Langton Capital – 2020-11-02 – PREMIUM – Lockdown 2.9, Deltic, Brighton Pier, holiday refunds etc.:
Lockdown 2.9, Deltic, Brighton Pier, holiday refunds etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Hedgehog (or porcupine) graphs show the Good News, i.e. an upward line on a chart, always tracking to the right.
Common with start-ups, political projections and the like, they may also exist in weather forecasting because, a couple of days ago, the BBC (which I think is the Met Office) was promising a nine-day dry spell from and including tomorrow.
Meaning that, almost a miracle in the North of England, we may have been able to get the grass cut in November but, rather than spark up the mower and change its flat tyre, we decided to track the forecasts and, as rain is now expected tomorrow and on one other of the nine days in question, that’s probably just as well.
Hence asking if something is really a) going to be ‘better’ or b) is just ‘further away’ is always sensible. Seems to apply to Track & Trace, promises re economic recovery, the sunlit uplands of Brexit etc. On to the news:
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LOCKDOWN 2.0: Something that the government said would never happen, is just about to happen. Planning is difficult when U-turns such as this are sprung on the sector. Here we consider some of the implications.
• The announcement that England is to join the other English regions in lockdown from Thursday has bumped our comment on pubs vs restaurants to tomorrow or more likely Wednesday.
• See also comments in general email below for basic details re the lockdown.
A lack of certainty:
• The government has done what it said it would not do.
• This leaves the hospitality industry either a) wrong-footed if it believed the government’s previous statements or b) better positioned if it maintained a stance of suspicious disbelief
• The latter would be better for companies in the very short term but terrible over the longer term as, unless the rules have changed a great deal in recent years, belief in and faith in government should be positively correlated with success over time
• Business, in this case at least, would have been better advised to ignore its own government and look at what the Labour Party was recommending and what was being done in Wales, Scotland, Northern Ireland, France & Germany and assume that the same was going to happen in England. Because it has.
Dealing with the impact:
The hit to sales:
• Pubs & restaurants will have to close from and including Thursday. That means 10pm Wednesday.
• Takeaways and collections will be allowed but:
o Pivoting left and right is exhausting. For some operators it is impossible.
o The above did not initially include alcoholic drinks, although SIBA says this is still up for discussion.
• Most pubs will be in loss. Even post furlough receipts. We will be back into ‘cash-burn’ territory.
• The length of financing agreements with banks will become critical once again. Any companies looking to refinance in the near term may be worried. Companies such as Marston’s, which received its Carlsberg cash last Friday, will be in a better position
• Operators with securitised debt may once again need to speak to bond holders in order to secure waivers. This, though it cannot be absolutely taken for granted, should be possible
• Some restaurants can survive on takeaways and collections – see Fulham Shore’s comments at its finals on 15th of last month
Stock and the supply chain:
• Pubs (and restaurants) will be left having to ditch real ales and perishable foods. Some of this may go to charity. But there is a limit to how much lettuce and cucumber a homeless shelter will take, and a lot of the drink will literally go down the drain.
• The supply chain will be in tatters.
• Bigger companies such as the global brewers may be charitable (again) but smaller food suppliers, craft breweries and distribution companies will lose much of their revenue and may struggle to survive
• Thousands of conversations will have to be re-started with landlords.
• Pubs & restaurants had been assured there would be no lockdown and they will likely have passed this on to landlords. This is not now the case.
• The furlough is back, which is a relief.
• But the shoe-leather involved in taking staff on, training them, then laying them off, taking them back on, retraining them to scrub off the rust and then laying them off again is considerable
• If the lockdown lasts 4wks, then it may not be worth putting permanent staff on furlough only to bring them back a fortnight before reopening in order to get pubs ready and to check stock levels
• The problem, of course, is that 2 December may become a movable date.
