Langton Capital – 2020-10-16 – PREMIUM – JD Wetherspoon, Loungers, MARS, FUL, regulations etc.:
JD Wetherspoon, Loungers, MARS, FUL, regulations etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
It’s Friday, our week in London is drawing to a close and, aside from the unopened post, the bills, rent demands & dead office plants, it has been quite a pleasant though odd experience.
An empty King’s Cross Tube Station at 7pm, bars charging you a 12.5% service charge because they won’t let you order from the bar, a deathly silence on the roads etc all of which is new to most of us.
And, talking of dead office plants, let’s hope there weren’t any office hamsters or goldfish out there that got abandoned, Chernobyl-style, on 23 March and have been guiltily remembered since.
And no kippers left in the fridge because solid and rather sour milk is one thing but a 7mth old haddock steak or chicken breast would have been quite something else.
Anyway, time’s pressing so on to the news:
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JD WETHERSPOON FULL YEAR NUMBERS: JDW will be one of the first companies to report a period of closure. Attention may be focused on current trading and comments re potential future developments. 16 Oct 2020:
JD Wetherspoon has this morning reported full year numbers and our comments thereon are set out below:
• JDW has reported LfL revenues down 29.5% for the period. Total revenue is down by 30.6% at £1.26bn.
• The pre-IFRS16 loss before tax is £34.1m compared with a profit in the prior year of £102.5m.
• JDW is reporting EPS of minus 27.6p per share compared with earnings per share of 75.5p in 2019
• There is no full year dividend (2019: 12p)
• Slowed momentum post new regulations
• The company says ‘Like-for-like sales in the first 11 weeks have been 15.0% below those of last year, with strong sales in the first few weeks, followed by a marked slowdown since the introduction of a curfew and other regulations, some of which are referred to above.’
• Chairman Tim Martin says ‘the recent curfew and introduction of table service only have been particularly damaging for trade, depressing sales for customers who find it too much ‘faff’, at the same time as substantially increasing costs.’
• He adds ‘as a result of recent changes in regulations, the outlook for pubs over the remainder of the current financial year is even more unpredictable than hitherto.’
Balance sheet – debt & capex:
• The company reports that net interest was covered 0.3 times by operating profit before interest, tax and exceptional items (2019: 3.9 times).
• It says total capital investment was £171.6m in the period (2019: £167.6m), almost all of which occurred, or was contracted, before lockdown.
• Free cash flow, after capital payments of £44.3m, £11.1m for share purchases for employees and payments of tax and interest, decreased by £155.9m to minus £58.9m
• The company reports that at 26 July, the company’s total net debt, excluding derivatives, was £817.0m (2019: £737.0m), an increase of £80.0m.
• Year-end net-debt-to-EBITDA was 9.48 times (2019: 3.36 times)
• JDW says ‘it is the company’s intention that the maximum net-debt-to-EBITDA ratio should be around 3.5 times, other than in the short term. The ratio has risen mainly as a result of the temporary closure of pubs.’
• Company chairman Tim Martin says ‘since 100 governments adopted a lockdown strategy, it was very difficult for any government to adopt a different course. However, pubs eventually reopened in England on 4 July and in the rest of the UK shortly thereafter.’
• He says ‘the lockdown was far longer than was necessary to achieve its stated objective of ‘flattening the curve’ so as to assist the health service.’
• Mr Martin says ‘the regulations and guidelines reflected in the plan drastically reduced pub capacity, but were carefully thought out and had the backing of the industry, legislators, licensing officials, local authorities and the public.’
• He says that ‘for the two months following reopening, it appeared that the hospitality industry, in difficult circumstances, was adapting to the new régime and was getting ‘back on its feet’, albeit in survival mode.’
• He says that recent regulations, however, were ‘introduced, without consultation, under emergency powers’ and he says ‘these are extraordinarily difficult for the public and publicans to understand and to implement. None of the new regulations appears to have any obvious basis in science.’
• He criticises table service, face coverings when guest visit the loos and the 10pm curfew.’
• Mr Martin praises Sweden and calls the UK government approach ‘erratic’. He says it is tinkering. The chairman concludes ‘risk cannot be eliminated completely in pubs’ but adds ‘the company has successfully adapted its business, over the last 41 years, to cope with widely different political and economic circumstances.’
• He says ‘the company and the entire hospitality industry need a more sensible and consistent regulatory framework in which to operate – the current environment of lockdowns, curfews and constantly changing regulations and announcements threatens not only pub companies, but the entire economy.’
• Total sales, at 70% of last year’s total despite the lockdown and recent slower trading, are reassuring.
• Comments on the direction of travel, though realistic, are less so.
