Langton Capital – 2021-01-25 – PREMIUM – Covid impact, lockdown spec., survivability, JDW, Hollywood Bowl etc.:
Covid impact, lockdown spec., survivability, JDW, Hollywood Bowl etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Lies, damned lies and statistics. Are events coincidental, correlated or causal? The words may sound similar, but they imply very different things: a few illustrations below.
Statement One. There’s frost on the grass and it’s Monday. That’s a coincidence. The weather doesn’t even know what Monday is. It just does what it does. There’s no correlation in this statement, far less causality. Frost doesn’t cause Mondays nor Mondays the frost.
Statement Two. Over the last few years, York has lost dozens of pubs to alternative use developers and it has ‘gained’ dozens of new sets of traffic lights. So, there’s an inverse correlation. However, there’s no causality. I could demolish as many traffic lights as I felt able but a) that wouldn’t cause more pubs to reappear and b) it would land me in jail.
Statement Three. People with big feet (a.k.a. ‘adults’) are brighter than people with small feet (a.k.a. toddlers). Usually, anyway. There’s a strong correlation but the causality is elsewhere, age rather than shoe size.
Politicians often point to correlations and imply causality. The way of the world. It’s lazy and dangerous but, in the short term at least, it gains more traction than the often truthful answer ‘it’s complicated’. From a cold but snowless York, it’s time to move on to the news:
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MEANWHILE, IN THE REAL WORLD. THE FINANCAIL IMPACT OF COVID ON THE GROUND:
Langton is close to several companies in the hospitality area. Some are listed (value less around £50m or less) and most are not (these substantially smaller than their listed peers).
Below, some comment on what we’ve heard back from 13 such companies.
• Two companies. One after a long financial struggle against high rents, increased competition, low margins and a narrow window of time during which it had to make sufficiently high sales to cover costs. Covid was coincidental and correlated but only partially causal.
• The other to a failed business model. Though that’s a bit harsh. The business model wasn’t a failure as such. But it was clear that there was only room for a small number of winners. Covid-19 was not damaging to the business model.
• One company. Whilst there’s life, there’s hope. If rents are reduced, a couple of sites jettisoned etc., then this one could be OK. It’s not, however, in a corner of the market that is going to bounce back as rapidly as some other areas.
• The company seeks to give sites back & cut rents. Trade creditors may take a hit but the company is trying to maintain relationships.
• Covid-19 was causal in this instance. It is also the reason for what will be a late-cycle reopening. Not helpful.
Requests for more equity:
• Five companies. Three listed, two not.
• Some of the companies needed to raise equity finance to secure increased bank loans. One was as a part of a merger deal. Only one, perhaps, was a ‘rescue’ placing.
• The three listed companies in this category have all seen their share prices rise since their placings.
None of the above:
• Five companies are a) still trading and b) have not asked for additional funds. Bravo.
• One or perhaps two might possibly ask for money shortly and three are ‘doing OK’ because they are either good at delivery (not the main business model) or are in residential areas or both.
A few other points:
• The success or failure or neutral positioning of the above companies does not seem to be correlated to the ability of the management.
• Prior to Covid, that may have been the case. But Covid was no respecter or management ability though, at the margin, it is always possible for a good management team to make a bad situation that little bit less bad.
• What is irrefutable, we would suggest, is that a bad management team can always make a bad situation worse.
• Most if not all of the above companies have pursued insurance claims for lost sales / interruption of business, etc. At least four, and maybe more, have been successful. There are a number of appeals ongoing.
• All the companies are in discussions with landlords. Most have had a mixed response. Some have commented that smaller landlords have been more accommodating than their larger peers.
• Most are in talks with banks. Several have had facilities extended.
• All have cut costs, most have cut staff, virtually all have cut capex & marketing.
A final word:
• We are as close to operators as it is possible to be without wearing an apron.
• We have not met a management team that has not given their utmost. This is a tragic situation for some and a fantastic, life-altering opportunity for others. Good luck to all and see you on the other side.