• Companies will also need to consider whether or not to top up staff payments from 80% to 100% as they may lose staff if they do not
• Messrs Johnson and Gove are journalist/politicians, rather than businesspeople. Words are sometimes not enough
• The hurdles are getting higher
• Accrued costs (VAT for one quarter, likely some rent, other tax bills etc) will continue to accrue. VAT rises from 5% to 20% on April Fool’s day next year and Business Rates will be levied once again
• Companies may have begun to plan based on the Tier system. This has now been superseded and cash burn may once again become a major issue.
• Companies that have secured their financing may need to look at the numbers once again. Those that had not, may be in trouble.
• There could be talk of fund raises via equity issues.
• RTN and JDW have raised equity already and Marston’s received its Carlsberg cash on Friday. Among the larger quoted operators, M&B may need to look at its cash position, particularly as it is not certain that the current lockdown will definitely end on 2 December
• If the industry can ‘have a Christmas’, that would be a big plus
• But there is no definite exit date for the current lockdown. It is ‘at least until’ 2 December rather than the latter being a firm exit date.
• Delaying the lockdown by 5wks has maybe doubled (or more) its length
• Additionally, as Lockdown 2.0 is not as severe as Lockdown 1.0 (which lasted for 14wks or so), it will not bring down the rate of spread as rapidly
• There have been no targets set re R rate, number of new positive tests, hospitalisations or deaths, so it is not easy to plan or to judge the efficacy of the measures
• We can comment further on this tomorrow
PUBS & RESTAURANTS:
• England is to follow the lead of Scotland, Northern Ireland, Wales, France and Germany and the suggestion of the Parliamentary Labour Party and enter into a second lockdown from Thursday, despite PM Boris Johnson saying recently that to do so would be ‘a disaster’ and would bring misery to millions.
• SAGE recommended a fire-break as early as 21 September.
• Sophie Ridge on Sky played back a two week old interview with Michael Gove to the Cabinet minister in which he had completely ruled out the chance of a second lockdown (called, officially, enhanced measures or some such). Mr Gove said the measures imposed (tiers etc.) had not done the trick.
• But we are where we are. What does this mean?
The situation from Wednesday midnight:
• England will go back into lockdown with non-essential shops, pubs, restaurants & other hospitality units closing. Schools & universities will remain open. Workers will be asked to work from home if possible.
• The lockdown will commence on 5 November and be reviewed (and hopefully but not necessarily ended) on 2 December.
• The PM has been criticised by both libertarians, who would like to keep the economy fully opne and lockdown ‘doves.’ Deaths in the week that SAGE recommended a firebreak (21 Sept) averaged 30 a day. The week just past has averaged 8.7x as many at 260 per day.
• The Guardian says the ‘extraordinary U-turn’ followed a delay that will ‘cost lives and livelihoods across the country.’ The Independent says the lockdown is ‘better late than never’ but The Telegraph, on the other hand, says that ‘the government is wrong to pub England into lockdown’.
• The public are to be ordered only to leave home for specific reasons, such as work, food shopping and essentials such as exercise, medical appointments or caring for the vulnerable.
• The furlough is back at 80% of wages. This will apply only for the 4wks of the lockdown.
November under the bus for the sake of Christmas:
• Having passed on SAGE’s advice five weeks ago, why act now? The death projections are similar to previous projections. They are at the worse end of expectations though various press sources suggest that SAGE had been warning for weeks that this was the case. So, why the delay?
• PM Johnson says ‘Christmas is going to be different this year, perhaps very different,’ He adds ‘but it’s my sincere hope that by taking tough action now we can allow families across the country to be together.’
• Labour leader Sir Keir Starmer says ‘I don’t think Christmas will be normal and I think we need to level with the public on that.’ Saving Christmas would be a notable positive, but trying to fine-tune the behaviour of a virus could be harder that it might appear in a brain-storming session.
Early-December also under the bus?
• Michael Gove yesterday told Sky’s Sophie Ridge that the lockdown could be extended beyond 2 December if necessary.
• Gove says it would be “foolish” to predict what would happen with the pandemic over the next four weeks. But that’s his and his boss’s and their advisors’ jobs and, to be fair to the latter, they have not been wrong re the second wave.
