Langton Capital – 2021-01-15 – PREMIUM – 2021 outlook, December Tracker, job losses, Diageo, Gym Group etc.:
2021 outlook, December Tracker, job losses, Diageo, Gym Group etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
During lockdown, I’ve decided to put my theory that, if you leave dirty shoes for long enough the dirt will just fall off them, to the test.
So far, it hasn’t.
But it’s only been about nine months since I cleaned them, so I think we’ll have to give it another couple of years or so because nothing’s been definitively proven either way.
And the theory works for dirty cars though there have been some objections to my rationalisation. I’ve been told that cars clean themselves because they stand in the pouring rain all night from time to time and I’ve been advised to do the same in my shoes.
And I’ve been asked just where I think the dirt goes when it ‘simply falls off’. I’m sure Einstein and that bloke who turned lead into gold faced similar objections. On to the news:
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FEEDBACK REPORT: WHAT CAN WE EXPECT FROM 2021?
Last week, we asked for reader comment as to how the year might turn out. We’ve covered points one and two below and now we’ll have a look at point four.
• How will the year pan out, by quarter?
• Different recovery paths by sub-sector, region, product-type
• Any permanent or long-lasting changes? Any other observations?
• Longer term implications for rents
• Major risks & other considerations
The future for rents?
• This is a subject dear to many hearts and, across the spectrum of hospitality companies, it’s fair to say that there isn’t much sympathy for landlords.
• But a) they have to eat too and b) they are not all the same
The current situation:
• One contributor rightly points out that many big rent deferrals have simply been kicked down the road
• Few people are forgiving anything, at present. There is an understandable move to ‘demand legal rights’ (as a negotiating position) and then see what happens.
• Tenants cannot currently be evicted. This is scheduled to change at the end of March. The government says (again) that it ‘really means it this time’.
What could happen:
• A) HMG may either wish to (or have no choice but to) intervene.
• The government, if it is thinking along commercial lines, may rather ‘deal’ with a few hundred landlords rather than with tens of thousands of commercial tenants
• It may, if it is thinking this way, consider it ‘easier’ to engineer a bailout for lost rent for landlords than pay many thousands of businesses to pay their rents.
• In the above case, some sort of forgiveness package may be engineered though it has to be said that this would go against the free-market instincts of many Tory MPs
• Or B) there may be no government intervention and tenants and landlords may have to fight it out through lawyers, accountants and administrators over the next few years
• C) in this situation, it may be to plan for the worst and hope for the best
• One operator identifies the problem when he says ‘landlords are reluctant to take haircuts and govt do not seem keen to subsidise rents in any way – this will be a BIG problem and I cannot see that intervention will be effective especially since many landlords are pushing govt to allow them to send bailiffs in.’
The most likely outcome is rents fall. But some may not.
• The most likely outcome – and the best for tenants – is that rents fall.
• However, this may only impact new leases with existing tenants having to threaten or enact CVAs etc to get rents down
• On the other hand, on commentator says ‘landlords with solid balance sheets hold all the cards in the game versus the non-rent payers. They have a real opportunity to change tenant mix and generate higher rents in their best locations.’
• Calling the bluff of non-payers could be a real thing.
• Many operators ‘expect more turnover based rent deals, less ‘new schemes’ and more reconfiguration of space that will be good for hospitality.’
• There may be some payback, with landlords seeking to evict operators from some sites if they seek to cut rents on others. We have seen this with CVAs – but what comes post Covid could be on an altogether larger scale
• One operator says ‘landlord fatigue will be a problem if the open/close [i.e., stop/start lockdowns] thing keeps happening into 2021.’ The feeling here is that smaller landlords ‘have been far more generous than the big boys.’
• This may be because larger landlords do not want to set precedents that could then be quoted by dozens of other tenants. It’s for this reason that some landlords have action taken against them by councils when they keep voids empty rather than accept a lower rent.
• Another operator says that ‘rent deals including spreading repayments [will become more numerous] ‘but not many evictions’ are expected. Given the liability to dilapidations, business rates and insurance that would be incurred by landlords on empty properties, this is understandable.
• A further operator says it won’t all be one way. He says ‘landlords will act tactically. A lot will depend on the opportunities for change of use locally.’