PUBS & RESTAURANTS:
Lockdown. Negative direction of travel:
• The mood music re when and how we will come out of lockdown has arguably worsened.
• Matt Hancock says it will be a long while before restrictions are eased.
• Ministers are said to be considering paying £500 to everyone who tests positive in order to encourage them to stay at home. This sounds open to substantial abuse. Labour has claimed that three-quarters of applications for the current £500 discretionary grant for those on low incomes are rejected.
How long can operators survive?
• Lumina Intelligence has conducted a poll on behalf of the MA & has concluded that 79% of operators will only survive a trade shutdown until May with support from Government schemes.
• Talk of a May Day reopening has been doing the rounds. The vaccine rollout is currently engaged in a race with the more infectious UK variant of Covid-19. The MA poll found that 84% of business leaders did not believe that delivery was a viable long term alternative business model for their operations.
• The poll says 35% of operators had cut investment completely whilst virtually all other operators had cut it back to some extent.
The road out of lockdown:
• Further speculation and comment as to when and how the current lockdown will end. There is no firm date. Matt Hancock says we are a ‘long, long, long way’ away from ending the lockdown but, with current inoculation numbers beating the government’s targets, there are hope that death and hospitalisation numbers could be in serious decline within a matter of weeks.
• This lockdown could be longer than the first. There seems to be some agreement that a tier system will replace the lockdown when it is finally lifted. The Sunday Telegraph reports that ‘Britain faces three-month ‘halfway house’ lockdown after Easter as over-50s wait for second vaccine.’ It says ‘a source close to the discussions said pubs and restaurants could be open from Easter with social distancing measures.’
• The Telegraph adds ‘Boris Johnson and ministers are considering plans to open the economy by mid-summer.’ It says ‘Ministers are keen to reopen hospitality venues in some capacity before the G7 summit in the second week of June, when the UK will host world leaders in Carbis Bay, Cornwall. National measures will be eased in advance of the summit, allowing pubs, restaurants and tourism to begin to trade again.’
• The above, though disappointing (and not necessarily correct), is arguably broadly in line with current expectations.
Other Covid-19 news:
• KAM Media comments on delivery apps saying that they have moved into the mainstream and now cover all dayparts. KAM says ‘the next phase of delivery will move from a purely functional transaction to experiential.’ It ads ‘operators need to think beyond the food they offer and consider the total experience; consider a delivery as a gift arriving on your customer’s doorstep.’
• PM Boris Johnson has side-stepped questions on whether a dedicated hospitality minister would be appointed.
• See Services PMI news under Finance & Markets below.
• The CGA has reported that consumer confidence about eating and drinking has fallen by 10% since October. The CGA’s Hospitality Consumer Forecast has found that 34% of UK consumers would feel confident about eating or drinking out, if they were permitted to open now, down from 44% in October.
• The BBPA points out that, in the middle of lockdown 3.0, some pubs are still waiting on their grants from lockdown 2.0.
• ‘Phenomenal glut’ of CVAs could follow the end of the lease forfeiture moratorium at the end of March. See our earlier comments on The Killing Zone. Loungers’ chairman Alex Reilley says ‘Loungers won’t lose any sites as a consequence of this, but there will be thousands of smaller hospitality businesses that will be horrifically exposed once this ends.’ He says ‘on that day, you can bet your bottom dollar, we’ll begin to see winding up petitions being served and landlords going down the nuclear route.’
• JDW on Friday commented on a Guardian article that had suggested it would move ‘to buy smaller pubs on the cheap amid Covid crisis’ and that ‘it is targeting pubs in central London.’ The company says ‘these statements are completely untrue.’ It says ‘Wetherspoon operates pubs which are three or four times larger than average and rarely “targets” existing pubs.’