Trade & other reaction:
• The move will likely have wrong-footed a number of operators who had taken the government at its word. Share prices may slip. See premium email for comment on specific companies and specific financing structures. Some companies may need to consider equity raises.
• Helen Dickinson of the British Retail Consortium says retailers are facing a “nightmare before Christmas”. It looks very likely that Amazon (and to a lesser extent the supermarkets, which can still sell non-essential products in England) will wipe the floor with them.
• The BRC maintains the lockdown ‘will cause untold damage to the high street in the run-up to Christmas, cost countless jobs, and permanently set back the recovery of the wider economy, with only a minimal effect on the transmission of the virus.’
• UKH CEO Kate Nicholls says of Mr Gove’s suggestion that the lockdown could be extended ‘this is deeply unhelpful for businesses trying to plan to stay afloat and save jobs. Yesterday the PM said it would end on 2 Dec and then we revert to tiers – that would be difficult enough to survive but this type of statement makes it impossible.’
• UKH says ‘leaders in the other devolved nations have been clear and confirmed to their citizens that lockdown has a finite end point and restrictions then lift. We need the same in England – the help on offer is simply inadequate for a longer uncertain future.’
• The Evening Standard says ‘the sequel is always worse than the original.’ It says the nation is ‘exhausted’. It points out that ‘in July he had promised never again to a lockdown.’ We were also told that furlough would finish, no ifs or buts, in October. It says ‘track and trace…is a shambles that has not ever gained world beating momentum’ and adds ‘without a high-performing test and trace operation, the virus will spread once more as soon as lockdown is lifted.’
• The British Beer & Pub Association says ‘28-day lockdown will result in thousands of pubs and many of the breweries that support them being lost, unless the Government urgently provides the sector the same, if not greater, levels of support than it did for the first lockdown.’
• BBPA CEO Emma McClarkin says ‘this could be the final straw for thousands of pubs and brewers.’ She calls for more financial support.
• SIBA says many of its members ‘will not make it to the festive season without extension of hospitality industry support.’ It says the extension of furlough is a relief but adds ‘furlough funding cannot alone keep business who are struggling due to unfounded restrictions afloat. The evidence clearly shows that when pubs are told to close the impact on small breweries is devastating, with small brewery sales during the first lockdown down 82% on average across the UK. Small breweries still have rent, business rates, beer duty and VAT payments coming up – if they are unable to trade, then they cannot pay these.’
• SIBA CEO James Calder says ‘if the Government wishes to shut the hospitality sector it needs to provide a full financial package for the entire supply chain covering wages, rent, business rate holidays, VAT, and the destruction of beer that now needs to be poured away, direct to the UK’s independent breweries.’
• See Premium Email for more on the second lockdown.
Other Covid news:
• Sky quotes work undertaken by the University of Warwick that suggests EOTHO ‘caused a “significant” rise in new coronavirus infections.’ See Premium Email.
• The BBPA says 20,000 hospitality venues will ‘miss out on lockdown grants, putting over 1 million jobs at risk unless Government takes advantage of State Aid reforms.’ The BBPA says ‘until recently, State Aid rules directed by the EU meant that businesses could only receive up to €800,000 (£720,000) of cash support from the Government, which many businesses had already reached.’ Cash however, particularly during and after Covid, will be limited.
• Wireless Social reports that footfall across the UK as a whole on 24 October was down 3% on the previous Saturday and down 50% on February levels. Sunday footfall was up 2% week on week but still down 45% on the prior year.
• These numbers could see a bounce over the weekend just passed (on stocking up) but then register material falls hereafter.
• London footfall over both the Saturday and Sunday mentioned above was down 45% on last year.
• Manchester (just gone into Tier III) was down 66%.
• KAM Media reports that, even post Covid, there is likely to be a growing demand from customers for the ability to pay at table. KAM and OrderPay say ‘41% of customers say that over the last 6 months it’s become more important to them that venues offer this.’