• The 10pm curfew has damaged trade. The movement of large areas of the country into Level 2 yesterday (no mixing in pubs and also no compensation) will be a blow. This is clearly an industry rather than a stock specific issue.
• JDW should be able to keep most of its pubs open in areas that have moved into Level 3 (as it serves main meals).
• Whether it will be profitable to do so (no household mixing indoors) is another matter (but at least there is some compensation)
• The outlook, as the company says, is unclear. There are no meaningful forecasts (although we do know that the assets are capable of earning 80-100p per share in a ‘normal year’)
• But JDW does what it does extremely well and it has taken steps (dividend passed, capex reduced, debt facilities increased and a share placing) to secure its finances
• The company has in recent years significantly increased the proportion of freehold pubs within its estate (this now stands in the mid-60s, up from 41% a decade ago), which will be an advantage in a post-Covid-19 environment where landlords may be twitchy and potentially troublesome.
COFFER PEACH TRACKER – SEPTEMBER 2020:
• The Coffer Peach Tracker for September reports that UK managed pub, restaurant and bar groups ‘saw sales fall back significantly in September after August’s Eat Out To Help Out campaign boost and the introduction of the 10pm curfew at the end of the month.’
• The Tracker maintains that, with 88% of group-owned sites reopened, up from 85% in August, total sales across the whole managed sector (not like for like) were nevertheless 20.3% down on the same month last year, compared to being down just 12.2% in August.
• The Tracker reports that ‘like-for-like sales in those businesses trading were 14.7% below September 2019, having been flat in August.’
Food vs drink:
• Drink-led outlets fared less well than food-heavy units. This perhaps surprising as the 10pm curfew would be expected to impact drinkers more than diners.
• Drink-led pubs saw total sales down 22.7% and like-for-likes down 21.1% on September last year (most units being open).
• Restaurant groups, which will see revenues boosted by any of the VAT cut that they are not passing on ‘performed better…with total sales down 19.6%, but like-for-likes just 6.7% below September 2019’.
• The Tracker points out that ‘only 72% of group-owned restaurant sites were open and trading during the month. In contrast almost all (96%) of the country’s managed pubs’.
• Bar groups saw revenues down 42.7% in total and by 37.1% on a LfL basis.
• CGA reports ‘September figures show the massive importance of the Eat Out to Help Out initiative had on both sales and consumers’ willingness to go out during August.’ September has perhaps been something of a reality check.
• CGA says ‘while food sales will become an increasingly important in keeping the managed sector afloat, with table-service and the 10pm curfew in force across England and tougher restrictions in other parts of Britain, the situation is looking increasingly challenging for drink-focussed operations – and in September all parts of the market were in negative territory.’
• The Tracker reports that ‘delivery accounted for 10.4% of sales among restaurant groups’. This will be almost entirely food rather than drink. The percentage is up from a pre-lockdown level of 5.9% in February.
London vs The Provinces:
• London ‘struggled during September, with many office workers, commuters, tourists and international business travellers still staying away.’
• The Tracker reports that ‘total sales across managed pubs, bars and restaurants inside the M25 were down a hefty 32.1% on September last year, with collective like-for-like sales in those sites open down 24.2%.’
• It says that ‘outside the M25 the market saw like-for-like sales down 12.3% and total sales down 16.7%.’
• Trevor Watson of Davis Coffer Lyons says ‘the recent EOTHO scheme, followed by the curfew and now the increasingly prevalent local lockdown restrictions, means there are clearly no significant conclusions to be drawn from short-term trading trends.’
• He adds ‘the latest announcement that London is to join Manchester and enter Tier 2 is catastrophic.’ What about York? We’re going into Tier 2 as well.
• Watson says ‘it is difficult to see how many restaurants and pubs in these city centre locations will be able to stay open. Neighbourhood areas will also suffer but not to the same extent. A ‘Tier 3’ status with increased government support would be preferable for such businesses.’
• Sponsor RSM says ‘these results lay bare the deepening fight for survival faced by operators as we head into winter in the midst of tightening coronavirus restrictions and the tapering of government support.’
• Job loss announcements are likely to become more common in the coming weeks.
• RSM says ‘there is undoubtedly more pain to come but those operators in the best position to emerge on the other side will be leaner and more agile, focussing on an acceleration in delivery (accounting for 10.4% of sales among restaurant groups in September, up from the pre-lockdown level of 5.9% in February), embracing technology and balancing health and atmosphere in their venues.’
• See Premium Email for comment.
