Langton Capital – 2020-09-08 – PREMIUM – Fevertree, DPEU, Ten, financial pressures, hospitality sales etc.:
Fevertree, DPEU, Ten, financial pressures, hospitality sales etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Bit busy this morning, on to the news:
ADVERTISE WITH US:
Langton’s free email now carries adverts. See front page of website for today’s copy & contact us for further details.
IS THERE A BACKLOG OF FAILED COMPANIES? Companies may not fail in the order of their distress levels. Size will be a factor and banks & landlords will have their own priorities. 8 Sept 2020:
• We spent a large part of 2019 periodically reporting on the accounts of private companies that had lodged numbers with Companies’ House.
• Some of these were very robust companies. But it should be said, a larger number of them were not.
Private companies’ accounts:
• These have to be examined at the operating level and at the net level because, if the owners of the equity are also the owners of the debt, they may not be interesting in the bottom line but rather in the EBITDA and in the operating profit
• For companies where this is not the case, a net loss is more dangerous as it likely reflects the accrual of liabilities to third parties who may have a different agenda to that of the shareholders
• And even in this case, if the company is truly in a ‘build-up’ phase – and crucially if it has the capital to continue trading for some time, the bottom line may not tell the whole story
• But there were and are a number of companies kept alive on a wing and a prayer by persuasive entrepreneurs who, often genuinely, think that there is a lot of jam tomorrow
• By and large, loss-making start-ups cannot easily access debt. Some do but more source capital from, broadly in this order, themselves, friends, family, friends & family of the above, angel investors, The Crowd or private equity
• And though one might hope for a little sophistication from the above, this is often lacking. Langton is not immune as the story and earnest presentations overcome doubts and then comes Covid-19
Why have fragile companies not already disappeared?
• Without being too macabre about it, there may be a logjam at a number of places on the way to the graveyard
• Larger companies, witness all those CVAs and the fees that are being paid to advisors, muscle their way to the front of the queue leaving struggling tiddlers thinking their time may never come
• But, sadly, it probably will
BREWHOUSE & KITCHEN: Full year numbers for the year to 28 September. Too dated to be very relevant but, as they were signed on 27 August, the comments on Covid are interesting: 8 Sept 2020:
• There isn’t meant to be a clever link between these comments and those before. It’s just the timing of Brewhouse’s report to Companies’ House made it relevant.
• These are not very meaningful but, for the record, in the year to 28 September 2019, Brewhouse & Kitchen lost £976k after tax on £15.17m of turnover (2018: loss after tax £761k on £14.14m.)
• The operating loss was £829k (2018: loss £561k).
• Shareholders’ funds rose to £18.2m after the loss but also after a share issue during the year (2018: £17.4m)
• The group had around £4.3m of bank borrowings in both years with net debt after knocking off cash of £3.5m in FY19 up from £3.0m in FY18. The extra funds raised from shareholders look to have been spent on fixed assets.
• Whilst it wasn’t possible to anticipate Covid-19, that could make cash-management a little more difficult than it would otherwise be
• Here we have a picture, not at all uncommon, of a relatively well-regarded company that, if all went well, could push into profitability over the medium term.
• Of course, a company accruing freeholds, as Brewhouse & Kitchen is, could be generating value other than through its P&L account
• However, it is probably fair to say that Covid-19 has knocked things off course.
Comments on Covid-19:
• As mentioned, the accounts were signed on 27 August, at which time, the company had strong views on Covid-19
• B&K initially comments ‘the continuing Brexit uncertainty and cost headwinds around wages, input costs and business rates continued to make the trading conditions difficult throughout the hospitality sector.’
• It says ‘although the current uncertainties surrounding the Covid-19 pandemic have delayed the future expansion of the company, the directors are of the opinion that the company will return to profitability within the foreseeable future.’
• It says Covid-19 is a major risk to the business. It says ‘the business recommenced trading on 6 July 2020 with’ a number of measures in place to ensure the safety of staff and customers:
• B&K says ‘although we expect that turnover will be reduced whilst Covid-19 is circulating in the population, the reduction of social distancing to l metre plus has been a great help to encourage customers back to the brewpubs. We anticipate that turnover will recover to pre-pandemic levels within one year.’