• Marston’s announced on Friday ‘the completion of the proposed arrangements with Carlsberg UK Holdings Limited’ in order to set up the Carlsberg Marston’s Brewing Company. The money will have changed hands, a great relief in the face of Lockdown 2.0 to both Marston’s and its shareholders.
• The FT reports that Deltic Group ‘is seeking a buyer as it fights to stave off bankruptcy after the seven-month closure of its venues during the pandemic drained the business of cash.’ The Guardian points out that nightclubs are among the very few businesses unable to reopen at all since Covid-19 hit the UK. CEO Peter Marks said the government’s failure to offer more support had “slowly choked us to death”.
• Deltic has already cut 1,000 jobs but is still burning money. The company told the FT ‘we have to look at every option going and part of that is to see what other capital is out there to get the business through this.’
• The Brighton Pier Group has reported full year numbers to end-June saying that ‘the prolonged closures have resulted in impairments to goodwill, property, plant and equipment and right-of-use assets totalling £8.1m. Of this, £7.2m relates to the Bars division, much of which remains unable to trade.’
• The company reports full year revenue of £22.6m (vs £32.0m) and reports a loss before exceptional items of £10.2m (2019: profit £2.7m). CEO Anne Ackord says ‘the COVID-19 pandemic has presented an unprecedented challenge to our business. The closures during Spring 2020 came during what would normally be a key trading period, spanning both the Easter break in April and two May Bank Holiday weekends.’ She says ‘the Group is well placed to resume normal trading at the earliest opportunity.’
• Brighton Pier says ‘group trading for the period from 4 July to the end of September has been better than the Board expected. Like-for-like sales (excluding closed sites) for the Group as a whole were at 81% compared to the same 13 weeks last year. The pier has traded at 83%, the Golf division at 87% and the Bars at 65% compared to the same 13 weeks last year. This trading was ahead of the Group’s expectations at the time of the reopening.’
• Chairman Luke Johnson says ‘it is profoundly disappointing to me that the government continues with its failing strategy of lockdowns. The collateral damage from these restrictions and the fear being promoted by the authorities are having a catastrophic impact on our way of life. The loss of jobs, toll on mental health, harm to education, the national finances and treatment of other illnesses will cause vastly more hardship than the virus itself.’
• M&B brands Harvester & Toby are offering 50% off main meals this week until Wednesday.
• Shake Shack announced third quarter 2020 financial results on Friday saying that average weekly sales and same-shack sales were up sequentially. Its operating profit percentage had risen to 14.8% in Q3 vs 2.2% in Q2.
• Shake Shack nonetheless made a loss of some $6.1m in the quarter on sales down 17.3% to $130.4 million versus the same period last year. CEO Randy Garutti says ‘our business during this most recent quarter showed steady recovery.’ He says ‘since our last update at the end of July, forward momentum has continued and we’re encouraged to see significant improvement in both sales and profitability, with many Shacks returning to or exceeding last year’s results.’
• Shake Shack says ‘we believe we are uniquely positioned to exit this challenging period stronger, and with greater opportunity than when we entered, as we double down on multi-format expansion and accelerate our strategic digital investments. As of the end of fiscal October, we are back to a full development schedule, having opened 33 Shacks so far in this challenging year, including 15 domestic company-operated Shacks, and expect to complete the year with 18 to 20 total new company-operated Shacks. Our pipeline for 2021 is strong, and we expect to open between 35 and 40 new company-operated Shacks, many of which will incorporate our new Shack Track and Drive Thru designs.’
• Molson Coors reported Q3 sales down 3.1% but net income up in its Q3. The company says that sales in the US were down by 1% but down by 12.2% in Europe.
HOTELS & LEISURE TRAVEL:
• The lack of certainty is negative. Adverts on TV as late as Saturday evening were calling on UK residents to take UK short breaks. See The Eye, see Malham Cove, the Cornish Coast etc. Problem now is you can’t. There will be a period during which hoteliers and cottage owners have to sort out with would-be guests as to who takes the financial hit.