• Sky reports that Hollywood Bowl ‘has been trying to appease top investors in recent days in order to prevent an embarrassing revolt at its annual general meeting on Friday’ regarding boardroom pay. Sky says ‘the company’s decision to move the goalposts in relation to its LTIP has…infuriated investors which supported the company by injecting nearly £11m in a share placing last year.’
• Re Hollywood Bowl, Institutional Shareholder Services, a proxy voting adviser, says ‘while shareholders will note that awards will be subject to a two year holding period and continuous employment, they may question whether such payments are appropriate, given the company’s circumstances, the government help received, furloughing 98.6% of staff (it will be noted that unlike the case in other companies, the directors did not reduce their salaries to reflect reductions for the furloughed staff, but deferred a portion of their salaries until October 2020) and suspending dividends.’
• Hollywood Bowl says the board has ‘received external advice to ensure that its remuneration policy strikes the right balance between the interests of shareholders and the ability to incentivise and retain senior management, which is undoubtedly in the best interests of all of our stakeholders.’
• The French spirits group Remy Cointreau has seen sales increase 25.1% in Q3. Finance Chief Luca Marotta of the group said: ‘We feel very confident over our outlook and well on track for a strong topline performance in the second half’.
• Red Oak Taverns has acquired three pubs from Reclamation Inns for an undisclosed sum. Co-founder and chief executive of Red Oak, Mark Grunnell, said: ‘These sites are a perfect match for our business and are fantastic community pubs’.
HOTELS & LEISURE TRAVEL:
• Negative for the travel industry as bans imposed and re-imposed.
• US President Joe Biden is to re-impose a number of travel bans repealed by Donald Trump. The President is expected to ban arrivals from South Africa, the European Union countries, the UK and Brazil today.
• The STR has reported that the hospitality sector will not see as many closures as in the first period of Covid-19 lockdown as hotels have become ‘better at controlling costs’ while remaining open. Robin Rossmann, managing director of STR commented: ‘We expect a few more hotels to close, but don’t think it will go back to the levels of the first lockdown. Hotels have got better at controlling costs while remaining open. Second, hotels that stayed open significantly outperformed those which closed and they continued to outperform since’.
• Iain Powell, head of trade sales at Saga has commented that the company is ‘really confident’ of restarting cruise operations in May. Powell stated the company: ‘The customer response has been really fantastic so we know it’s the right thing to do and we hope to see that pent-up demand for the bookings customers have told us they want to make [once they and other passengers are vaccinated]’.
• The Spanish government aims to have international travellers return to the country by the end of spring by promoting Spain as a ‘safe destination’. Tourism minister Reyes Maroto said ‘We are working to adopt a common framework of a series of planned actions to give confidence to tourists.’
• A JV between Property Alliance and Starwood Capital Group has purchased the Renaissance Manchester site from Urban & Civic.
• Carnival Cruise Line extends its suspension of sailings until April 30, 2021 for its US departures and May 19, 2021 for its Australian departures.
• Eagle Hospitality Trust, the Singapore-based hospitality operator, has begun the process of selling off an 18-hotel U.S. portfolio amid a bankruptcy filing including The Queen Mary, a docked cruise ship turned hotel in Long Beach, California.
• UK and France are in talks to save the Eurostar after Covid-19 travel restrictions led to a collapse in passenger carryings. Passenger numbers fell by 78% in 2020, with numbers down 94% YoY in Q4.
• Escape Hunt is to acquire French master franchise partner. The company will raise £1.4m through a share placing, part of which will be used to fund the deal.
• No Time To Die, the next James Bond film, has been delayed for a third time because of the pandemic. The film had originally been due to hit screens in April 2020, but instead will now be released on 8 October 2021.
• National Fitness Partners, a Planet Fitness franchisee, has acquired 16 Planet Fitness clubs across the US. President and CEO of National Fitness Partners, Stephen Kindler Jr. said ‘We remain bullish on the near-term recovery prospects and long-term growth of the Planet Fitness brand, as encouraging membership and utilization trends continue to point to a successful emergence from the COVID-19 pandemic’.
