Langton Capital – 2020-08-24 – PREMIUM – JDW, CVAs, EOTHO, commuters, Intercontinental Hotels etc.:
JDW, CVAs, EOTHO, commuters, Intercontinental Hotels etc.:
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A DAY IN THE LIFE:
Working from home is great but, if your nearest and dearest take it as an opportunity to order masses of flatpack furniture and insist that you build it, you may not get much done.
Hence my plans on Friday didn’t survive first contact with what I was told was the ‘immediate need’ to build our daughter’s flat-pack, easy-to-assemble (but in a million pieces), bedroom desk.
Assembling this piece of furniture, which I suspect was French as it had the word ‘facile’ next to a stick figure with a stupid grin on its face and a screwdriver in its hand, proved to be a bit of a task and, as no piece of furniture construction is complete unless you arrogantly throw away the instructions, put the runners for the drawers on upside down and then have to dismantle most of the thing to correct the error, took quite some time.
However, after that major hiccup, this week was looking better.
At least it was until I was informed of the day out at the zoo, Flamingo Land, which I’d been promising for some time.
That’s today. Followed by a brisk walk in the country (in a howling gale) and a pub lunch tomorrow and a trip to Robin Hood’s Bay on Wednesday.
Anyway, I’d better get my skates on and to move on to the news.
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A NUMBER OF COMMENTS ON COMMUTERS, CVAs, EOTHO, RE-RE-CLOSURES, JDW TRADING UPDATE: 24 Aug 2020:
Commuters, London in particular:
• Many London-centric businesses and organisations, not least No10 Downing Street and the Mayor of London, have called on commuters to return to work.
• But they, the commuters, haven’t done so. Attendance is put at less than a fifth in some areas.
• Langton is not out of the ordinary in not having visited London since March. We were down regularly in that month when trade, to put it mildly, became a bit weird.
• But we haven’t been back since. First because we weren’t allowed to, then because we were advised not to if we didn’t have to and currently because there appears to be very little reason.
• The questions that need answering are a) why go to London? b) do you really want to wear a face mask for three hours each way (train and tube)? and c) don’t you have something better to spend your money and time on?
• The answers here are obvious.
• Meetings are being undertaken remotely, facemasks are a bit of an irritant after several hours even if you don’t suffer from claustrophobia and the trains cost quite a bit each way (both in terms of time and money)
• Applying the defibrillator to travellers and commuters was always going to be more difficult than was switching them off in the first place.
CVAs – is there a history (see 2018) of never cutting deep enough?
• CVAs are back in the news.
• History may not be repeating itself in every respect – but it’s worth pointing out that the CVAs of 2018 were not deep enough.
• Companies did not cut enough of their tail. Several are having CVAs again this time around and some have gone bust.
• Managing decline is, in many respects, more challenging than managing growth.
• Look at the declines (often collapses) of various empires, battlefield casualties during routs etc.
• The management slide rules work better in advance than retreat and, though FRP, Alix Partners, KPMG and the rest are skilled in what they do, still we had 2018 where companies were going bust post CVA even before the advent of Covid-19.
• But what’s the alternative?
• That’s a fair question. It’s not an answer but it’s perhaps best not to need a CVA in the first place. The CVA may give a poor company a temporary advantage, think Chapter 11 in the US but, over the longer term, it’s advisable not to be poor at all.
Eat Out To Help Out:
• This has been an outstanding success at modest cost.
• It has smoothed the week, got some customers back into the habit of coming out and has re-booted chunks of the industry.
• This is good for the companies, their staff, customers and suppliers and for the government and ultimately the taxpayer.
• Some companies have been having the equivalent of 8 or 9-day weeks. But EOTHO is finite.
• If HMG is to extend it, then we should surely hear this week. If major companies are going to extend it themselves, then we should also hear this week – but the first comment should come before the second.
• In the absence of an extension, Tasty has already said that it will consider re-closing some of its units. The company will not be alone.
• Yo-yo openings and closures will not be good for the same people (see above) that benefited from EOTHO.
• There is little more obvious way to tell a unit and its staff and its suppliers and its customers that it / they are marginal and may not survive. This could have a knock-on to behaviour, confidence etc.
JD Wetherspoon trading update:
• See below for details of trading update.
• JDW has been able to reassure that sales are only down a short 17% LfL. This is arguably a good number.