• It’s hoped by several that ‘rents will soften and become more flexible with landlords sharing in down and upside on a more frequent (annual?) basis.’
COFFER PEACH TRACKER FOR DECEMBER:
• See also general email below.
• CGA says ‘hopes that Christmas and New Year would help at least part of the market recoup a little of the income lost earlier in 2020 were dashed when the Government started to impose increasingly severe tier restrictions across England in the run-up to the Christmas break.’
• This only got worse into the New Year.
• This isn’t new news for either operators or would-be customers.
• CGA says ‘the tier system had already kept pubs and restaurants across large parts of the country closed from the start of the month, but the escalation of measures saw the sector effectively grind to a total standstill by the end of December.’
• Moving from Tier III to lockdown didn’t change much for the industry. It shared the misery a little wider and may have the effect of speeding recovery. But the mood music isn’t currently very positive.
• In late November. ‘just over half of the country’s managed pubs, bars and restaurants were trading again [but by] the end of December the number was less than 10%.’
• Annual sales were around 50% for the full 12mths.
• David Coffer says ‘with most operators now unable to create any turnover whatsoever the accrual of debt has become critical.’ We have covered this accumulating baggage in a number of emails.
• Coffer says ‘the crucial date will be 31st March when the moratorium for insolvency is removed and many operators will face over a year of unpaid property outgoings.’
• ‘Similarly, there are debts relating to rates, taxes, VAT, insurance and repayment of business loans.’
• The furlough scheme ends in April, VAT is currently scheduled to rise to 20% after the end of March and business rates are meant to kick in.
• Mr Coffer says ‘I don’t expect these operational figures to improve in any way over the coming quarter.’
• RSM says ‘December’s results lay bare the stark reality facing the hospitality sector.’ It says cash flow forecasting will be key.
• It says ‘urgent clarity on substantial, additional Government support is needed now as the 3rd March budget may simply be too late.’
CHRISTMAS SALES TRACKER (30 Nov to 3 Jan):
• The Christmas Coffer Peach Sales Tracker reports the season saw ‘sales misery for pub and restaurant groups.’
• The Tracker says ‘Britain’s managed pub and restaurant groups saw total sales drop by 72.6% over the festive season.’
Food vs drink:
• The Tracker says ‘drink-led pubs and bars [were the] worst hit by escalating restrictions
• The Tracker says ‘drink-led managed pubs and bars were worst hit, with total sales down 83.7% and 87.2% respectively on the same period last year.’
• Managed food-led pubs and pub restaurants ‘were down 78.2%, while group-owned restaurants saw total sales drop 57.9%.’
• The Tracker says ‘restaurants had a marginally less miserable time, benefitting from people out Christmas shopping at the start of month and more importantly from delivery business’
• Delivery’s ‘share of restaurant chain sales [rose] up to 23%.’
• London fared ‘slightly better than the rest of the country with sales down 66.8% on last year, compared to 73.9% down outside of the M25.’
• This will have varied materially within the capital. Residential areas will have performed less poorly than The City, the West End and Docklands.
Coffer Peach interpretation:
• See Premium Email.
PUBS & RESTAURANTS:
• Data from Fourth has shown that the hospitality workforce has shrunk by more than a quarter, with 660,000 job losses over the course of the year. Commenting on the latest figures, Sebastien Sepierre, Managing Director – EMEA, Fourth, said: ‘As we enter a new year, hospitality businesses would typically be reflecting on and celebrating a roaring festive trading period. But due to the pandemic, operators continued to suffer very difficult and challenging times in December, when many businesses were shut or running with severe restrictions and are now faced with another lengthy period of little or no revenue’.
• In addition, over 300,000 more jobs in the hospitality and tourism sector could be lost if the VAT rate reverts back to 20% in April 2021, data from the Cut Tourism VAT Campaign has found.
• Some Langton readers have suggested moving Mothers’ Day into May this year in order to preserve some sort of a buzz (and income for the sector).
• Diageo has announced that Kathryn Mikells, CFO, will leave the company in June 2021, returning to the US. Lavanya Chandrashekar will be appointed Chief Financial Officer, effective 1 July 2021 and will join the Diageo Executive Committee and Board.