FINANCE & MARKETS:
• Flash PMIs for January in the UK on Friday came in below expectations. The Composite PMI was 40.6 (down from 50.4 in December) and the services PMI was 38.8. Any number below 50.0 implies contraction.
• Markit says ‘a steep slump in business activity in January puts the locked down UK economy on course to contract sharply in the first quarter of 2021, meaning a double-dip recession is on the cards.’ It says ‘services have once again been especially hard hit, but manufacturing has seen growth almost stall, blamed on a cocktail of COVID-19 and Brexit, which has led to increasingly widespread supply delays, rising costs and falling exports.’
• The CBI, on the other hand, has reported that business optimism improved significantly in the quarter to January, but export sentiment continued to fall.
• The UK government borrowed £34.1bn in December, the highest figure for that month on record. Government borrowing in the first three quarters of the current financial year is now up to £270.8bn.
• The BBC reports that British employers made plans to cut 795,000 jobs last year.
• The BBC says that some ‘UK firms that export to the EU say they are being encouraged by the government to set up subsidiaries in the bloc to avoid disruption under new trade rules.’ This is ‘not government policy’ reports the Department for International Trade.
• London’s population is reported to have fallen by 700,000 since last March.
• Sterling up vs dollar at $1.3714 but down vs Euro at $1.1257. Oil price lower at $55.40. UK 10yr gilt yield down 3bps at 0.30%, World markets broadly lower on Friday but Far East up in Monday trade & London set to open up around 22pts.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-page headlines of the Saturday papers were dominated by the PM’s warning that the new Covid variant now looks more deadly than the original virus, eg “New variant “more deadly”” in the Times, “New Covid variant may be 30% more lethal, warns PM” in the Guardian and “Mutant strain “more deadly”” in the Telegraph. The FT also had a very similar headline (“Johnson warns variant in Covid surge may be 30% more deadly”), but, even more alarmingly, it also reported that “Wine lovers wake up to price rises and less choice as Brexit hangover kicks in”. The Daily Mail buried the Covid news on page 12 and launched a new campaign to get free laptops to children with no computer access at home (“Help us get computers to schoolkids”).
• Saturday’s Press and News (2): In terms of Retail news, there was plenty of uncritical coverage of the worse than expected December Retail Sales figures announced by the wretched ONS on Friday morning, whilst the other big story was the news that the John Lewis Partnership saw better than expected Christmas trading…As far as the silly ONS figures are concerned, the Economics correspondents saw no conflict between the JLP news and the ONS news, eg “Retailers miss out on boost from Christmas shopping” was the FT headline, whilst the Times went with “Stay-at-home Britain takes fizz out of Christmas”…
• Saturday’s Press and News (3): As for the news from the John Lewis Partnership, most of the papers flagged that JLP has been able to repay its £300m loan from the Government early, because of better than expected liquidity after Christmas, but there was some critical Editorial comment and the Times jumped on the news that JLP is still refusing to repay its Business Rates relief for Waitrose, as its headline was “Pressure on John Lewis to hand back rates relief”. And the Business editorial in the Times stuck the boot in (“John Lewis halo has lost its shine”), noting that although JLP only had to issue a profit guidance update because of its obligations to the £600m bondholders, “as tin-eared statements go, it’s hard to beat” and that if JLP thought it would get some PR credit for the loan repayment “it’s backfired big time”. The Business editorial in the Telegraph took a similar line
• Saturday’s Press and News (4): In other news, the main Business story in the Daily Mail was that Overseas bidders are now leading the race to buy Top Shop, following Next’s withdrawl from the auction, although it noted that Boohoo is not out of it yet and that Asos is still very interested…The Business editorial in the Telegraph also highlighted the surprising amount of interest in the break-up of Philip Green’s Arcadia empire, thundering that “it is a reminder of the tycoon’s limitations as a retailer that brands he tried several times to revive could survive under new ownership”. The Daily Mail flagged that the struggling High Street gifts chain The Works has warned that it may run out of money later this year, whilst the Times picked up the Sky News story that the Online gifts business Notonthehighstreet is in advanced talks to sell out to the US private equity fund Great Hill
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were mostly about Covid in some way: the Observer went with an exclusive about the very poor management of the virus in the DLVA in Swansea (“Minister faces fury over mass outbreak of Covid at DVLA”) and the Sunday Telegraph ran with a warning from the Deputy CMO, Prof Van-Tam (““Don’t break rules once you’ve had the vaccine””), whilst the Mail on Sunday flagged a plan to vaccinate all teachers over the February half-term: “Top schools: we can jab all teachers”. The Sunday Times went on a different tack, highlighting opinion polls showing support for breakaway referendums in both Scotland and Northern Ireland: “Our disunited kingdom”.