PUBS & RESTAURANTS:
York, several other towns (and London) will go into Tier Two:
• Tier 2 restrictions will apply in York, London and a number of other areas from Saturday. At the time of writing, discussions are still underway as to whether Manchester should move from Tier 2 to Tier 3.
• Tier 2 means there should be no mixing of households indoors. That puts the kybosh on meeting anyone who’s not a member of your immediate family in the pub.
• And there is no compensation at Tier 2 meaning that operators may have take a hit without support.
• The British Beer & Pub Association says that ‘a stronger, “proper package” of financial support for pubs, brewers and their supply chains in these areas will be needed if they are to survive.’
• It says that ‘pubs were already struggling to survive due to the current restrictions in place, low consumer confidence and lack of tourists and commuters in cities and towns. The additional tier two restrictions, which stop households from mixing indoors and further erodes consumer confidence will lead to the permanent closure of many pubs, unless there is an improved package of support to help compensate for the vast reduction in their revenue.’
• CEO Emma McClarkin says ‘Tier two restrictions will decimate pubs, brewers and their supply chains in these regions unless a proper package of support is given to them.’
• The impact on the supply chain is often overlooked. Support there is even sparser than it is for hospitality units. It is not likely that anyone will ever tell a bread van to cease trading, but if it delivers to pubs, the impact will be the same.
• The BBPA spells it out, saying ‘Tier two measures mean pubs can remain open, but households cannot mix inside them. This completely kills our pubs’ business model making many of them totally unviable, yet under tier two restrictions they are not eligible for any additional financial support from Government, unlike in tier three where additional support is provided. The knock-on effect to brewers and pubs’ supply chain partners will devastate them too without more support.’
• UKH has said that a quarter of a million hospitality jobs are at risk from additional coronavirus restrictions imposed on London. CEO Kate Nicholls tells mayor Sadiq Khan that the move to Tier two will be ‘incredibly damaging without additional financial support and urge you to work with us to secure that is in place before any changes to London’s classification is made’.
• Ms Nicholls says an absence of support means we ‘are looking at catastrophic businesses closures and widespread job losses in the capital as early as 1 November.’
• Loungers’ chairman Alex Reilley tweets ‘Tier 2 is an absolute killer for hospitality in London. Where will this all stop? How much devastation to livelihoods, jobs and the medium to long term health of the nation are we prepared to accept?’
• The Society of Independent Brewers says ‘these latest Covid restrictions come as a huge worry to pubs and breweries who are fighting right now to save their businesses and find a way out of the other side of the pandemic.’
• It says ‘in areas affected by lockdown we are likely to see many more small breweries closing for good, unless the Government take the simple and necessary steps to expand the support offered to hospitality businesses to small breweries too.’ It points out that ‘small independent brewers have not received direct support as the rest of the hospitality sector did — such as the Business Rates holiday or inclusion in the expanded Job Support Scheme – despite beer being an integral part of every pub in the country and making up 80% of sales for small brewers.’
• In a letter to the Chancellor, hospitality industry bosses have said they face a crisis due to new restrictions in London that will stop households from mixing indoors including in pubs and restaurants. The letter has been signed by the chief executives of Greene King, Fuller’s, Slug and Lettuce owner Stonegate, All Bar One parent Mitchells & Butlers, and Young’s.
• There will be a demo at the House of Commons on Monday.
• The letter referred to above says that ‘the perverse reality is that as a sector we are financially better off under tier 3 Covid measures than we are under Tier 2 and that is surely not right. In London alone, being in Tier 2 will mean a further collapse in trade for 2,700 pubs across London’s 32 boroughs, but no access to the emergency support available for those forced to close.’
• Drake & Morgan boss Jillian McClean has told BBC News that the move to Tier 2, where households cannot mix in pubs or restaurants, is disastrous not just for D&M but for the whole of the pubs & bars sector.
• Gaucho Restaurants is emailing customers saying that diners will no longer be able to mix in groups indoors. It says it is allowing one booking per household plus support bubble, in line with the law. Though operators are making the best of it, this will be extremely bad for business.
• Perhaps predicably, Marston’s comment that it was placing 2,150 jobs at risk has grabbed the headlines re that company.
• The BBC reports on Fulham Shore’s comments that many restaurant operators were never up to the job. Chairman David Page says ‘there were too many restaurant businesses with owners and managers convinced they could swim like Mark Spitz, but which were actually being kept afloat by some badly made rubber rings and various leaky flotation devices.’
• Mr Page says me-too rivals ‘were driven to expand by historically cheap debt, supposed high exit multiples on sale of the businesses and run by management teams who had never experienced either a downturn in the UK economy or an oversupply in the restaurant sector.’