• MEATliquor will open a drive thru restaurant in North Finchley for a weekend next month. The drive thru will be in the car park of The Bohemia pub.
• THIS, the London-based meat substitute start-up has announced that it will earn £1m this month as more customers are eating meat alternatives. The company’s current bestseller is THIS Isn’t Bacon made from peas and soybeans.
• Lidl has been named the UK’s cheapest supermarket. Which magazine found that it was slightly cheaper than Aldi.
• Research from KAM Media has shown that 20% of consumers are planning to make a bigger effort than normal this Valentine’s Day. Katy Moses, MD at KAM Media, said: ‘consumers are really embracing any excuse to celebrate right now and to make one day seem different from the next! Operators and brands should already be actively communicating their offer as consumers are already researching their options’.
• IGD identifies what it calls five ‘retail trends to watch’ in 2021. More digital tech and the rise in eCommerce will not be disputed. Health & wellness and sustainability would also be in many operators ‘top five’. What IGD calls ‘Making a meal of it: creating inspiration and excitement’ may be a little more esoteric. IGD suggests that retailers will seek to ‘create inspiring meal solutions for all occasions.’
• The Caterer has reported that members of the Scottish Hospitality Group (SHG) has taken on more than £16m of debt over the last year to stay in business. Stephen Montgomery, spokesperson for SHG, said: ‘Our members don’t have their usual Christmas reserves to see them through the quieter months and government help doesn’t even cover the costs of employer furlough contributions for most operators’.
HOTELS & LEISURE TRAVEL:
• Spain extends its ban on UK arrivals until February 2 due to the UK’s surging Covid numbers.
• Travel into the UK from several South American, Portugal, Denmark & South Africa have been announced. Returning Brits can still come home but they must self-isolate for ten days along with their households.
• These kinds of development are not conducive to a buoyant travel market.
• Tui is making more than 170,000 excursions, activities, tickets and transfers available to partners, travel agents and customers across the world. Tui claims that ‘With hygiene and safety standards above the current market standard, a quick restart will be possible during 2021’.
• London hotels are going to be used as quarantine facilities for recovering Covid patients under new plans aimed at easing the pressure on the NHS. King’s College Hospital in Camberwell is the first to trial the set up by sending homeless Covid patients to the four-star Best Western hotel in Croydon.
• STR reports that US hotel occupancy fell by 28% year on year in the week to 9 Jan with room rates down by 27%. REVPAR was 48% lower.
• Gym Group reduces cash burn but is in discussions with its banks.
• The Gym Group has updated on trading for the year to end-Dec saying that ‘total revenue for 2020 was £80.5 million (2019: £153.1 million) with the Company losing 45% of the trading days in the year due to closure as a result of Government restrictions’. Year end debt pre-IFRS 16 was £47m, in line with last year.
• Gym Group says that monthly cash burn (before expansionary capex) during the current closure period will be c.£5 million. It says this is down on the November lockdown ‘as a result of recently announced Government grant support.’
• Gym Group says ‘we have significant liquidity available under the Company’s £100 million bank facility. Given the ongoing impact from the latest lockdown and its implications for the operational reopening of our gyms, we have started discussions with our lending banks, who continue to be supportive, to review the future covenant tests relating to this facility.’
• CEO Richard Darwin says ‘2020 has been a challenging year for our business, our members and our colleagues.’ He says his units have been resilient when allowed to open. Darwin adds ‘our cash management during the pandemic has ensured we ended 2020 with manageable levels of debt and significant liquidity. At a time when health and fitness has never been more important to the nation, we are ready to emerge from the pandemic and take advantage of the many opportunities available us.’
• Sky reports that the owner of Ladbrokes ‘is lining up the first female chief executive of a major quoted British gambling group as it tries to defend itself against an £8bn takeover approach from the US casino giant MGM Resorts.’ It has existing director, Dane, Jette Nygaard-Andersen, in mind.
• Hard Rock International is reported to have acquired a casino premise license from The Ritz Club in order to expand in London. Hard Rock says ‘we look forward to expanding our brand offerings within London and bringing our award-winning hospitality, gaming and entertainment to the birthplace of Hard Rock.’