• Covid will have a wider impact on the economy and on customer’s job prospects.
• B&K says ‘we have loans of £4.3m repayable in 2021 and there are banking covenants pertaining to the loans, one of which have been breached. However, the lender has agreed that the breached covenant is replaced and the directors are of the opinion that the company will meet the new covenant until repayment is due.’
• B&K says ‘at the time of writing this report on the future outlook of Brewhouse and Kitchen, the business is managing its first wave of openings as it emerges from the period of enforced closure due to the Covid-19 pandemic crisis.’
• It says it had traded strongly up to closure
• it says ‘we are actively continuing to develop the franchise model which increases our revenue mix, reduces our capital at risk while increasing revenue and leverages the growth of our estate. We also continue to position and prepare our business for a possible liquidity event, though this is highly unlikely in the next 12 months given the impact of the pandemic on the wider marketplace.’
• Liquidity events are often interesting. They are sometimes aspirational.
• Re going concern, the company continued to be loss making.’ It says ‘unfortunately, the Covid-19 pandemic has seriously affected this work [to move the company back into profit].’
• B&K says ‘it intends to raise further funds to provide working capital and continue with its expansion plans. To this end, the company has already received 3 offers of refinancing of the existing loans. In addition, the company intends to grant a rights issue to raise circa £2.5m.’
• The directors say they ‘have a reasonable expectation that the company is a going concern for at least 12 months from the date of signing the accounts.’
• The auditors do not disagree.
PUB & RESTAURANT NEWS:
Levels of trade:
• S4labour has reported that weekly hospitality sales were up 19.9% on pre EOTHO levels last week. That’s great but the week died a bit of a death as S4 says that, after Wednesday with ‘the Eat Out to Help Out scheme came to an end, children returning to school and many going back to work, hospitality sales tailed off with a 12.8% week on week decline.’
• S4laboursays ‘London bore a less severe week on week dip than the rest of the country, down 9.4%, but up 26.4% compared to the week before the EOTHO scheme launched.’ It says ‘outside the capital, week on week sales were down 13.4%, but up 18.8% compared to the week before EOTHO.’
• Perhaps not surprisingly, S4labour says that food sales outperformed drink over the EOTHO period. It says ‘however last week, with EOTHO not available for the majority of the week, there was for the first time since July, a relatively modest difference, with drink sales slipping 11.5% and food sales down 14.0% on the previous week.’ Chief Customer Officer Sam Wignell says ‘last week was interesting because we had one day of EOTHO and a bank holiday Monday.’
• Wignell adds ‘this week will be the first full week without the government backed discount and so give a much clearer indicator of the health of the sector. While week on week sales were down, it is highly encouraging to see operators are still trading well above where they were a 6 weeks ago. On the whole, these set of figures point to a healthy level of public confidence albeit with a hard road of recovery ahead.’
• Analyst Peter Backman has published his latest Weekly Briefing Report reminding observers that the three essentials of the infrastructure of eating out are: places, people and product. He says each of these has been damaged to a great or lesser extent by Covid-19.
• Backman says that’ the supply chain for product has been affected least because retail has been a secure alternative market for many suppliers (but not distributors) and that will clearly remain.’ He says ‘but for the future, we will also have to see what effect Brexit might have on the supply chain.’
• Backman says there is some hope that the worst is behind us. However ‘it is likely that the government will not be there with the same level of financial support as last spring – businesses will need to have the financial, personnel and other resources in place to cope with a dramatic local loss of custom for a period.’
• Barclaycard has reported that UK consumer spending in August exceeded the figure for the same month in 2019 for the first month since the Covid-19 crisis began. It says this was helped by a rebound for clothing, pubs and bars. It says, however, that shops continued to struggle as more was bought online.