• However, is a LfL number and does not account for still-shut pubs (which are still down 100%) and it may slow when EOTHO ends next week.
• Its shares have recovered markedly from their mid-March lows but there will be a degree of dilution for those not taking part in the recent share issue.
• JDW has a portfolio of large pubs and should be able to distance customers if this is required. As always, it has been in the news.
• The company has in recent years significantly increased the proportion of freehold pubs within its estate (this now stands at 64%, up from 41% a decade ago), which should prove to be an advantage in a post-Covid-19 environment where landlords may be twitchy and potentially troublesome.
JD WETHERSPOON TRADING UPDATE:
JD Wetherspoon has updated on trading saying that ‘apart from a small number of development sites, and pubs in airports and stations, Wetherspoon reopened all its pubs in England, Scotland and Wales as soon as permitted.’
Trading since reopening:
• LfL sales down 16.9%. They are on an improving trend – but this may slip when EOTHO ends.
• JDW says ‘some airport and station pubs have now reopened, but some remain closed. 844 pubs are now open, out of a total of 873.’ It says ‘LFL bar and food sales are -16.9% for the 44 days to 16 August 2020.’
• The company adds ‘sales have gradually improved, with a rapid acceleration recently, largely due to subsidised food, coffee and soft drinks in the early part of the week. Sales have also been helped by the addition of extra outside seating.’
• JDW says ‘landlords, landowners and local and licensing authorities have been extremely flexible in accommodating extra outside space – which has helped Wetherspoon and the licensed trade generally.’
• It concludes on trading ‘the company nonetheless expects a period of more subdued sales once the scheme for subsidised early-week meals and drinks ends.’
• Re the temporary VAT cut on pub food, JDW says ‘if this major step towards tax equality is maintained in the long term, it will result in a significant increase in investment and employment in the on-trade.’
Balance sheet – capex:
• The co adds ‘since the beginning of July the Company has opened two new pubs, in Crossgates, a suburb of Leeds and in Kingswinford in the West Midlands.’
Debt & financial position:
• Re its finances, JDW says ‘the Company remains in a sound financial position. Net debt at the end of the last financial year is estimated to have been about £825m.’
• It adds ‘since the closure of pubs in March 2020, the Company has received a waiver of bank covenants for April and July 2020’ and ‘a share placing raised £141 million and a £48.3 million loan was agreed under the government loan scheme.’
• JDW says it ‘proposes to enter discussions with its lenders regarding waivers for the current financial year, in due course.’
• JDW then outlines at some length its various disputes with newspapers, commentators and MPs and it adds an appendix on Sweden’s approach to the pandemic.
• Re the outlook, chairman Tim Martin says ‘on the balance of the arguments, that avoiding full lockdowns and adopting the Swedish approach, is the better solution.’
• Mr Martin adds ‘Wetherspoon had 5 positive tests for Covid-19 among its 43,000 staff before lockdown and has had 24 positive tests since pubs reopened on 4 July – since reopening, the amount of testing has substantially increased.’
PUB & RESTAURANT NEWS:
Eat Out to Help Out:
• As the Eat Out to Help Out scheme enters its last full week, there are more calls for it to be extended. There is a chance this will happen.
• The BBPA has called for the scheme to be extended. It says the scheme has been a ‘great success for food led pubs’ but it says ‘more support still needed though for ‘wet led’ pubs who do not benefit.’ The scheme has boosted Monday to Wednesday trade. The BBPA says the help provided ‘has been immeasurable in terms of securing jobs and building consumer confidence.’
• BBPA CEO Emma McClarkin says ‘the Government should definitely repeat the Eat Out to Help Out Scheme.’ She adds ‘repeating the scheme, particularly as we approach quieter months for trade, would be a significant help’ and says ‘it still remains the case that ‘wet led’ pubs – those who predominantly just serve drinks and bar snacks – don’t benefit from the Scheme and so still need further support from the Government elsewhere.’
• Other chains, steak restaurant chain Gaucho amongst them, have said that they will fund the scheme themselves in September. UKH’s CEO Kate Nicholls says ‘the benefit to consumers, the importance to businesses shows the need to continue it for another month to get the remaining 50 percent of restaurants and pubs reopen and successfully trading.’
• Analysis by the Centre for Cities has suggested that seaside towns like Bournemouth, Southend, Blackpool, and Brighton have seen large increases in trade because of the scheme.
