Langton Capital – 2020-07-21 – PREMIUM – Current trading, DPEU, GVC, holidays, economy etc.:
Current trading, DPEU, GVC, holidays, economy etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
The Covid-19 epidemic has touched al of us to a greater or lesser extent and, yesterday, we filled up the car for the first time in four months.
And even then, it was only because we had to get some petrol for the lawnmower meaning that habits, in place for decades for many of us, have (or had, hopefully) been thrown out of the window.
Scrubbing the rust off the nation’s human capital could be a bit of a task.
The ONS’s suggestion that a half of commuters were now back at work doesn’t accord with eye-ball evidence as many people still seem to be doing Zoom calls in their pyjamas and that might not change any time soon.
And holidays? Don’t mention holidays because, whilst it may have a Venice, Lake Garda, Innsbruck, Munich, Vienna, Ljubljana, Venice loop last year, this year it’s a more modest Dales and Lincolnshire Wolds combo but, as life is what you make it, I’m sure it will be wonderful.
No tweets yesterday (@brumbymark) due to a getting-the-grass-cut emergency. Covid lockdown, huh? On to the news:
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TRADING, WHAT WOULD IT BE REASONABLE TO EXPECT. No plan, it’s said, survives first contact with the enemy. However, it’s still generally a good thing to have some idea as to what to expect. 21 July 2020:
• With apologies to Donald Rumsfeld, there are some things that we know.
• We know that around a half of pubs and restaurants (more pubs than restaurants) are open.
• We know, per the ONS, that around half of commuters are back at work
• That sounds like a high number to us but we also know, per Andy Haldane at the Bank of England, that around a half of the 25% drop in GDP has been made up
• We know about the VAT cut, we know when the CJRS furlough scheme tapers and finishes, we know about the Eat Out to Help Out scheme, we know about business rates being suspended and we know that a lot of units, mostly casual dining restaurants, will not reopen
• And we know that the UK is already in recession (though we don’t know for sure how deep or how long it will be – see below)
• We know that the world’s scientists are clever and incentivised, we know humanity has survived everything nature has thrown at it even without their help in the past, we know that we’ve spent 50-100yrs out of pandemic for every one that we’ve spent in it and we know that, whilst there were no office blocks, rail commuters and travel hub coffee shops in the bible, there were certainly pubs and restaurants
• So, there are some grounds to be hopeful. But then we move on to the known unknowns.
• These are biggies.
• We don’t know if there will be a second spike or if the virus will mutate and nor do we know if our scientists will brew up a vaccine
• We don’t know (fur sure) if people who’ve had the disease are immune
• We don’t know when or to what extent consumer confidence will return, we don’t know how deep the recession will be and we don’t know when normality will return
• We don’t know (for sure) if Rishi Sunak means it when he says he (the taxpayer) will do ‘whatever it takes’ (though we do know that he has to say this, whatever his intentions)
• Nor do we know where the government will allow the trade-off between the economy and health settle – but we do know that our government is facing the same problems faced by every other country in the world and the political risks associated with being an outlier probably outweigh the potential rewards
• These are, by definition, unknown.
• Because, in the real world, known unknowns exist, it is perhaps better to have good products, understanding landlords and a conservatively financed balance sheet, than not
• Unfortunately, in a devil-take-the-hindmost environment, provisioning for black swans is not the top of many people’s lists
How may trading shape up?
• Given the unknowns above, this is the proverbial ‘first-contact-with-the-enemy-type comment but we could make a few points
• These are relatively straight forward and have been made elsewhere but here we go:
• There are a lot of moving parts, some good, most bad. Most of them will abate over (probably) about the period until next Easter or Q2 (this in the absence of a second lockdown and vaccine)
• Bad certain. Fear factor, capacity limits. Recession coming.
• Bad unknown. Second lockdown, trends in confidence (up or down?)
• Good certain. Rivals not open (some permanently shut & capacity down), novelty factor for pubs good in the short term after long absence, punters not going to work & favouring community boozers, half-price food next month (but not for wet-led).
• Good uncertain. Slow recovery in confidence, no 2nd spike.
• To say anything more definitive, you need to pin down the variables. And they’re all moving about at the moment meaning there are a non-finite number of ‘answers’.
