Langton Capital – 2020-11-09 – PREMIUM – Pubs vs restaurants, Pizza Express, Caffe Nero, OTB, Gym Group etc.:
Pubs vs restaurants, Pizza Express, Caffe Nero, OTB, Gym Group etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, we’ve got the first weekend of Lockdown 2.0 out of the way but, with the weather damp & overcast and the nights drawing in, the differences between it and the first lockdown are only too clear.
There won’t be many picnics in the garden at this rate and, when the wind is howling up your trouser leg and the rain is assaulting you from above and dripping from your nose, drinking a coffee outside isn’t quite what it used to be.
On the other hand, if it’s all about ‘getting through it’, there are only three-and-a-half weeks to go in the present lockdown and it’ll be getting lighter again come the end of next month.
And the government has a world-beating plan, tremendous, like the world has never seen so, sure in the knowledge that they’re handling all this as competently as they can (that, at least, is true), we can grit our teeth and get on with it.
On to the news:
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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. Part 3 (of 3). 9 Nov 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.
• A few days ago, we looked at Supply & Demand (of outlets) followed by comment on costs, pricing, discounting, distress, CVAs and the like.
• Part III got bumped a few times by Lockdown II but here we look at other issues.
• Getting restaurant supply out of the market is tougher than it is for pubs. The next ‘best’ use of a busted restaurant is still as a restaurant. Getting capacity to exit the market is difficult.
• The free market is wonderful, but not perfect. Any adjustment could take some time (or it could be achieved quickly, but at great cost)
• There’s no braking mechanism when it comes to restaurant & coffee shop capacity, but there is a crashing mechanism – see CVAs and administrations
• Leaseholds (usually restaurants) are less flexible than freeholds. A convoluted series of hoops need to be jumped through in order to secure meaningful change across a leasehold estate. CVAs can achieve this – but they are often shooting at a moving target.
• Freeholds can (and have been) turned into accommodation, other retail use etc.
• IFRS16, though often disparaged, does bring home the fact that leasehold liabilities are every bit as onerous (and sometimes worse) than banking liabilities. As early as 2016, Ernst & Young said that Retail (including leisure retail) would be the most heavily-impacted sector. It was not wrong.
• IFRS16 explodes the myth that having low levels of bank debt is the same as having low levels of fixed charges.
• Large, freehold estates may, going forward, remain attractive to buyers. Greene King, Punch & EI Group have all been purchased recently. Buying large chains of leasehold assets can be tricky (or disastrous).
Trading & sales:
• Restaurant ‘turnarounds’ are not easy. Branding matters for restaurants, less so for pubs. A failed brand leaves a bit of an aftertaste with would-be customers (and bankers and investors).
• Service charges, olives, bread, bottled water etc can lead to bill-shock and disaffected customers in restaurants. This isn’t (usually) an issue for pubs.
• Delivery is more of a threat for restaurants than it is for pubs. Many restaurants may have ‘let the fox into the hen-house’ by using Deliveroo, Uber Eats etc and by supplying them with customer details (see Dark Kitchens)
• Pubs, and particularly wet-led pubs, pitch to a lower price point than do restaurants. This may be an advantage during a recession.
• Overrenting is more of an issue for restaurants. Overrented sites may still be too expensive, even if charges are reduced. Various CVAs in 2018 didn’t cut deep enough. The same could happen this time (or, of course, it could be the opportunity of a lifetime to pick up sites).
• Labour margins are higher in restaurants vs wet-led pubs. Labour pressure has come from the NMW, NLW, apprenticeship levy, mandatory pensions, chef shortages etc.
• Service, though always important, may be more critical (and easy to get wrong) in a restaurant. The labour involved in popping the cap on a bottle of Beck’s is less complicated than that involved in sourcing, cooking, serving and clearing up after a meal. Automation isn’t much of an option.
• Prices (of wine, beer etc) are more stable than they are for commodity foods. Supply is usually more reliable.