• Tip Jar has reported that the EOTHO scheme may have encouraged customers to leave larger tips. Tip Jar says that tip transactions were up 145% across the Monday 3 August to Wednesday 5 August period. The number of transactions would have been up over that period, as well, but perhaps not by that large an amount.
• Tip Jar reports that in the second week of the scheme, there was a 160% increase in tip transactions. Again, trade was up – but by a lesser amount. Tip Jar says ‘the driver for the increased tip values is that consumers are ordering slightly more, and due to the increased feeling of value feeling happier with the overall value of the deal and giving some of that value directly back to the staff who looked after them.’
• All-day café Gastrono-me has said that it believes the EOTHO scheme, though it has ‘seen amazing results’, needs to come to an end sooner rather than later. Owner Gemma Simmonite says ‘the EOTHO scheme has had profound results for us at Gastrono-me, on most Mondays to Wednesdays through August we’ve seen a 350% increase year on year. Even whilst reaping those results we’re still concerned that the impact of extending the scheme could end up having a negative impact on the hospitality industry in the long term.’
• Gastrono-me says ‘restaurants have to have a chance to find their equilibrium; to stand on their own two feet. Discounting is a hard habit to break customers from, we have to help them appreciate the real price of a meal out, and to not only be turned on by cheap fixes. Customers don’t get to see how much restaurants are claiming back, they are unconcerned and understandably unaware. But those costs are very high and equally unsustainable as is EOTHO for the government.’
Other Covid-19 news:
• New West End has suggested that West End footfall was picking up last week. It was up 32% week on week on Thursday and up 26% week-on-week on Saturday. Compared to last week, footfall was still down by 49%.
• Eater London has suggested that the London ‘villages’ are performing more strongly than are central London locations. The suburban recovery is partly due to more workers continuing to work from home and partly due to a reluctance to travel on public transport – and particularly to travel to city centres.
• Eater has reported that use of the London Underground in July was 70% below normal levels. Mastercard has reported that spending is up in some suburban locations.
• The Night Time Industries Association has reported that 83% of businesses are set to make staff redundant in Scotland within in a matter of weeks. A survey of the NTIA’s members also showed that 58% of businesses within Scotland’s Night-Time economy fear they will not survive longer than two months without further Government support.
• The NTIA says ‘of all the affected sectors of the Scottish economy, hospitality has been among the hardest hit by the pandemic. In the case of nightclubs, we were the first to shut down and without a shadow of doubt we will be the last of the last to re-open.’ It says ‘we urgently need some clarification of the perceived timescales for reopening and without financial support in the meantime the consequences for nightlife in Scotland are potentially cataclysmic.’
• Wasabi has appointed KPMG to enact a CVA. The Caterer reports the company as suggesting that ‘social distancing, the slow return of office workers and low levels of tourism to continue to adversely impact future trading.’ A small number of the group’s 51 sites may be closed as a result of the proposals.
• Wasabi says ‘prior to the outbreak of the pandemic, Wasabi had been performing strongly on the back of the investment and operational improvements we had made during 2019. However, the extraordinary impact of COVID-19 on trading has meant that we now need to take additional steps to address our fixed cost-base if we are to secure the long-term future of our business.’
• Wasabi concludes ‘we strongly believe that this turnaround programme will provide us with a stable platform upon which we can emerge from this difficult period as a healthy and sustainable business, for our staff, suppliers and loyal customers.’
• Customers who have visited a JD Wetherspoon pub in Wrexham have been told to look out for Covid-19 symptoms after three staff at the site tested positive for the disease. Public Health Wales said there was ‘no evidence of transmission to customers at this stage.’
• EI Publican Partnerships, now owned by Stonegate, has upped support to its tenants to £32.5. It has subsidised rental payments to the tune of 40% during September. EI MD says ‘we know from discussions with our publicans that our support, and that provided by the Government, has made a critical difference to cash flow and given publicans the initial confidence to reopen into an uncertain, socially distanced market.’ He says ‘about 96% of our publicans are trading and we continue to support the increasingly few pubs who have so far been unable to do so, primarily as a result of their trading format.’
• Birmingham bar PBs on Key Hill has had its licence suspended after several breaches of coronavirus guidelines.