• Hence, assume no second spike, a ‘normal-type’ recession after a partial recovery (say half) from the trough of minus 25% and no Brexit collapse or political problems. This is already a tad optimistic.
• Even then, this is a tightrope & we’re assuming no wobbles. That’s a big assumption.
• On the basis of the above, some sort of ‘normality’ by Q2 next year could be achievable
Winners and losers:
• This is not a zero-sum game. The losers will outnumber the winners but, over time, some operators should do well. Factors include:
• Geography (north / south or community / city centre or reliant on commuters / not). The former, in both cases, should perform more strongly
• Food v wet. Wet is performing better
• Traditional v trendy, maybe even male / female. Traditional, community assets are stronger at present
• Outside space or not
• Steady trader v packed out two sessions a week. Peak trading periods will be flattened. Better to have steady business
• Freehold, leasehold. The position of landlords is as yet unclear and variable.
• Good balance sheet v heavily indebted. Now is not a good time to have a lot of debt (in addition to which operators will now have accumulated rent & VAT bills)
• The more we write, the more we realise that the variables are so numerous that any sort of generalisation is almost meaningless
• Nonetheless, if we consider the above as a series of Venn diagram circles, one of the least good places to be would be intentionally crowded, large units in the south, next to a train station, reliant on commuters, with an aggressive landlord, a load of debt etc.
• Or a cruise ship operator
PUB & RESTAURANT NEWS:
Covid – the new (ab)normal:
• Foodservice analyst Peter Backman reports that, whilst the trading picture for UK pubs & restaurants is ‘still murky…it is clear that the sector is not enjoying much of a boom time.’
• This accords with feedback heard elsewhere suggesting that trading levels commenced at perhaps 50% to 60% of normal (depending on venue type) and have risen by perhaps 10-15 percentage points in the two weeks since reopening.
• This is good as far as it goes but, with more units reopening every week, consumer demand will have to rise by more than 10pps in order for pubs & restaurants to see double digit increases in trade.
• Backman says normally ‘the lever to get things moving again is money in consumers’ pockets.’ This will be influenced by macro factors but operators will be able to move the goalposts by offering discounts. But, re price, Backman says ‘that is not an issue right now.’ Worry about finances will pick up (relatively) when job losses push Covid-19 from the headlines.
• Backman points out that the previous largest drop in foodservice demand was 7% (in the period after 2008) but that record may be challenged shortly. The drop in demand between Q1 and Q2 this year was minus 92%, an altogether different magnitude. Much of this (but surely not all) will come back over time but, in the short term, new records are likely to be set.
• Backman suggests that only around 10% of the spend from July 2019 is currently being spent in UK restaurants. Whilst fewer are open, that is a sobering statistic. Data from BVA BDRC suggests that only 6% of consumers sampled had eaten in a restaurant in the prior week and only 2% had spent a night in an hotel.
• There have been concerns raised regarding the new powers to shut venues in response to local conditions with both the BBPA and UKH saying that compensation would need to be paid to units forced to re-close. In August, furlough payments drop and, at the end of October, they will stop altogether. This would leave many operators with no alternative but to make staff redundant in the event of a renewed closure. This would make any subsequent re-re-start more expensive and difficult.
• London Union’s Jonathan Downey says ‘these are almost certainly the most significant powers ever delegated to local authorities to close premises and stop events. There is no doubt that this is going to add more unnecessary concern about compliance for all of us and it will also be disastrous for some.’ Downey says ‘Hackney Council came into Dinerama on Saturday and were concerned that our background recorded music was too loud. That’s where we’ve got to with all this.’
• There are concerns that, if you give someone a hammer, they will start to find nails.
• The Morning Advertiser reports that some city operators remain concerned that public transport bottlenecks could slow down any recovery in trade. Arc Inspirations CEO Martin Wolstencroft says that ‘the bigger the city, the less chance of people going there. If you have got sites operating around central business districts and office and corporate markets, those are the ones struggling more than the suburban offerings.’
• The government has called on venues to make sure that non-smokers are catered for in outside spaces.
• In the US, Black Box Intelligence finds that around two thirds of restaurateurs polled ‘expect things to get worse for restaurants over the next three months.’ Black Box says ‘trust will come when guests feel safe, and we are already noticing higher service scores likely as a result. But to keep consumers dining out, it’s table stakes for operators to absolutely get cleanliness right and be consistent.’