• There should be less stock wastage in a pub than in a restaurant. Bottled beers last for nearly a year and spirits and wines last virtually forever. Lettuce, not so much.
PUBS & RESTAURANTS:
• We are were we are but The Telegraph says PM Boris Johnson was ‘bounced into a second lockdown he didn’t want’ and it asks ‘is Boris Johnson still in charge of No 10?’ It quotes ‘some of his allies’ as saying, ‘that he no longer runs No 10 but is instead run by No 10.’ With allies like that…
• YouGov says 72% of Brits back the current lockdown measures.
• Although an extension is not out of the question, Mr Johnson has said that the regulations will automatically expire on 2 December.
• The lockdown in Wales ends today. It will be interesting to see how consumers behave.
• Worth remembering that, with the extension of the furlough, the £1,000 job retention bonus that would have been available to companies to help them get through January, is no longer there.
• OrderPay reports its data suggests that ‘ahead of the new lockdown that drinkers feel comfortable visiting and socialising in pubs and are confident with the measures operators have put in place to keep them safe since reopening.’ It adds ‘with the industry hoping that restrictions are lifted as planned in time for Christmas, we hope the willingness we have seen to be back socialising in the last few weeks isn’t a sign that the public have become complacent with what is still a global pandemic. We need to do the right thing and abide by the rules for the short term so that the industry can survive in the long term.’
• Pizza Express announced on Friday the completion of its recapitalisation ‘giving the company a strong balance sheet and significant funds to invest in growth in the years ahead.’
• It reports that Allan Leighton and David Campbell have been appointed, as Chairman and Group Chief Executive respectively.
• The company says it has reduced debt from £735m to £319m. Allan Leighton says ‘this is a unique opportunity in casual dining. With a significant recapitalisation of the company, and substantial further funds committed, we look to building on our position as a leader in the casual dining market, once Covid restrictions are eased.’
• Zoe Bowley, MD of Pizza Express UK & Ireland, will be joining the main Board, alongside Group CFO, Andy Pellington.
• Caffe Nero has appointed financial advisors ahead of a restructuring reports Sky News. It says ‘Alcentra and Partners Group, which provide mezzanine debt to Caffe Nero, have drafted in FTI Consulting to advise them on the implications of a CVA.’
• Sky quotes an ‘insider’ as saying ‘that while a final decision on a CVA had yet to be taken, it was likely to be announced later this month.’ The chain said in September ‘it has been a difficult period since lockdown measures were introduced by the government and we’re working incredibly hard to navigate our way forward. As part of this, we are working closely with advisors to help review our options and assist with our ongoing negotiations with landlords.’
• Shepherd Neame will cut one-in-ten of its employees as a result of the current, one-month lockdown. The company will furlough the bulk of its staff. Again. The company says ‘it is extremely disheartening to go into lockdown again after the immense efforts of the past few months.’ It adds ‘but, as evidenced by the overwhelming wave of support given to our pubs when we reopened in July, our communities need, want and love their local. We look forward to welcoming you back as soon as the situation allows.’
• Edinburgh Woollen Mill has called in administrators, FRP Advisory. FRP says ‘recent months have proven extremely challenging for many retailers, even those that were trading well before the pandemic, including the teams at Edinburgh Woollen Mill and Ponden Home. The administrations will provide some further protection while we continue our search for buyers to secure the long-term futures for both businesses.’
• Uber has reported that its food delivery business has more than doubled, Q3 this year on Q3 last. Boss Dara Khosrowshahi says ‘we’ve got more eaters, they’re staying longer, they’re eating more.’ He says ‘there’s no question in my mind that … there’s a fundamental behavioural shift that has gone on. People aren’t going to stop using Amazon. People aren’t going to stop using Eats.’
• Cracker Barrel Old Country Store in the US has reported its Q1 numbers to end-October saying that sales are down only 16.4% on the same quarter last year.