• This may not encourage re-bookings in a hurry.
• International travel, other than for business, is to be banned for at least a month from Thursday as a part of Lockdown 2.0. The travel ban was not specified in the initial statement but has been made clear in later documentation. The legislation will state that ‘overnight stays and holidays away from primary residences will not be allowed – including holidays in the UK and abroad.’ It says ‘this includes staying in a second home, if you own one, or staying with anyone you do not live with or are in a support bubble with.’
• PPHE Hotel Group has updated on trading for the quarter to end-September (and for the 9mths to that date) saying that ‘the year started well for the Group. However, due to the COVID-19 pandemic most of the Group’s properties were closed or partially closed between March and July.’
• PPHE says that, post reopening ‘the second half of August and September saw reduced demand in some markets due to the introduction of travel restrictions in some regions. Since the period end, the trading environment continues to be equally volatile. Demand has reduced further due to the significant impact of the recent local lockdown restrictions in most territories.’
• PPHE says ‘as a result of this prolonged uncertainty, the Group has continued to undertake restructuring measures, with certain properties remaining closed and others operating with limited services.’
• CEO Boris Ivesha says ‘following the onset of COVID-19 and its unprecedented impact on the trading environment, including enforced lockdowns in some of our markets, we were pleased with the Group’s improved performance throughout the summer months which was driven predominantly by domestic leisure travel and resulted in market outperformance.’
• Ivesha says ‘looking ahead, we remain focused on positioning the business well for long-term growth, underpinned by our unique model, well-invested portfolio and strong customer proposition.’
• The World Travel & Tourism Council has said that up to 174 million travel and tourism jobs could be lost this year if global travel remains restricted.
• In addition to existing travel problems, Turkey and Greece have registered a powerful earthquake.
• Silversea says that cruises in the Caribbean could re-start by the end of this year
• British Airways owner IAG says demand for air travel may not fully recover before 2023.
• IATA says cost cutting will not be sufficient to stop airlines from going bust if they do not receive state aid.
• MGM Resorts says that it is hopeful for the return of demand as restrictions ease. All of its sites, at home in the US and abroad, are now open.
FINANCE & MARKETS:
• The IEA says UK unemployment could rise to more than 3 million, or 10% of the workforce. However, it adds that ‘a less pessimistic “bottom up” approach suggests it will be capped at about 2¼ million, or less than 7%. Either way, talk of “many millions” of job losses is still wide of the mark.’
• Official data has shown that Eurozone GDP rose by 12.7% quarter-on-quarter in Q3.
• The IMF has increased its estimate for the fall in GDP in the UK this year from 9.8% to 10.4%. The report blamed “second wave headwinds” for the adjustment.
• The IMF goes on to say that it will be “essential” that the government continue to support struggling businesses in the UK if the country’s economy is to recover.
• The Nationwide Building Society reports that annual house price growth in the UK reached a five-year high in October of 5.8%. It says, however, that ‘data suggests that the economic recovery has lost momentum in recent months with economic growth slowing sharply to 2.1% in August, down from 6.4% in July, despite a strong boost to the hospitality sector from the Eat Out to Help Out scheme, which has since expired.’
• The Nationwide also says ‘labour market conditions also weakened with the unemployment rate rising to 4.5% in the three months to August – still low by historic standards, but up from an average of 3.8% in 2019.’
• Sterling mixed at $1.2896 and €1.1081. UK 10yr gilt yield up 4bps at 0.26%. World markets mostly lower last Friday & London set to open down by around 15pts.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front page headlines of the Saturday papers were focused on the infamous leak of the Government’s “U-turn” on having another lockdown: the Guardian went with “Tough new lockdown rules due next week”, whilst the Daily Mail highlighted “National lockdown next week”, the Telegraph flagged that “PM set to announce national lockdown” and the Times ran with “National lockdown looms”. The FT’s spotlight, however, was on the shake-out in global stockmarkets last week: “Election and virus jitters hit stocks”.