• The Retail Gazette reports that only a half of UK stores have reopened since lockdown was eased. The East Midlands, which includes Leicester, is the lowest at 43% with London on 44%.
• A Deloitte poll reports that 49% of CFOs from large and mostly listed companies forecast a return to pre-pandemic levels of business only towards the end of next year. Some 33% expect it to recover in the first half of 2021.
• Private equity is taking a haircut on its investments in casual dining. Observers calculated that it put in around £4.5bn to UK casual dining deals in the 2011-2019 period.
• DP Eurasia has updated on H1 trading to end-June saying that store numbers were up by 3% with system sales up 6.0%. The company says it performed strongly in the pre-Covid period. CEO Aslan Saranga comments ‘group performance has been resilient during the last quarter. Our business, along with the sector, was heavily affected by the on-set of the Covid-19 pandemic from the middle of March. We took immediate anti-infection measures for business continuity, such as contactless delivery, contactless take-away and compulsory mask utilisation to ensure the well-being of our customers and employees. However, governmental measures implemented in our core markets resulted in varying operational constraints.’
• DPEU says ‘Turkey also started the normalisation process earlier compared to Russia, such as the opening of restaurants for dining in as of 1 June 2020. As a result of these different approaches by local governments, Turkey is moving closer to its pre-Covid level of operations; however, Russia has some ground to make up especially in dine-in, which opened on 23 June 2020, and take-away.’
• DPEU concludes ‘despite these challenging circumstances, digital continues to be a core focus and to drive our business forward. Online ordering as a percentage of delivery surpassed 75% in the period, up from 67.5% in H1 2019 as we continuously fine tune our user experience, network architecture and loyalty programme.’ It says ‘we feel more comfortable that a full shut down of our stores in the future would be a very remote possibility. Assuming that we are not faced with significantly worse operational constraints, the Group remains confident in its near-term plans for business continuity and cash flow as well as its overall prospects in the longer term.’
• Jonathan Downey has reported that Soho bar Milk & Honey will close for good in September after 18 years of operation unless a new deal can be struck with its landlord.
• Oakman Inns has replicated the Chancellor’s “Eat Out to Help Out” campaign for the last few days of July. It says it is offering downloadable £10 vouchers that can be used against food in its pubs Monday to Wednesday for the period 20 July to 29 July. CEO Dermot King says ‘our teams have been retrained and are temperature checked before each shift.’
• The Buck Street Market in Camden is offering 50% off food and 25% off other goods. The site is home to 80 + eco-conscious food and retail businesses.
• The ONS says that around 50% of those people working from home earlier in the pandemic are now travelling to their place of work. That sounds like rather a high number.
• RBS has told around 50,000 staff that they will continue to work from home until at least 2021. The FT says ‘other banks are taking a similarly cautious approach, while workers remain worried about using public transport in particular, despite changes to government guidance last week.’
• The Resolution Foundation’s annual Living Standards Audit says that the coronavirus is the biggest shock to the income of working age families since the 1970s. It says there has been a 4.5% fall in typical earnings.
• Around 900,000 public sector workers are to be given an above inflation pay rise of up to 3.1% in 2020/21.
• M&S has confirmed that it is to cut 950 jobs. Delivery company Hermes is to recruit as many as 10,500, albeit mostly self-employed van drivers.
• The BBC says that young consumers are most likely to have lost their jobs as a result of the pandemic.
• If 95% of those furloughed at ‘peak furlough’ (including the 2m self-employed covered) get their jobs back, UK unemployment will rise to 2m. If 90% get their jobs back, it’s 2.5m and if 85% are re-employed, unemployment will hit its prior all-time record of 3.1m.
HOLIDAYS & LEISURE TRAVEL:
• The Telegraph reports that it is taking up to 4mths to process passport applications. It says this is leading to some families having to cancel holidays.
• The Scottish Liberal Democrats have called on Nicola Sturgeon to rule out quarantining holidaymakers from England
• Airlines UK says that a 12-month APD waiver could save 8,000 airline jobs.
• Royal Caribbean has delayed the delivery of its new ship, Wonder of the Seas, to April 2021.
