Langton Capital – 2020-10-30 – PREMIUM – Tasty, DP Poland, TUI, Starbucks, current trading & other:
Tasty, DP Poland, TUI, Starbucks, current trading & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Yesterday, a day when it was already pouring with rain, was truly topped off by having to spend several hours producing tax calcs for HMRC, the reward for which will probably be that I have to pay them some money.
So, it wasn’t exactly a win-win-win.
Indeed, the day had a negative vibe from the start because, in order to produce accounts and tax calcs, you have to unearth documents that you’ve been studiously ignoring for months and that has a touch of a ‘prod the wasps’ nest with a stick and see what happens’ feel about it.
Because there will doubtless be unpaid bills in there that you could swear you had paid, reminders to do things you really don’t want to do and zero unbanked cheques, lottery winning tickets or emails informing you that a long-lost aunt has popped her clogs and left you a 100-acre vineyard in Australia.
But it’s mostly done now.
Just need to type up the docs, deliver them to the bean-counter and arrange the obligatory Zoom call to go through in more detail just what we’ve been doing wrong financially for the last 12mths, how qualified accountants like ourselves should be in control of their own financial destiny and how a 180-degree shift in most of what we do could be a move in the right direction.
Anyway, it’s Friday today, that’s something. 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.
PUBS VS RESTAURANTS: We posited 18mths ago that pubs were more flexible assets than restaurants. The CVA flurry suggested we were right and then Covid-19 struck. We remain of the same view. 30 Oct 2020:
• Although pubs & restaurants are often referred to in the same breath, they are arguably not the same thing at all.
• They both trade in food & drink but there, often, the similarities end.
• Yesterday, we looked at the Supply of and Demand for, units. Capacity increases (restaurants) and reductions (pubs) have been central to diverging performances.
• Today, we comment on costs, pricing, discounting, distress, CVAs and the like. We’ll also consider tenure (freehold vs leasehold), existential threats (delivery etc.), government action (favouring restaurants & café culture) and alternative uses
• Next week, we’ll pull it together & ask what it means for survivability in the age of Covid.
• The rush to put on capacity across the restaurant market has pushed up rental costs, the price of fit-outs and the cost of labour, particularly chefs.
• Competition for sites has resulted in some crazy prices being paid and to gazumping and the competition for staff has increased staff turnover and raised training costs.
• None of this was good. Some of it impacted pubs, though to a lesser extent than restaurants.
Keeping it simple. Last year, we said:
• Cheap money + lazy, entitled, me-too concepts => overcapacity.
• Overcapacity + economic slowdown => discounting, CVAs & closures.
• Capacity is sticky. The next best use of a restaurant is as another restaurant.
• We said: ‘there’ll be blood on the streets but outlets selling the right product from the right units at the right price to the right customers will still do just fine.’
• Covid has accelerated the above. It has raised the hurdle for survivability.
Pre-Covid symptoms of overcapacity:
• There has been much talk of co-morbidities. In the context of restaurants, having a rubbish (or simply undifferentiated) product, inattentive and poorly motivated staff with a high rate of turnover, high rents etc. are co-morbidities.
• Pre-Covid, there were a rash of CVAs in 2018. Many if not most of these companies have had another crack at CVAs this year. They did not cut quickly enough or deep enough
• Discounting was another symptom. This had a ‘beggar thy neighbour’ effect. It didn’t really do anybody much good.
• There may not be a lot of point discounting at present, but at least EOTHO was funded by the taxpayer
• Restaurants, prima facie, have not been regulated against as intensely as pubs.
• But many have not fared well. CGA suggests a quarter haven’t reopened and they may never do so.
• Busts have been delayed by taxpayer support. And banks have bigger fires to fight, administrators are too busy to get involved, the HMRC might be a little less aggressive than usual etc.
• But the music has stopped. As Jeremy Irons says in Margin Call: ‘standing here tonight, I’m afraid that I don’t hear – a – thing. Just… silence.’
Other existential threats, alternative uses etc:
• Delivery was and is a major threat and opportunity. But mostly a threat.
• And it is a bigger issue for restaurants than it is for pubs.
• Re alternative uses, this has two meanings. What other use can the property be put to if you want to exit it – but also, what other things can you do in the space as an ancillary service?