• US sandwich shop chain Potbelly Corp, which had warned that it could close up to 100 of its 400 stores, now says it could close only between 25 and 30 units after successful lease negotiations with landlords.
• Bottom line, 25 December will happen, but it will be different.
• KAM Media reports YouGov as saying that the UK mood moved from Apathetic to Fearful around March. It is now ‘Stressed and Frustrated’. Few would deny that we want and maybe need, a Christmas.
• Some 48% of those interviewed by YouGov describe 2020 so far as ‘bad’ or ‘terrible’.
• KAM reminds us that 17% of people would go to a pub or restaurant for lunch or dinner on Xmas day, but it says that only 11% plan to do so this year. That is perhaps a larger number than might have been feared.
• Some 33% ‘would usually visit a pub on or around Xmas day (3 days either side) – that figure has dropped to just 15% who intend to do so now.’
• Wireless Social reports a 3% rise in footfall on 31 October compared with the previous Saturday. This is still 46% down on February numbers. The Sunday, 1 November, was also up 3%.
• These numbers may have been influenced by purchasing decisions being brought forward ahead of the lockdown, which started on the following Thursday.
• Hilaire Belloc – ‘When you have lost your inns, drown your empty selves, for you will have lost the last of England.’
• Intuitive eCommerce platform Toggle has reported that a ‘flurry of F&B operators’ are turning to it to take advantage of an online Christmas sales surge. CEO Dan Brookman says ‘closed physical spaces mean that businesses are now relying entirely on their online channels to drive sales at this crucial time of the year. Now is the time to get creative, to keep pushing your brand to customers. There’s going to be a massive shift towards shared experiences.’
• Chartered Surveyors Paul Newby and Matt Philips ‘have joined forces to offer an extended range of pub property services to clients in the Midlands and beyond.’
HOTELS & LEISURE TRAVEL:
• Amid our business worries, the Economist says ‘much of the current outbreak [of Covid-19 across Europe] can be tracked back to holidaymakers from around the continent mingling in Spain.’ It says enforcement of 14 day quarantines, where they existed, was lax.
• On the Beach Group has updated on trading saying that the freedom for customers to travel during the summer ‘was short-lived and the subsequent impact on consumer confidence has led to significant reductions in seat capacity over the winter.’ The company adds ‘this position has now been further exacerbated by a four week ban on international leisure travel which began on 5 November.’
• OTB says the group had a ‘varied trading performance through Q3 and Q4 with booking volumes down 75% and 53% respectively YOY.’ It says ‘cancellation rates have been in excess of 90% across summer 2020, well above our assumption at the half year. The Group expects it to continue at these levels over the winter. This has led to further exceptional costs of £10m in H2 which the Group now expects to be £45m for the full year.’
• OTB CEO Simon Cooper says ‘it is clear now that the full impact of Covid-19 will be every bit as extreme as any of us could have mapped out at the beginning of the year. Following the overwhelming support we received from our shareholders in May, combined with our ring-fencing of customer prepayments, we are in a strong and debt-free financial position. The Board is confident about the Group’s long term strategy and we will continue to look at the increasing number of exciting opportunities to grow our market share both in the UK and internationally.’
• Moody’s says that a vote in California to exempt app-based ridesharing and delivery businesses from a requirement to classify their drivers and couriers as employees in California ‘is a strong credit positive for Uber Technologies.’ It says this ‘removes a large overhang from regulatory risks and pending lawsuits related to Uber’s ridesharing and delivery businesses.’
• Marriott International has reported Q3 numbers saying that REVPAR in the quarter was down by 65.9% with EPS of 31c vs 116c in Q3 last year. The company added more than 19,000 rooms globally during the third quarter.
• Marriott CEO Arne M. Sorenson says ‘while COVID‐19 is still significantly impacting our business, our results for the third quarter showed continued improvement in demand trends around the world. Worldwide RevPAR1 declined 66 percent in the quarter, a nearly 19‐percentage point improvement from the decline in the second quarter.’