• Pragma Consulting says holiday companies with slack demand ‘would do well to take advantage of the current traveller downturn to carry out infrastructure projects earlier than might have been planned, thus being prepared for increased demand as it materialises.’ Yes, but where is the money going to come from?
• Saga is reportedly trying to find a buyer for its luxury tour operation, Destinology, per Sky News
• Cruise & Maritime Voyages has been placed in administration
• STR reports that UK hotel rates remain down 44% on last year, though there has been a pickup in occupancy. It says ‘the U.K.’s regional markets are also showing signs of recovery.’ It says ‘it is also good to see that the U.K. broke the 30% occupancy barrier this past week.’
• US tourists have been banned from entering the Bahamas
• GVC has updated on discussions with HM Revenue & Customs saying that it had been ordered to ‘produce information to HM Revenue & Customs (“HMRC”) relating to the group’s former Turkish facing online gambling business.’ It says ‘prior to 20 July, it had been understood that no GVC entity was a subject of HMRC’s investigation…however, HMRC yesterday informed the Company that it was widening the scope of its investigation and is now examining “potential corporate offending” by an entity (or entities) within the GVC group which HMRC has not yet identified.’
• GVC says it is ‘surprised by the decision to extend the investigation in this way and are disappointed by the lack of clarity provided by HMRC as to the scope of its investigation. HMRC has not yet provided details of the nature of the historic conduct it is investigating, with the exception of a reference to section 7 Bribery Act 2010, nor has it clarified which part of the GVC group is under investigation. In the meantime, the Company continues to co-operate fully with HMRC regarding the provision of information.’
• GVC says ‘the group disposed of its Turkish facing business in December 2017’ and adds ‘a further update will be provided, if appropriate.’
• Ten Entertainment has updated on its reopening plans saying it will reopen all of its English Bowling centres on 1st August 2020. Chairman Nick Basing says ‘we are delighted that we can now open and welcome back customers on 1st August . We are fully prepared and looking forward to delivering fun and entertainment in a very safe way. We will be opening all 39 of our English entertainment venues.’ Basing says ‘the Government has delivered extraordinary levels of support enabling businesses like ours to endure the crisis and emerge intact to restart and rebuild from here.’
• NPD reports that June 2020 spending on gaming was up 26% on the same month last year.
• Q Magazine is to close after 34 years.
FINANCE & ECONOMICS:
• Deloitte reports that 65% of companies plan to cut investment spending over the next three years. Around 80% believe their revenues will be lower in the next year than they were in the last.
• Bank of England economist Andy Haldane maintains that Britain’s economy has recovered around half of the drop in output that took place in March and April. Haldane says ‘roughly half of the roughly 25% fall in activity during March and April has been clawed back over the period since.’ He says ‘we have seen a bounceback. So far, it has been a ‘V’. That of course doesn’t tell us about where we might go next.’
• Sterling up at $1.2653 and €1.1065. Oil higher at $43.40. UK 10yr gilt yield down 1bp at 0.15%. World markets mostly higher yesterday. London set to open up around 45pts as at 7am.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Today’s News: On top of yesterday’s news that Walmart has put its stake in Asda up for sale again and that M&S is cutting 950 management roles as part of its “Transformation Plan”, the beleaguered Ted Baker has issued a trading update, boasting of “resilient trading and good progress despite COVID19 disruption” (overall group sales in the last 11 weeks are 55% down and Retail LFL in the past 4 weeks has been only 50% down). And the embattled landlord CapCo has also issued a trading update, trumpeting that “the company is confident in the long-term resilience, attractiveness of and prospects for prime central London, in particular the West End” and that “Covent Garden is a pedestrianised open air environment”, despite reporting a 17% fall in NAV at the end of June and revealing that only 27% of the last quarter’s rents have been collected.
• News Flow This Week: The latest monthly Kantar/Nielsen grocery sales figures (for the 4/12 weeks to July 11th/12th) are out at c8am and the AGM of Ted Baker is being held at the infamous London HQ at 11am today. The Howden interims are on Thursday and the Kingfisher AGM and the trading update from Hotel Chocolat are on Friday, along with the widely-followed monthly GFK Consumer Confidence index and the ONS Retail Sales figures for June. The hapless Frasers Group (aka Sports Direct) is due to announce its finals soon and we are still waiting for the delayed McColl’s interims.