date on which the furlough scheme is tapered and that they may cut jobs (which typically have a 45dy consultation period) accordingly.
• Pret’s sales are running 74% down and the chain is thought to be losing £20 per month per the BBC.
• JD Wetherspoon has commented on a Daily Mail article saying that the paper’s suggestion that it was to ‘get rid’ of 15 pubs was untrue. It says ‘the fifteen pubs in question were put on the market over a year ago, in April 2019.’ It adds ‘five of the pubs were sold and now belong to third parties. Eight of the pubs were withdrawn from the market and are no longer for sale.’
• Arc Inspirations is to open a BOX unit on Deansgate, Manchester next year. CEO Martin Wolstencroft comments ‘it’s been a challenging few months for the sector and for our business, but we’re now looking with excitement to the future. Manchester has always been a key location for us and when the time is right and consumer confidence fully returns, we will debut our BOX brand in the city.’
• Uber Technologies is to buy Postmates for c$2.65 billion in stock
• Campari is to move its legal offices to Amsterdam. It will change from an SpA to a NV.
• US hedge fund Elliot Advisors is reported to be interested in purchasing Casual Dining Group, reportedly in its entirety. CDG is currently in administration. A pre-pack is possible. The FT says that Elliott ‘is among a number of investors interested in the business but has yet to table a formal bid, according to a source with knowledge of the discussions’.
• A number of other casual dining groups are soliciting bids for their businesses. There are likely to be more administrations.
HOLIDAYS & LEISURE TRAVEL:
• Travel operators, though pleased to see a number of countries designated ‘safe’, have reiterated that there is an issue of consumer confidence, not just quarantine issues
• Greece will allow flights from the UK from 15 July
• Union the TSSA has called on Barrhead Travel to try to avoid redundancies
• EasyJet holidays will commence summer flights from 1 August
• Ferry operator DFDS is to commence crossings to and from France on 10 July
• Love Home Swap has suggested that Brits ‘have new travel priorities’. It suggesets that staycations will be in demand and that the period of time spent on holiday this year will reduce.
FINANCE & ECONOMICS:
• IHS Markit PMI UK Construction data for June shows a strong bounce back to a measure of 55.3 from 28.9 in May. Any number over 50.0 implies growth. Markit says ‘June’s survey data revealed a steep rebound in UK construction output as more sites began to reopen and the supply chain kicked into gear. House building led the way with the fastest rise in activity for nearly five years, while commercial and civil engineering also joined in the recovery from the low point seen in April.’
• The above is good news (amidst a flood of less good data) as the construction industry is good at providing jobs quickly.
• The TMMT says the number of new cars registered this June was down 35% on the same month last year. This is an improvement on recent months.
• The Social Market Foundation has said that the impact of Covid-19, though most acute in the short term in London and the South East, could impact the UK’s more traditionally depressed regions over the longer term.
• Household spending in Japan fell by 16.2% in May compared to the same month a year ago.
• Sterling up vs dollar at $1.2504 but down vs Euro at €1.1052. Oil lower at $42.91. UK 10yr gilt yield up 1bp at 0.20%. World markets up yesterday but Far East lower in Tuesday trade & London set to open down perhaps 20pts (as at 6.45am).
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
JD Sports: After the bad recent PR over the Go Outdoors pre-pack and the withholding of rents due to landlords, JD Sports has got back to basics today by announcing its delayed finals for y/e Jan, having said very little about the impact of the pandemic since it took hold back in March, apart from the need to focus on conserving cash. But although the final results are strong, with EBITDA up 28% to £624m on the back of a 30% jump in revenue to £6.1bn, driven by the highly successful US acquisition, investors will be disappointed by the absence of any detailed current trading news. All the company says is that “we were encouraged by the continued positive trading in the early weeks of the year prior to the emergence of COVID-19 and we firmly believe that we are well placed to regain our previous momentum”, whilst highlighting that footfall is a problem in major malls and town centres and
Halfords: Unlike JD Sports, Halfords had given an update on current trading ahead of today’s delayed finals (for y/e March), as it said back on May 6th that LFL sales in the 4 weeks to May 1st were only down by 23%, thanks to the boom in Cycling sales, so the main focus today is on the updated picture. And investors will be pleased to hear that LFL sales in the 13 weeks to 3 July were only down 6.5% (“significantly better than anticipated in late-March”). They will be less pleased to hear that “cycling is a lower margin, more capital-intensive segment than motoring” and that even a broad continuation of the overall Q1 sales trends would see the business make very little profit in the full year: Halfords has come up with 3 possible profit scenarios, based on LFL sales of -10.5%, -7.5% and -4.5% in the rest of the year. Why couldn’t JD Sports provide a similar analysis?