• Pubs are often freehold, they can be knocked down or converted into residential. Leasehold restaurants are not as flexible. The next best use for a bust restaurant is – a restaurant.
• This may iterate 3, 4, 5 times before anyone really scraps £400k to £600k of fixtures, equipment etc.
• And ancillary services are more numerous for pubs. Gaming machines, games, sports (participation and to watch professional sport), beer gardens, various societies, accommodation (as well as food) can provide additional income.
• But customers go to restaurants for one main reason, to eat.
• We cautioned 18mths ago that a rising tide (a strong economy) could still float all boats. This most definitely has not happened
PUBS & RESTAURANTS:
Covid & reactive legislation:
• Some sympathy for flip-flopping legislators as it may be impossible to ‘get ahead’ of the virus. That said, a plan would be helpful.
• The BBPA says there are ‘worrying times ahead for pubs, brewers and suppliers in Nottinghamshire facing tier three restrictions and 9pm cut-off on off-license alcohol sales. CEO Emma McClarkin says that Nottinghamshire-wide rules mean that ‘548 pubs who don’t serve substantial meals will be forced to close. 275 food led pubs will be able to remain open if they choose, but their trade will be decimated.’
• Langton shouldn’t get too wound up about the use of the word ‘decimated’ (which means to reduce by 10%) as, in common parlance, it means clobbered, ruined, devastated etc.
• The BBPA says it is ‘hugely worrying to see this additional alcohol curfew put into place with absolutely no evidence to show how it will fight the spread of the virus. SAGE itself has already called into question the effectiveness of the 10pm curfew on hospitality and this 9pm cut off for off-license alcohol sales in Nottinghamshire is yet another example of layer upon layer of restriction with no proper evidence for its effectiveness in the first place.’ Fair shout.
• The BBPA says ‘grants must also be made available to the brewers supplying pubs and off-licenses, who will lose a big proportion of their business overnight from this.’
• The BBPA has said that changes to Business Rates are required ‘for pubs to survive and thrive after COVID-19.’ It calls for an extension of the 100% relief for retailers beyond March 2021’
• Hull & the East Riding of Yorkshire are to go into Tier II. York infections are falling, as they are in Newcastle, raising hopes that a move into Tier III for some regions will not be necessary.
• UK Hospitality Cymru is calling for more help for Welsh hospitality businesses during the “firebreak” lockdown. It says ‘the package of restrictions currently in place is having a hugely debilitating effect on Welsh hospitality businesses.’ It goes on to say ‘we fully understand the need to control the spread of the virus and promote public health [but] we need help to do that and businesses need support to survive this winter and keep jobs secure.’
• Drinks Business quotes a number of London restaurant operators as saying that ‘Tier II is like being cut off at the knees’. Langton would point out that, before the official lockdown in March, PM Boris Johnson advised customers not to visit pubs although he did not instruct them to close. Tier II arguably has a similar impact.
Jobs and job losses:
• We try to temper the bad news with some good but, at present, that’s not remotely possible and it would open the door to claims of false equivalence.
• The Furlough scheme finishes this weekend. Furlough II, which can only be claimed for a period when units are forced to close (so it will exclude restaurants, food-led pubs, breweries, food distributors and the like) isn’t really going to move the dial for a number of companies and it is likely that the rate of job losses will pick up.
• There are a lot more hoops to jump through but S4Labout says ‘the improved version of the JSS is a big improvement for the sector on the previous version and should be seriously considered by most operators. We would recommend talking to your scheduling/payroll provider and getting an early understanding of how they will support you.’
• The Mayor of London, Sadiq Khan, has said ‘with the Government’s furlough scheme coming to an end this weekend, it will increase the huge anxieties faced by many workers across the capital.’ He says ‘I welcomed the changes to the flawed Job Support scheme that the Chancellor announced last week. But for many businesses facing acute financial problems in London’s retail, hospitality and cultural sectors this won’t be enough to prevent further closures and the devastation of more unemployment.’
• Khan says ‘the collapse of tourism has left these sectors without any prospect of returning to normal levels of business for many months to come. We urgently need a more comprehensive package of financial aid from the Government which reaches all of the businesses now facing the real prospect of having to close their doors as a result of COVID-19. This includes the same level of support for job retention as the original furlough scheme.’