• Loungers has updated on trading for the 24 weeks ended 4 October 2020. It says that ‘the significant outperformance of the market in the period post the commencement of reopening on 4 July has been maintained.’
• Loungers says ‘over the 13 weeks to 4 October the Group delivered like for like sales growth of 25.1%. Whilst the resurgence in Covid-19 cases increases the likelihood of additional trading restrictions, we remain very encouraged by the strength of our trading post reopening. All 168 of our café/bar/restaurants remain open and trading.’
• The group has opened two new sites, comprising Ponto Lounge in Hull and Cosy Club in Brindleyplace in Birmingham. CEO Nick Collins says ‘I am delighted with our continued excellent trading which reflects the resilience of our brands and fantastic performance of our team working in very difficult circumstances.’ He says ‘we anticipate further interruptions to trade in the coming weeks and months, but take confidence from our continued market out-performance. We remain well-positioned to accelerate our growth and to continue to lead the market once Covid-19 is behind us.’
• Property company Hammerson says that it has collected 38% of Q4 rents.
• Craft beer specialist Flavourly has created a new delivery pack of craft beers all brewed in and around London, in a bid to generate revenue for independent local breweries impacted by hospitality industry restrictions.
• MatchPint and Useyourlocal have announced a partnership to support local pubs.
• Bedlam Brewery has produced a limited edition brew, ‘The Dame’, to honour Dame Vera Lynn.
• The pubs code adjudicator is to fine Star Pubs & Bars for pubs code breaches. The PCA has told The Morning Advertiser that the move demonstrates she is both ‘a regulator with teeth’ and is ‘prepared to bite’
HOTELS & LEISURE TRAVEL:
• Grant Schapps has said that the quarantine period for returning travellers to affected countries is likely to be cut to one week. This perhaps partly to reflect the fact that the UK has a much higher infection rate than many of the countries in question.
• Travellers returning from Italy will have to self-isolate for two weeks from 4am on Sunday morning.
• STR reports that occupancy across the US hotel industry was down by 29% year on year in the week to 10 October. Average daily rates were down by 26% and REVPAR was down by 48%.
• Merseyside gym Body Tech Fitness has been fined £1,000 for not shutting in accordance with Tier 3 instructions.
FINANCE & MARKETS:
• PM Boris Johnson has said he is disappointed that the UK has failed to make more progress with the EU over future relations.
• The OECD has said that a disorderly Brexit would hamper the economy’s recovery from the impact of the Covid-19 pandemic.
• Sterling weaker at $1.289 and €1.1011. Oil lower at $42.70. UK 10yr gilt yield off 5bps on economic fears at 0.18%. World markets lower yesterday but London set to open up around 50pts.
RETAIL WITH NICK BUBB:
Boots Watch: The Walgreen Boots Q4 results in the US yesterday (for y/e August) revealed that Boots UK Retail LFL sales were down by as much as 29%, but that was better than the 48% slump in Q3 and on the analysts conference call the CFO said that the Q4 outcome was better than feared, helped by “targeted marketing” initiatives, whilst Online sales soared by 155% in the period. The turnaround of Boots UK performance is a key priority for the group in the new year and, given the continuing weakness of footfall in city centres, the further “digitalisation” of the business is a big focus (helped by more in-store picking of Online orders).
Today’s News: While we wait for the much-awaited John Lewis Partnership Strategy review (due at 7.45am), the morning has been enlivened by the final results from the pub company Wetherspoons and the ravings of its “colourful” boss Tim Martin against the Government’s “erratic” and “capricious” policies on controlling the COVID pandemic. There has also been some interesting CFO moves, with Superdry announcing (ominously?) that its new CFO Nick Gresham has stepped down with immediate effect and (coincidentally?) Howden announcing that its long-serving and well-regarded CFO Mark Robson is moving on at Christmas and will be replaced by one Paul Hayes, from a company called Consort Medical. There has also been news that the wretched CMA has reared its ugly head again by belatedly deciding to look into the planned disposal of Findel Education by Studio Retail. And the beleaguered Motor dealer
BDO High Street Sales Tracker: The BDO High Street Sales Tracker today for medium-sized Non-Food chains flags that things picked up in w/e Sunday Oct 11th: BDO Fashion LFL sales were marginally up, by 0.9% (even though Store Fashion sales were down c35%), whilst Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were up by 6.4% (down c25% in Store sales, but up c119% in Online sales).
News Flow Next Week: A quiet week kicks off on Monday with a Capital Markets Day for the shopping centre landlord Landsec. Thursday brings the Superdry AGM and then we get the much-awaited GFK Consumer Confidence index for October first thing on Friday, along with the ONS Retail Sales figures for September.