• Sunday’s Press and News (2): In terms of Retail stories, the main revelation in the Sunday papers was the Sky News scoop that ASOS has emerged as the front runner to buy Top Shop (despite not wanting to operate any of the shops), although the Mail on Sunday revealed that another surprise late entrant to the auction is the Issa brothers, along with their private equity friends TDR: “Asda brothers enter race to buy Topshop”. The front page Business story about all this in the Sunday Telegraph was headlined “Asos battles Asda owners in auction of Topshop” (even though the Issa brothers haven’t bought Asda yet…) and also flagged that the Chinese Online fashion business Shein has backed away from the auction. The front page Business story on the Arcadia/Top Shop auction in the Sunday Times (“Asos breaks cover as frontrunner to buy Philip Green’s Topshop”) said that Boohoo has been alarmed
• Sunday’s Press and News (3): In other news, the main story in the Sunday Times Business section was headlined “Dr Martens to fill boots with £3.5bn float”, flagging that the IPO valuation has firmed up (crystallising a £350m windfall for senior managers and staff) and that Dr Martens will reveal tomorrow that it has secured some cornerstone investors, as it publishes its prospectus for next month’s IPO. The Sunday Times also had a background article on the IPO boom in the City, with the takeaway food delivery business Deliveroo and a couple of fintech giants set to join Moonpig on the float trail soon: “How Moonpig and chums are putting float fizz into the City”. The Sunday Telegraph highlighted that hedge funds are betting that Sainsbury will be the next in line to receive a takeover bid, in the light of the Canadian chain, Couche-Tard’s interest in buying Carrefour. The Mail on
• Sunday’s Press and News (4): In terms of all the Economics comment columns in the Sunday papers, we would, as usual, highlight the column by the Sunday Times Economics correspondent David Smith (“Tax rises aren’t easy. Sunak will need to tread stealthily”), in which he flagged that “there is no silver bullet on property taxation, but Chancellor who wants to leave his mark should be looking at it”. We would also flag up the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“It’s far too late to be closing the borders; the horse has already bolted”) and two columns in the Observer: the column by the veteran Economics correspondent Willian Keegan was headlined “Brexit has left us all at sea: even the fishing industry” and the column by the Political correspondent Andrew Rawnsley was headlined “The bill for Boris Johnson’s Brexit is coming in and it’s
Today’s News: After all the speculation in the weekend press, ASOS has confirmed that it is indeed now the front runner to buy the Top Shop/Top Man brand, as it is in “exclusive discussions” with the administrator of Arcadia. ASOS is also talking about buying the Miss Selfridge and the HIIT sportswear brand. Apart from saying that “The Board believes this would represent a compelling opportunity to acquire strong brands that resonate well with its customer base” that’s all it says and there is no indication of the purchase price or what will happen to the stores. And Boohoo has confirmed the FT scoop last night that, despite all the rumours about its own interest in buying Top Shop etc, it has actually been working on a deal to buy Debenhams.com, what it calls a strategic acquisition for the “Development of an Online marketplace and the extension of its target addressable market”, given