• Certainly, there will be some claims that commentators are playing politics but, in London in particular, trade is dire.
• William Lees Jones comments in the Daily Mail that small brewers and pub owners are finding themselves truly up against it. He says ‘we don’t want to be the generation that turns out the lights.’ He says his business is suffering more than at any other time, including both world wars, adding that the firm is in ‘survival mode.’
• The BBC reports that ‘British employers planned making redundancies at close to a record level in September.’ It says ‘some 1,734 employers notified the government of plans to cut 20 or more posts, close to the peak levels seen in June and July’ adding ‘those were the highest levels seen since 2006, the earliest date for which figures have been published.’
• The data was released to the BBC after a Freedom of Information request. Companies intending to make 20 or more redundancies need to inform certain authorities.
• Begbies Traynor’s Red Flag Alert survey shows that over half a million companies are in ‘significant distress’. The scale of the problem is being masked as banks are fighting major fires first, landlords find themselves voiceless and evictions are not currently possible.
• Begbies says ‘unfortunately for the many zombie companies in existence across the UK, a perfect storm is on the horizon.’ It adds ‘with so many businesses limping along there could be a flood of insolvencies when the courts do get back to anywhere near normal capacity and attempt to clear the backlog of pending cases.’
• Aviation and retail are currently the worst impacted.
• Pizza Express has said it is to make another 1,300 staff redundant as trading has worsened again in the face of tightened restrictions. The company already cut 1,100 jobs in August.
• Pizza Express says ‘unfortunately, the recent increase in Covid-19 cases is again causing footfall to decline across the UK. As this is expected to continue for some months, we sadly need to make changes that will impact more of our team members.’ It says ‘we believe that this difficult decision will give us more resilience through the next six months and help us to continue serving our customers in our restaurants and at home in the years ahead.’
• The 48th edition of CAMRA’s Good Beer Guide warns that the number of breweries in the UK is falling for the first time in a decade. CAMRA says ‘many pubs and breweries have fought hard and the majority have survived the first lockdown, but it’s clear the industry was already in a vulnerable position when COVID-19 hit. Since then, breweries have all but been forgotten about, and may even be hit with higher taxes as the Government considers changes to Small Brewers Relief.’
• CGA reports that sales across some parts of the hospitality industry have been reduced by a half in Q3. It says that its Quarterly Tracker indicates a £53bn drop in sales in just six months and an urgent need for more support.
• CGA says the sales fall, of 48%, ‘equates to a shortfall of £17bn on the same quarter in 2019. Hospitality’s sales for the 12 months to the end of September totalled £80.3bn, the Tracker shows—£53.2bn less than the £133.5bn that the sector contributed to the UK economy in 2019.’
• CGA adds ‘the huge drop in sales comes despite an injection of trade from the Government’s Eat Out to Help Out promotion in August. Since the scheme came to an end, tough local lockdowns and falling consumer confidence have cut into sales again, highlighting the need for extensive financial support while restrictions remain in place.’
• UKH says ‘this is clearly dreadful news and made all the more desperate when combined with the expectation that Christmas will be, for many businesses, very bleak. Regional lockdowns and additional restrictions are also beginning to bite businesses hard. This highlights the need for clarity on the roadmap for businesses in tier 2 and 3 regions. We need some idea of how businesses can plan to move out of the higher tiers, to give themselves a half chance of success. Otherwise, these awful figures are likely to be surpassed in Q4.’
• CGA adds ‘the Tracker makes plain the seismic impact of COVID-19 and restrictions on hospitality. After sales were all but wiped out in the second quarter, a 48% fall in the third is not the recovery the sector was hoping for, in spite of the temporary boost from Eat Out to Help Out. Hospitality’s sales are inextricably tied to government restrictions on trading and socialising, and every new measure deals another blow to operators and the supply chain. Businesses have responded to the pandemic with resilience and innovation, but they need proper, sustained support over what is going to be an extremely challenging winter.’
• The Telegraph reports that a second lockdown ‘will destroy hospitality and the high street’. This despite the fact that France and Germany have decided to go down the lockdown route. The BRC says the government ‘should not risk the retail recovery by closing stores during the all-important run up to Christmas’.