• Fleetwood Mac’ Mick Fleetwood is reported to have become the latest musician to sell the rights to their biggest hits. The sum involved has not been reported.
FINANCE & MARKETS:
• The German economy shrank by 5% in 2020 per official stats. The drop, though large, is less than it endured in 2009.
• Michel Barnier has said that issues with trade are not all teething problems and that some friction will be permanent. Deliveries of Scottish seafood to the EU have been halted until 18 January. Sky reports that some operators have only ‘weeks left’ before they will collapse. Tesco says that it is still committed to Northern Ireland. The BBC quotes hauliers as saying this has been the most difficult week in 20yrs. German logistics company DB Schenker has paused deliveries to the UK.
• The RICS has reported that the UK housing market softened in December.
• The US economy saw nearly a million people making their first claims for unemployment benefits last week.
• Sterling $1.3675 and €1.1263. Oil $55.74. UK 10yr gilt yield 0.29%. World markets: UK & Europe up yesterday with the US down and Far East lower in Friday trade. London set to open down around 31pts.
RETAIL WITH NICK BUBB:
Today’s News: There was no news scheduled today, after the rigours of “Super Thursday”, but the struggling home shopping business N Brown has stepped into the breach, with a sober trading update: revenue was still down in the last quarter (the 18 weeks to Jan 2nd), by nearly 9%, but the group says that it “continues to trade in line with its expectations and expects to deliver FY’21 adjusted EBITDA of between £84m and £86m”, albeit “we expect depreciation to be higher than FY’20 as we accelerate the pace of our strategic change”. And it has been confirmed that, on top of the big placings this week in B&M and THG, there has also been a big placing in Watches of Switzerland, with Apollo continuing to sell down its post-IPO stake, reducing it now to just 10.4%.
Next Week’s News: After the overload of company news this week, next week is a lot quieter, but we have a sort of “Super Wednesday”, as, on top of the inauguration of President Biden in the US, we get the Dixons Carphone update, the WH Smith AGM update and the Burberry Q3 update. Friday then brings the monthly GFK Consumer Confidence survey, the ONS Retail Sales figures for December and The Works’ interims. We are also still waiting for the Superdry interims, so they could be announced as well at some point.
BDO High Street Sales Tracker: Given the lockdown, the BDO High Street Sales Tracker for medium-sized Non-Food chains was weak again in w/e Jan 10th…BDO Fashion LFL sales were down by c6%, with Store Fashion sales down by a hefty 94%…And Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as the Fashion retailers) were down by c11% (down 86% in Store sales and up 163% in Online sales). The BDO index is, however, just an unweighted average of percentage changes in the sales of their reporting retailers, so it’s not to be taken too seriously.
Trade Press: Retail Week magazine has not been published today, but the new monthly Drapers magazine is out and it looks ahead to the new year, with the Editor arguing in her column that, despite the new lockdown, there is “light at the end of the tunnel” for fashion. The main feature is on the young talent in the industry, as featured in Drapers’ annual “30 Under 30” survey, which includes The Drapers Interview “power couple” who have built the £50m business Lounge Underwear in just five years. Elsewhere, fashion business leaders (including Michael Murray of Frasers) share their strategies for dealing with Brexit, business rates, forced store closures and the other challenges in 2021. And there is a feature on Outlet centres, which have been a bright spot in an otherwise dire market.
Primark Watch: We flagged yesterday that Primark saw sales slump by 30% in the last 16 weeks, given the enforced store closures, but it also announced that 5 new stores were opened in the period: Barcelona Sant Cugat and Espacio Leon in Spain, Sawgrass Mills Florida and American Dream New Jersey in the US and Roma Maximo in Italy (as well as the relocation to larger premises in Southend, in the UK!). Primark noted that “The very positive customer reaction to these store openings, both in the US and in Europe, was striking given the circumstances”, but it also admitted it was having to downsize its flagship downtown Boston store in the US again.
Signet Watch: Investors in the US were pleased yesterday with the stronger than expected trading announced by the jeweller Signet, with US sales up by a healthy 7.8% LFL in the 9 weeks to Jan 2nd, but its UK chains (H Samuel and Ernest Jones) did badly because of the lockdowns, with LFL sales down by 19.2%, despite strong Online sales.