• The parent company of Debenhams, Celine, has asked FRP to advise on an administration. Celine says their own administration won’t affect Debenhams’ sales, staff, customers or suppliers.
• Chinese online giant Alibaba says ‘our domestic core commerce business has fully recovered to pre-COVID-19 levels across the board.’
• The wheat harvest is reportedly the worst in 40 years. Prices of wheat and products made from wheat, are likely to rise.
• The Greencore sandwich factory in Northampton has closed after a coronavirus outbreak among staff.
• The eviction ban in England and Wales has been extended by four weeks. It is unclear whether this is intended to set a precedent for commercial leases.
HOLIDAYS & LEISURE TRAVEL:
• ABTA has said that 40,000 jobs have been lost or put at risk in the outbound tourism industry to date, around 18% of the workforce. It says that the number is perhaps 90,000 when supply chains are taken into account. ABTA has called on the government to save the travel industry.
• Le Figaro has reported that French hotel group Accor considered bidding for rival InterContinental Hotels Group over the summer. Reportedly Accor’s board was in favour in principle, but CEO Bazin decided not to proceed.
• Both companies have declined to comment. Trade journal Hotel Management quotes analysts as saying the move would be complementary in some regions, with IHG strong in North America and China, with Accor more present in Europe and the Rest of the World.
• A combined company would have over 1.6 million rooms, ahead of Marriott International, which had close to 1.4 million rooms at the end of last year. Hotel Management reports ‘Accor is already involved in the UK’s biggest budget drama as it courts the Travelodge owners and bigger can only be better in their eyes – unless it means more cannibalisation.’
• Safestay has updated on trading reiterating its comments in May that there was ‘material uncertainty which has resulted from the impact of the COVID-19 virus on the economy and the hospitality industry and the company now sets out its revised plan as it adapts to the prolongation of the pandemic beyond June and the current travel restrictions in parts of Europe and across the globe.’
• It says ‘the Directors believe that Safestay has the infrastructure in place to manage the re-opening of hostels and re-engagement with its customers and that ultimately, Safestay will find the route to returning its portfolio of hostels to pre-COVID-19 occupancy levels.’
• Chairman Larry Lipman says ‘this is a challenging period but I am confident that in time we will get back to normal. We are working closely on a range of options to strengthen our financial position, which may not be required but will be an additional comfort to have. We know we have a good cash generative business and while the current market is challenging we have a clear strategy for addressing it and as importantly for moving back to being fully operational.’
• STR reports that the European hotel industry saw occupancy down 66% in July versus the same month a year ago. Room rates were down 21% and REVPAR was some 73% lower. UK REVPAR was down by 79%.
• Ryanair is to cut fewer jobs than previously announced as staff have agreed to pay cuts.
• Youth travel specialist STA Travel in the UK has ceased trading.
• Jet2holidays has extended its flight suspension to the Canary Islands and Croatia.
• Crossrail has been delayed again. It will not now open until the ‘first half of 2022’. The project has further overshot its budget.
• TUI is to flights and holidays to Portugal from August 29
• Manchester airport has shut its Terminal Two as Covid-19 has hit demand. The Terminal will be shut ‘until further notice’.
• A Hull-based gift company, which makes puzzles amongst other products, has reported a 160% rise in sales as jigsaw demand shot up during lockdown
FINANCE & ECONOMICS:
• UK government debt has risen above £2 trillion for the first time ever. Economists have cautioned that the situation will worsen before improving.
• IHS Markit has reported flash PMIs for the UK for August showing that the composite index rose to 60.3. Markit says ‘August’s data illustrates that the recovery has gained speed across both the manufacturing and service sectors since July.’ It says ‘the combined expansion of UK private sector output was the fastest for almost seven years, following sharp improvements in business and consumer spending from the lows seen in April.’
• Michel Barnier has said that a trade deal between the UK and the EU “seems unlikely” at this stage. A deal can always be struck if one side or the other backs down. The UK has said it will not extend talks if an agreement cannot be reached by the December deadline.
• Sterling lower at $1.309 and €1.1096. Oil lower at $44.32. UK 10yr gilt yield down 2bps at 0.21%. World markets. UK & Europe lower on Friday but US up and Far East Higher in Monday trade. London set to open up around 35pts.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The headlines on the front pages of the Saturday papers were quite mixed, although the exam results fiasco and schools situation still dominated: the Daily Mail warned “Poll fury: don’t let children down again”, whilst the Guardian flagged “Back us over U-turn or I quit, Ofqual chief tells Williamson”. The Times, however, went with “Johnson and Sunak split over reform of pensions” and the Telegraph ran with “Second lockdown warning as R-rate rises”, whilst the FT noted that “Shoppers spur post-lockdown economic lift”.