• Marriott says ‘Greater China continues to lead the recovery and demonstrates the resiliency of travel demand, with third quarter occupancy of 61 percent and RevPAR recovering to down 26 percent, a 35‐percentage point improvement compared to the decline in the second quarter.’
• The company says ‘although the timing of a full recovery remains unpredictable, we are pleased with the significant progress we have made in restructuring and repositioning the company to successfully manage through these challenging times.’ Sorenson says ‘we still have a long road ahead, but this crisis will come to an end, and I believe travel will rebound quickly. I am confident that the many steps we have taken this year, combined with our unrivaled global portfolio, the strength of our brands, and the power of Marriott Bonvoy position us very well now and for the future.’
• Uber reported Q3 revenues down by 18% at $3.1bn. Analysts had been looking for a shade more. Q3 losses were $1.1bn, down from a loss of $1.2bn in the same quarter a year ago.
• Greece has imposed a three-week national lockdown from last Saturday.
• Costa Cruises (owned by Carnival) has therefore suspended sailings to Greece on board Costa Deliziosa.
• Former Brexit Party candidate Glenn Thompson has accused the EU of being ‘spiteful’ as it has rejected UK requests for Britons to continue using passport fast lanes across Europe after Brexit.
• The Gym Group has updated on trading saying that its units are closed but, ‘during this closure period the Company will manage its cash outflow by minimising operating costs and using the government furlough scheme.’ The company expects its monthly cash burn during closure to be around £6.0 million.
• Gym Group says during the period that it was open, ‘the Company has traded profitably and cash generatively. It has invested £4.0 million of capital between 31 July and 31 October in the completion of four new sites (opened in August), the redevelopment of its London Oxford Street gym and ongoing technology and maintenance investments. In addition £4.5 million of the £9.4 million of rent deferred from H1 2020 has now been repaid.’
• Gym Group ‘remains in compliance with its bank covenants having met its Q3 EBITDA covenant test.’ CEO Richard Darwin says ‘the business has traded profitably during the period and we are confident that our strong financial position, with very low levels of net debt and close to £70 million of unused facilities, will provide the platform to resume our growth path once we reopen.’ The company says that more site opportunities are becoming available.
• Games Workshop updated on trading on Friday afternoon saying that ‘trading since the last update in September 2020 is ahead of the Board’s expectations. Given this, the Board’s estimate of the results for the six months to 29 November 2020 is profit before tax of not less than £80 million (2019: £58.6 million).’
• Games Workshop says ‘this has been driven by healthy growth in our online and trade channels. Our retail channel is still recovering from the COVID-19 closures both currently (170 stores) as well as earlier in 2020. The factory and warehouses are still in operation under COVID Secure measures.’
• It concludes that it ‘recognises that this performance is better than the prior year but is also aware that it is still early in the financial year. A further update will be given as appropriate.’
FINANCE & MARKETS:
• PM boris Johnson says that ‘significant differences’ between the UK and the EU remain, as negotiations for a post-Brexit trade deal continue. The betting is still on a deal this week, with both sides able to say they took it to the wire.
• The National Audit Office says that UK trade with the EU faces “significant disruption” when the Brexit transition period ends in January.
• The US economy added 638,000 jobs in October. The unemployment rate is now below 7%.
• Halifax reports that UK house prices rose by 7.5% in the year to October. It says, however, that ‘the country’s struggle with Covid-19 is far from over’ adding that this created ‘clear headwinds’ for the UK housing market.
• There may be some issues with the US post the election. Jim Pickard at the FT reminds us that president-elect Biden has described Boris Johnson as “a physical and emotional clone” of Trump. Pickard quotes ‘a senior politician’ as saying ‘if you think Joe hates him [Johnson], you should hear Kamala.
• Former spokesperson for Barack Obama Tommy Vietor tweeted of PM Boris Johnson’s congratulator tweet to Joe Biden ‘this shapeshifting creep weighs in. We will never forget your racist comments about Obama and slavish devotion to Trump.’