• Consumer spending was up 0.2% in August vs last year. Spending in supermarkets remained strong, at +14.9%. Barclaycard says ‘it’s encouraging to see the first uplift in spending after such a turbulent time for retailers. It seems the final throes of summer have spurred households to get out and about with clothing stores, pubs and bars welcoming growth for the first time since lockdown began.’
• The figures will have been skewed somewhat by the EOTHO scheme. Barclaycard still reports that some sectors remain depressed, including leisure, hotels and accommodation, with spending here down 19.1% on the same month last year, despite a 10pps appreciation since July.
• New West End says that footfall was down 1% week-on-week in Week 36 as a whole. A few days were better but, overall, the week dipped a little on last week. Whilst ‘footfall in the West End & Mayfair has grown by 76% since non-essential retail stores have reopened in Week 25 (w/c 15 June)’, volumes are still down by around 53% on the same week last year.’
• Cumulatively, year to date footfall is down 57% on last year. This won’t be improving much if the marginal weeks we are now clocking are still down by 53%.
• Netflix’s chairman has said working from home could make debating ideas in the workplace harder. However, Reed Hastings, who founded the business, said his own workforce would not be pushed to return to the workplace until there was a vaccine for Covid-19.
Other Covid-19 issues:
• Nielsen has reported that US off-trade sales have settled back after an initial Covid-19 lockdown inspired boom. The industry, however, is still recording enviable growth numbers.
• Nielsen says that US off-trade grew 17.4% last week, slightly down on the growth rate seen the previous week, and well below the 25.2% of the whole Covid period to date.
• The Scottish Licensed Trade Association has said that 12,500 hospitality jobs north of the border are at risk due to depressed trading. The SLTA says 45% of owners did not expect to return to normal trading until a vaccine for the disease was found.
• Pizza Express’s CVA has been approved by creditors. The company will now move to shut 73 restaurants and make around 1,100 staff redundant.
• Some 89% of creditors voted in favour of the deal with 63% of landlords and a higher proportion of other creditors approving the deal.
• Pizza Express says it would like to ‘thank its creditors for their support during this period and look forward to ongoing partnership as the hospitality industry recovers to growth.’ It adds ‘as previously announced, the CVA is a key component of a wider financial restructuring which will strengthen the business for the future. The successful vote unlocks the company’s ability to actively address the challenges brought by Covid-19.’
• Majority owner Hony Capital is reported to have put the business up for sale.
• Commenting on CVAs in general, Pragma says that ‘there have been well publicised administrations and CVAs over the last few months, but many of these retailers had pre-existing challenges that were exacerbated by lock-down.’ It is hard to disagree with this.
• Fevertree Drinks has reported H1 numbers to end-June saying that the company turned in a ‘resilient outcome for the half-year, further strengthening our position as the clear global leading premium mixer brand.’
• Revenues were down 20% at £48.3m with adjusted EBITDA of £23.8m, down 35% on last year. CEO Tim Warrillow says ‘our performance in the Off-Trade over the first half of the year has been very encouraging with sales across our regions exceeding our expectations.’
• Warrilow says ‘we have had an encouraging start to the second half of the year and, while we certainly aren’t immune to the ongoing challenges of COVID-19, our performance and our investments so far this year, coupled with the growing interest in long mixed drinks, gives me confidence that we will exit the crisis in an even stronger position than we entered it.’
• DP Eurasia has reported H1 numbers to end-June saying that group sales rose by 3% over the period with adjusted EBITDA down 73.9% at 12.1 million TRY. CEO Aslan Saranga comments ‘our Turkish business performed well, indeed broadly in line with our start of year pre Covid-19 expectations whilst the performance in Russia reflected the heavier operational constraints imposed on us along with the increased competition due to the aggregators.’
• DPEU says ‘we have continued to make operational progress during the period’ and says ‘our technology and product innovation pipeline remains strong with new pizzas to be launched in the second half of 2020 in both countries.’
• DPEU concludes ‘assuming that we are not faced with significantly worse operational constraints…the Board remains confident in the Group’s near-term plans for business continuity and cash flow as well as its overall prospects in the longer term.’ It says ‘however, given the considerable uncertainty ahead, including the risk of additional lockdowns and a possible decline in consumer spending in the countries in which the Group operates, the Board is not in a position to provide meaningful guidance on the likely financial and operating results for 2020 and will continue to update the financial market in due course.’