• Saturday’s Press and News (2): In terms of Retailing/Business stories, the FT front page lead was typical of the uncritical coverage of the better than expected ONS Retail Sales figures for July on Friday: the Times and the Guardian both flagged that Retail sales have regained all the lost ground during the pandemic, although the Telegraph warned that economists feel that Retail sales may have peaked and the Daily Mail highlighted that the recovery has been Online-driven and that many High Street shops are still struggling. Talking of Online retailing, the Telegraph had an interesting Business editorial warning that “The late, late Online show is doomed” and that it is way too late to move Online now. Lex column in the FT highlighted the “unappealing economics” of Online Grocery delivery, whilst the FT also had a feature on M&S’s hopes for its tie-up with Ocado, with M&S Food
• Saturday’s Press and News (3): John Lewis was also in focus, with the Daily Mail highlighting that it has just launched an interactive sports zone in its Oxford Street flagship and is introducing a system of virtual queuing. The Business Editorial in the Daily Mail noted, rather randomly, that Amazon might buy Asda, despite Amazon’s tie-up with Morrisons and the planned sale of a stake in Asda to US private equity funds. On that subject, the Times had a big feature on the problems facing the Walmart plan to sell Asda (“Will private equity decide the price is right for Asda?”), including some background on how former Asda boss Allan Leighton cooked up the original deal with Walmart in 1999.
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were all about the exam results fiasco and the schools crisis, with many carrying photos of the PM on holiday in Scotland: the Sunday Times and the Mail on Sunday both flagged that the embattled Education Secretary was on holiday in Scarborough the week before the A-level results fiasco. The Observer flagged “Starmer tells PM: your chaos puts schools return at risk”, but the Sunday Telegraph, loyally, ran with the headline “PM: failure to reopen schools not an option”.
• Sunday’s Press and News (2): In terms of Retail/Property stories, the main front page feature in the Sunday Times magazine was on the new JLP Chairman Sharon White (“Can this woman save John Lewis?”) and although one of the main front page headlines in the Sunday Times was “John Lewis knowingly kills off its slogan” the more interesting revelation in the interview was not the decision to drop “Never Knowingly Undersold”, but the plan to row back on own-label womenswear, as well as to cut back on Travel and beauty services in John Lewis. The Sunday Times and Sunday Telegraph both flagged that the administrators FRP have been appointed to the holding company of the beleaguered Debenhams, whilst the Sunday Times noted that the embattled Harvey Nichols has brought in PwC to advise on restructuring the business. The Sunday Times also noted that the US private equity firm Apollo plans an
• Sunday’s Press and News (3): In terms of all the Economics and comment columns in the Sunday papers, we would, as usual, highlight the thoughtful column by the Sunday Times Economics correspondent David Smith (“Will this post-lockdown housing boom turn to bust?”), in which he noted that mortgage lenders are nervous because of what is to come for the economy. The Business Editor of the Sunday Times, Oliver Shah, also stuck the boot in on the bosses of the big quoted property companies after the vast sums they paid themselves before the crisis hit. We would also flag the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“Just how much political capital can Johnson risk on an EU trade deal?”), as well as the column by the veteran Observer Economics correspondent William Keegan (“Even after a U-turn, the Tories are still heading for disaster”).
• As we flagged on Friday, with a quiet week for Retail news coming up, ahead of the Bank Holiday, “The Daily Retailer” has decided to take a well-earned break and will not be published next week, with the next edition on Tuesday Sept 1st. “Premium” subscribers, however, will get this Weekend Press preview next Sunday (plus the September Calendar).
• News Flow Next Week: As we move even further on into the “dog days” of August, there is not a lot going on next week, although Monday brings the Studio Retail finals and the Motorpoint AGM, with the CBI Distributive Trades survey on Tuesday and the finals from The Works on Thursday. The week after is also very quiet, after the Bank Holiday Monday, although Tues Sept 1st brings the Applegreen AGM and the much-awaited launch of the Ocado/M&S joint venture.