• Nicholas Watt tells Andrew Marr the ‘Biden team is expected to send “strong words” to No 10 calling for removal of clauses from a parliamentary bill which would break international law on the Northern Ireland protocol.’
• Sterling up vs dollar at $1.3175 but down vs Euro at €1.1081. Oil higher at $40.47. UK 10yr gilt yield up 4bps at 0.28%. World markets mixed on Friday but Far East higher in Monday trading on the Biden victory. Japan at a 29yr high. UK set to open up around 79pts.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front page headlines of most of the Saturday papers were focused on the news that Joe Biden was “on the brink” of defeating Donald Trump, after the protracted US Election counting, although the Daily Mail chose to splash the lurid details of the scandal about the infamous BBC interview with Princess Di back in 1995…
• Saturday’s Press and News (2): In terms of Retailing stories, the main news was that the Edinburgh Woollen Mill and Ponden Home chains had gone into administration (but not the whole EWM Group), as highlighted by the Telegraph and the Guardian. The Guardian also flagged that independent stores are calling for more clarity from the Government rules about which shops can sell “non-essential” goods during the lockdown, amidst a row about why The Range, Carpetright and Ryman have been able to keep trading, noting that even Frasers Group has done the decent thing and closed all its stores. The Times also noted that Gary Grant, the boss of The Entertainer toy chain, was angry to get a demand for unpaid rent from Westfield on the eve of lockdown The Business editorial in the Telegraph (headlined “Ashley takes aim at Gove”) said that Mike Ashley was right to lay into the incompetence of the
• Saturday’s Press and News (3): In other news, the Times went big on the news that Amazon has been allowed to sit on the Tax Committee of the CBI…whilst the FT highlighted that the competition authorities in Thailand gave their blessing on Friday to the sale of Tesco’s supermarket business to its nearest Thai rival. The modest boost to the Tesco share price this prompted was mentioned in the market reports in the Telegraph and the Times. The other feature in the market reports was the c6% surge in the Games Workshop share price on Friday, after a surprise profit upgrade, with the Times noting that this pushed the market cap of Games Workshop close to the £4bn mark. The Daily Mail focused on the strength of B&M, in its “Popular Shares” column feature, ahead of next week’s interims. The FT had a column that highlighted that Ocado has been using the argument that it “saves lives” with
• Sunday’s Press and News (1): The headlines on most of the front pages of the Sunday papers were, inevitably, about Joe Biden being named the next US President, although the Sunday Times’ “Sleepy Joe wakes up America” was a little unnecessary. The Mail on Sunday went with the Government inquiry into which Minister leaked the recent lockdown plan to the press a week ago.
• Sunday’s Press and News (2): In terms of Retail stories, the main Business story in the Mail on Sunday was headlined “Two weeks to save Christmas, say shops”, highlighting the demand of the Retail industry for clarity from the Government that it will be able to reopen shops on Dec 3rd, with JLP Operations Director Andrew Murphy quoted at length on the logistical challenges for multi-channel retailers. The Sunday Times feature article headlined “Amazon’s British Empire” focused on the same theme, flagging that many High Street retailers are up in arms about the lockdown advantage handed to Amazon this Christmas, although JD Sports boss Peter Cowgill was quoted raging about the unfairness of supermarkets being able to sell clothes. There was a similar article about Amazon in the Sunday Telegraph: “Lockdown delivers early Christmas present to Amazon”. The Sunday Telegraph also had a
• 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 (“After another handout from Sunak, how do we pay for it?”), in which he noted that sustainable growth is the only way to restore the public finances. We would also flag the column by the Sunday Times Business Editor, Oliver Shah (“Business needs to find its voice before it is crushed by this bungling Government”), in which he highlighted a separate interview in the paper with Stuart Rose of Ocado (in which he said the Government doesn’t understand the industry) and by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“Our ship of fools sails on, from one destructive lockdown to the next”), which he ended by noting that the star of Chancellor Rishi Sunak “seems