• Fuller’s is to reopen The Trinity in Borough following an extensive refurbishment.
• Shake Shack says it is ‘thrilled to finally share the Vegan ShackBurger which will be available at select Shacks (Canary Wharf, Mansion House, Brent Cross and Stratford) starting 8th September for a limited time only.’
HOLIDAYS & LEISURE TRAVEL:
• Jet2holidays is offering £100 per person discounts off the first 50,000 summer 2021 package holiday bookings made from midnight tonight. See yesterday’s comments about the logical reaction to an excess supply over demand.
• Jet2 is introducing a ‘sale’ that includes 10% off Jet2.com flights to all summer 2021 destinations.
• Jet2 says ‘with Autumn already creeping up on us, after what has been an uncertain and difficult time for everyone, we want our independent travel agency partners to be able to give customers something to really look forward to.’
• Airline and travel agents’ spending was down 61% on the same month last year. These numbers are a) better than they were but b) still poor. They show the sector still has a lot of ground to make up.
• The government is introducing a new, regionalised travel corridors policy which, at first glance, seem to have the potential to complicate things. The number of differences between the regulations in the UK’s four countries is multiplying.
• The government is to introduce restrictions on travellers returning from seven Greek islands from 4am on Wednesday.
• Carnival brand Costa Crociere, which is based in Italy, has announced that it is suspending its 2020-2021 season in South America. It is also announcing the opening of 2021-2022 season sales in the region
• Costa says ‘Costa Cruises has been sailing in South America uninterrupted for 72 years and we are committed to continue operating here.’ Just not this year.
• Sky reports that Fosun, the owner of failed tour operator Thomas Cook, is ‘plotting an imminent relaunch of one of the most prominent names in the British travel industry.’ Sky quotes an insider as saying that the timing remains uncertain.
• Your Car Hire has ceased trading after 17 years in business.
• Ten Entertainment has announced the appointment, with immediate effect, of Graham Blackwell, initially as Interim Chief Executive Officer.
• Napster, which is now owned by British tech company MelodyVR, has started to make noises about providing music services to customers once again.
FINANCE & ECONOMICS:
• UK EU negotiator David Frost has said that the EU needs to be more realistic.
• Sterling down at $1.3137 and €1.1121. Oil lower at $41.91. UK 10yr git yield unchanged at 0.25% .World markets mixed yesterday but much better in UK. UK set to open up around 10pts.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
Today’s News: As well as the scheduled updates from Halfords, JD Sports and Travis Perkins/Wickes, which are all good and reassuring, there has also been an unscheduled update from the Sunderland-based sofa and carpet chain ScS, flagging that recent trading has significantly exceeded its expectations with LFL orders up 51% over the last 6 weeks, demonstrating the increased investment by UK consumers in their homes (as highlighted by the BRC-KPMG survey for August: see below).
BRC-KPMG Retail Sales figures for August (the 4 weeks to Aug 29th): We expected today’s figures, which came out overnight, to show that total sales were up usefully again (after the 3.4% increase in June and 3.2% increase in July), given further strong Online sales growth and the continued transfer of spending away from the service sector and the overall growth outcome was indeed very similar, 3.9% up (up 4.7% “LFL”, adjusting for closed stores). The BRC again pointed to the strength of demand from home workers and noted that the more autumnal weather at the end of the month compared to last year shifted some spend away from Food to Fashion. The exact Food/Non-Food split of total sales last month is buried within the 3-month moving averages (of +5.9% and +1.4% respectively), but it looks to us as if both total Food sales and total Non-Food sales were c4% up (with Non-Food the stronger if
News Flow This Week: While The Hut IPO bubbles away in the background, tomorrow is a quiet day for scheduled company news, but Thursday brings the Morrisons interims, the Dunelm finals, the Dixons Carphone AGM update and the N Brown AGM.