• Sector investor Imbiba has said that it ‘is very much open for business; it’s time to be bold….’ It says there will be casualties in the coming months but adds ‘great businesses are born out of the most difficult times.’
• Imbiba says ‘whilst it may sound counter-intuitive to say whilst we’re in the eye of the storm of Hurricane Covid, we at Imbiba strongly believe there will be once-in-a-generation opportunities for those businesses that can survive the chaos and who are brave enough to pounce as the world returns to some degree of normality. With less competition, the availability of great people and consumers thirsty to make up for lost time, the post-Covid Years could and should be very buoyant for our great sector.’
• Trade bodies have estimated that global wine production increased 1% this year over last.
• Starbucks has reported its Q4 (to end Sept) numbers saying that LfL sales were down 9% in the US and down 3% in China during the period. CEO Kevin Johnson says ‘I am very pleased with our strong finish to fiscal 2020, underpinned by a faster-than-expected recovery in our two lead growth markets, the U.S. and China. These results demonstrate the continued strength and relevance of our brand, the effectiveness of the actions we’ve taken to adapt to meaningful changes in consumer behavior and the extraordinary efforts of our green apron partners to serve our customers and communities in challenging circumstances.’
• For Starbucks, global comparable store sales ‘declined 9%, driven by a 23% decrease in comparable transactions, partially offset by a 17% increase in average ticket.’
• It says ‘international comparable store sales were down 10%, driven by a 15% decline in comparable transactions, partially offset by a 7% increase in average ticket; China comparable store sales were down 3%, with comparable transactions down 7%, partially offset by a 5% increase in average ticket; International and China comparable store sales are inclusive of a benefit from value-added tax exemptions of approximately 2% and 4%, respectively.’
• Re 2021, Starbucks says LfL sales growth should be between 18% and 23%. It says it should open a net 1,050 new stores in the next financial year.
• Tasty has reported H1 numbers to end-June saying that revenue fell to £8.7m from £21.1m in the prior year. The group reports a loss after tax of £11.0m versus a loss of £0.8m in the prior year.
• Tasty says it had net cash of £3.2m (30 June 2019: net cash £0.5m) at end-June. The company says ‘2020 has been an extremely difficult year which required swift action to mitigate the extraordinary challenges faced. Tasty was quick to react to the Covid-19 outbreak.’
• The company adds ‘having steered the Group to a debt free position following the sale of More London dim t for £2m in January; we were in the fortunate position to have no banking covenant pressure during the shutdown of the estate due to Covid-19 restrictions implemented in March.’ It says ‘whilst the trading environment continues to be extremely challenging and ever-changing, with the additional bank facility and support from our creditors and landlords, we are hopeful that we will be able to navigate our way through these difficult times due to our agility and restructured operational base.’
• Re the outlook, Tasty says this ‘remains extremely challenging and uncertain. The actions that the Group has undertaken to restructure, reduce the size of the estate and potentially reduce the Group’s rental cost base should ensure that we are in a better place for the future. However, the Board expects future trading to remain unpredictable and exceptionally difficult with the threat of further local lockdowns, tighter restrictions and the possibility of full lockdown still remaining. We will continue to monitor the situation and remain ready to respond.’
• Tasty ‘is continuing to work with its advisers, KPMG, to assess the potential impact of Covid-19 on the business and the various strategic options available to the Group.’ This with regard to a potential CVA.
• DP Poland has reported H1 numbers to end-June saying that system sales for the first half were up by 2.5% with positive growth in Q2 and +8.9% in Q3. The group CEO Iwona Olbryś says ‘with the delivery market growing and the use of digital and online payments increasing we believe that we are well positioned. Alongside our delivery expertise, we have a strong brand, an experienced and dedicated team and a reputation for quality of product and services. We have all the ingredients to continue growing.’
• Ms Olbrys says ‘work continues on the potential acquisition of Dominium S.A., with both parties delighted to receive Polish Anti-trust clearance recently. Further announcements will be made as and when appropriate.’
• Re current trading, DPP says ‘the year 2020 is undoubtedly without precedent. We are all facing the COVID-19 presence and its impact on our lives and our businesses. Further Government restrictions were imposed last week across Poland which affect the food and beverage industry, but these new rules do not currently apply to delivery and take-away food. Meanwhile, the Polish economy continues to be perceived as more resilient than many of the other European countries.’