• Saturday’s Press and News (2): In terms of Retailing stories, there was a surprising amount of focus on the news that Marks & Spencer will announce a first half loss on Wednesday next week: the Times even had two go’s at the story, with a bizarre photo of “The penny bazaar heading for a historic £59m loss” at the top of its main Business page and then a follow-up article on how the pandemic has sent M&S into the red. The Daily Mail had a similar theme on M&S, in its “Popular Shares” column feature. The Times also noted that the new CEO of Sainsbury will announce more Argos store closures with the interims on Thursday.
• Saturday’s Press and News (3): In other news, the FT went big on the news that Halloween sales in the US had collapsed (“Costume stores face a hellish Halloween as coronavirus spooks consumers”) and the FT also had an article on the plans of UK retailers to convert surplus store space into offices and homes (”High Streets look beyond retail for survival”). The market report in the Times noted that Boohoo was upgraded on Friday by Credit Suisse and the Daily Mail flagged that the flower delivery firm Freddie’s Flowers has raised nearly £4m in bonds from customers. Finally, the Times had a feature interview with Neil Clifford, the boss of the embattled shoe chain Kurt Geiger, headlined “The crisis that brought Barbour PPE, Dior hand sanitiser…and free shoes?”.
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were, inevitably, about the new COVID pandemic lockdown: the Observer flagged that “Johnson’s U-turn puts country under tough new lockdown”, whilst the Sunday Times ran with “Fears of “medical disaster” force PM into new lockdown”, the Sunday Telegraph went with “Four-week lockdown “to save NHS” as millions face return to furlough” and the Mail on Sunday wailed “Lockdown sparks Tory civil war”.
• Sunday’s Press and News (2): In terms of Retail stories, the Government clearly wasn’t thinking of the disruption to Christmas shopping from the 4-week lockdown “to save Christmas”, but one of the main Business headlines in the Sunday Times was “Retailers brace for Christmas disaster”. The main Retail news in the Sunday Times, however, was that #MadMike is furious about being locked out of the break-up of Debenhams, with Hilco said to be on the brink of liquidating the business, after both The Hut and JD Sports looked at putting in bids…The Sunday Times also flagged that the new boss of Sainsbury’s is looking at selling the troubled Sainsbury’s Bank and had a feature on “The two faces of Boohoo”, noting that despite Boohoo’s corporate governance problems, social influencers keep fuelling its sales. The Mail on Sunday highlighted that Sainsbury is expected to re-start dividend payments
• 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 (“Sunak’s bridge to normality proves to be a rickety one”), in which he noted that if there has been a persistent error in the Chancellor’s approach it is over-optimism. We would also flag the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“Investors have little to fear from Biden…if Democrats win Senate”), which he ended by noting that the new UK lockdown is “a bitter pill to swallow after a summer of rising economic and pandemic optimism”, as well as the column by the veteran Economics correspondent William Keegan in the Observer (“Support is waning for Johnson’s plague-year Brexit”).
Today’s News: With High Street retailers still reeling from the news that non-essential shops will have to close again on Thursday…Ocado has chosen today to announce that the Ocado Retail jv with M&S has been trading so well that full-year EBITDA for the group will be well ahead of expectations. Ocado has also announced the acquisition of a couple of West Coast tech firms in the US, to accelerate its move into robotic picking technology. Less happily, Primark has announced that as of Thursday, 57% of its selling space will be closed because of the COVID 19 lockdowns in the UK and Europe…But Howden has, oddly, brought forward its trading update from Thursday to announce that trading over the last 4 months has been strong, with LFL sales c10% up.
News Flow This Week: The week ahead was always likely to be dominated by the US Election tomorrow, but, as we move on into November, there is plenty going on in the UK to distract us, not least the news that all non-essential shops will have to close again on Thursday for 4 weeks…Tomorrow brings the ABF/Primark finals. Wednesday then brings the M&S interims, whilst on Thursday we get the Sainsbury interims, the N Brown interims, the Superdry pre-close and The Works’ pre-close (plus the latest MPC pronouncement).