• It says ‘the delivery market is growing, digital and online payments are growing and in this environment we believe that we are in a good position.’ It adds ‘we have all the ingredients to continue growing.’
• Amazon has reported Q3 results saying that Xmas sales should be boosted by Covid-19. The shares fell 2% in after-hours trading.
• Yum! Brands has reported Q3 numbers saying that operating profits fell by 2% with system sales growth of 1%. The group has 2% more units but LfL sales fell by 2% as well.
• YUM CEO David Gibbs says ‘third-quarter results were encouraging, demonstrating the resilience of the Yum! portfolio as Yum! generated year-over-year core operating profit growth, continued to reopen temporarily closed restaurants and achieved global same-store sales growth of approximately flat, in aggregate, for our open store base.’
• The company says ‘for the second consecutive quarter, digital sales increased by more than $1 billion over the prior year and set a single quarter record of $4 billion.’ CEO Gibbs says ‘I’m confident that by continuing to leverage our unmatched scale and champion the technology-centric customer experience, we will drive global growth, enhance unit-level economics and maximize long-term value for all of our stakeholders.’
• Re the brands, system sales were up 5% at Taco Bell but down 1% at KFC and they were 4% lower at Pizza Hut.
• Flat Iron is to open its latest site at Marylebone.
• Heineken is to acquire five beer & cider brands from Asahi in order that the latter satisfy a competition ruling post its purchase of Carlton & United Breweries.
HOTELS & LEISURE TRAVEL:
• TUI has announced the completion of a further Aircraft sale and leaseback agreement with BOC Aviation Limited. It says ‘the two new aircraft are expected to be delivered during Winter 20/21.’
• Royal Caribbean has reported Q3 numbers saying that, having suspended operations due to Covid-19, it is reporting a net loss for Q3 of $1.3bn versus a profit of $883m in the same quarter last year.
• RCL says it ‘continues to work with government and health authorities across the globe’ and that it will resume cruising when it is able. The group received approval to sail from the Singaporean Government recently and will resume cruising from Singapore in December 2020.
• Re the outlook, RCL says it ‘cannot estimate its near or longer-term financial or operational results with reasonable certainty.’ It says ‘booking activity for the first half of 2021 is aligned with the Company’s anticipated staggered resumption of cruises. The cumulative booked position for sailings in the second half of 2021 is within historical ranges with prices that are down slightly year-over-year.’
• Gran Canaria is emailing potential visitors saying it is ‘one of the safest destinations in Europe’.
• STR says the US hotel market registered occupancy of 48% in the week to 24 October, down 32% on last year and down on recent weeks. Achieved room rates were 29% lower than a year ago. REVPAR was 52% lower.
• Wyndham Hotels & Resorts has reported Q3 numbers saying that it earned net income of $27m in the quarter, down from $45m last year. It says that 99% of its U.S. hotels and 97% of its global portfolio are now open. Domestic (US) ‘drive to’ demand has held up relatively well.
• Disneyland Paris is to shut as a part of the French government’s nationwide Covid-19 lockdown.
• Carnival-owned German cruise brand Aida Cruises is suspending sailings as a result of Germany’s lockdown.
• Canary Islands winter holiday prices are reported to be around a third lower than they were a year ago.
• Twitter has reported Q3 numbers saying that it had added fewer new users than analysts had expected. The shares fell by 16%.
• Facebook has reported Q3 numbers. The company beat analysts’ expectations but cautioned that 2021 could be a tougher year. It says ‘considering that online commerce is our largest ad vertical, a change in this trend could serve as a headwind to our 2021 ad revenue growth.’
• Sky reports that Rank Group faces a shareholder revolt over boardroom pay next month at its AGM.
FINANCE & MARKETS:
• UK car production in September was at its lowest level in that month since 1995 reports the SMMT.
• Sterling weaker at $1.2908 and €1.1047. Oil lower at $37.46. UK 10yr gilt yield unchanged at 0.22%. World markets mixed yesterday. London set to open down by around 50pts.
RETAIL WITH NICK BUBB: