Langton Capital – 2021-03-22 – PREMIUM – JDW H1, closed units, comps, staycations, foreign hols, Hawthorn etc.
JDW H1, closed units, comps, staycations, foreign hols, Hawthorn etc.
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A DAY IN THE LIFE:
But let’s put that to one side. It’s interesting don’t you think that, having heard them butchered or carved up in one way or another, some words will never quite sound right again.
I’m thinking of a few so, here are the words, followed by the pronunciation that I had in mind. See if you can put a name to a word.
China. A large & venerable country pronounced sneeringly as ‘Chiy-e-nah’ is some quarters.
Authority. It may be earned or deserved. But who pronounces it ‘authoritaaaay’?
Freedom. Earned and in need of constant maintenance. But who shouted ‘freeeeedom…’?
Answers underneath ‘Advertise with us’ below. On to the news:
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The word China was mangled by former president Donald Trump.
‘Miaaay authoritaaay’ should be respected, said South Park’s Eric Cartman.
Freedom was, of course, promised by Mel Gibson’s William Wallace.
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JD WETHERSPOON: H1 CONFERENCE CALL:
Following the announcement of its H1 numbers, JD Wetherspoon hosted a conference call for analysts and our comments thereon are set out below:
Headline numbers, trading & reopening:
• Unlike many of its competitors, the company reports that it did pass the reduction in VAT on to its customers across a range of products (spread also to alcoholic drinks).
• The company outlined the leakage that is inescapable during shutdown. Energy will drop by only two thirds, staff NIC and pensions need paying, rents also etc.
• Q – any forex impact? Not material at this stage.
• Q – restructuring? Yes, cost of £6.2m. Some £5m to £6m should be saved per annum.
• Q – you mention a ‘gap opening vs peers’. What does this mean? Price gap as some competitors didn’t pass the VAT cut on. The company has not done a competitor survey for some time. The gap ‘has widened’.
• Some 450 pub gardens will open on 12 April. The co expects to lose money over that period. The group reiterates that it is disappointed to have dealt with ‘so many regulations, implemented at tremendous cost.’
• JDW ‘the future of the industry, and of the UK economy, depends on a consistent set of sensible policies, based on scientific evidence, rather than on political expediency.’
• Q – social distancing post 21 June? Neither the company nor the industry (nor the government) are yet clear on this.
• Q – capacity reductions? Certainly, yes, from mid-May – it will be table service only and 1m distancing. Not clear from 21 June.
Cash & balance sheet:
• Liquidity ‘is strong’ and ‘is better than it was a year ago’. Deferred payment plans have been agreed with suppliers, landlords and HMRC.
• Spend on dividend (nil), freehold reversions, capex and share buybacks (nil) has dropped sharply. Refurb cost was down by two thirds
• Net debt is only up by c£7m. CBILs expire 2023 and the bank debt runs to 2025.
• Q – are you still OK with your January debt forecasts? Closure lasted a little longer than expected. But figures are still ‘broadly in line’ as restrictions are ‘slightly less onerous than expected’.
• Q – spending on new sites? Yes, but modest. Some sites in central London alongside freehold reversions and investment in existing estate.
• Q – financial leverage measures? First test not covered by the waiver is Oct 2021.
• Q – future capital spending? Co has assumed it ‘gradually increasing’. The estimates at the time of the placing may rise somewhat.
• Q – acquisition opportunities? Possibly, but will depend on what the government rules are post 21 June.
• Q – freehold percentage is 64.5%. Where could this go to? There is no target, as such. It reduces risk and is the model adopted by mature pub companies & brewers. The price has to be right. The company will not chase sites.
• There are, of necessity, many unanswered questions. How strongly will trade recommence, will there be further restrictions, how will competitors reach, will many of them go out of business etc.?
• However, JDW is well positioned.
• It’s debt profile is not pressing on the company and it has raised equity twice. It has both defensive and potential expansionary reasons for having done so and expansion, albeit over time, is likely.
• Both pubs in general and JDW have weathered previous recessions and the opportunity to add freeholds is a real one.
• Taking a step back and attempting to look through the noise, no easy task, we have said before that JDW’s assets recently earned £105m to £110m in PBT and we see no reason why they should not do so again.
• Debt has increased but so has the opportunity to take market share. Having said this, the group’s shares have been strong recently and a pause for breath may be called for.
PUBS & RESTAURANTS:
Covid has reduced supply:
• Estimates vary but range up to 25%, even 30% when it comes to the number of branded casual dining outlets that will not reopen. Not quite comparing apples with the above oranges as the study below is looking at the total market for licensed outlets, but CGA pubs some numbers on the situation when it says ‘Britain has 7,592 fewer licensed premises than it did before the COVID-19 pandemic hit.’ It’s latest Market Recovery Monitor says there has been a ‘rapid acceleration in closures since the start of 2021.’ It says ‘Britain’s total licensed premises fell by 2,713 over January and February—equivalent to 46 closures a day’ and says ‘Britain had 107,516 sites at the end of February 2021, down by 7,592 or 6.6% from 115,108 in March 2020.’
• The closures have not been evenly spread across business types or geographies. CGA says ‘independent businesses have borne the brunt of closures. A total of 5,112 have been lost since March 2020, including 1,971 in January and February alone. This reflects the vulnerability of small and family-run businesses by comparison to well-invested restaurant and pub groups, which have recorded 1,229 closures—fewer than a quarter of the independent sector’s number.’
• Langton comment. CGA says ‘these figures show that dozens more businesses are being pushed to collapse every day. Losing Christmas sales had a shattering impact on many entrepreneurial restaurants, pubs and bars.’ It says hospitality can ‘help to kickstart the UK’s economic recovery this summer, but in the meantime support is desperately needed to avoid thousands more business failures.’ Alix Partners says the numbers show ‘what a truly devastating 12 months it has been for the hospitality sector.’
• Alix Partners goes on to say ‘all segments of the market have been impacted, but the dynamic independent sector has borne the brunt of closures. The pandemic has reshaped the market for many years to come and unfortunately there are likely to be further casualties before businesses are permitted to trade without restrictions this summer. With many businesses unable to trade before 17 May, further support is needed for the industry, which is creaking at the seams.’
• We would echo the final comments re both more closures and the need for support. Closures could continue at a high rate as some operators may not be able to afford to restock. They may not secure attractive credit terms with suppliers and may lack working capital. Landlords may also take action against late rent-payers later in the year once they are allowed to do so.
• Sliver lining? Demand is also unknown at this stage but, with supply reduced, operators that remain in business, which will be the majority of them, even under the most pessimistic of assumptions, could benefit via market share gains. Longer term, costs should be reduced as rents fall and the discounting that had been kicked off by overcapacity should abate. Good operators, selling the right things to the right people from the right units at the right price, should prosper.
• Sky strikes a downbeat note when it reports that ‘UK pubs face a “bleak future” as they mark a year since being forced to close due to the first coronavirus lockdown.’ It quotes the Forum for British Pubs as saying that at least 2,000 pubs have already closed permanently. The Forum says ‘many pubs will be reopening with a huge amount of debt. They took bounce-back loans but this industry hasn’t bounced back and we don’t know if drinkers will even return to wet-pubs. Will people have got used to drinking at home over the past year? If I’m honest, it’s a pretty bleak future.’
• To jack prices or not to jack prices?
• This will be a major issue for publicans in general. Should they try to recoup lost revenues by raising prices? Or should they accept that the consumer may be feeling a bit financially and socially fragile, and keep prices at reasonable levels? A further decision point will be reached when the VAT cut, which has not been passed on to customers by many outlets, is removed (albeit in stages).
Covid anniversaries are upon us:
• Comps are set to get much, much easier. Consumers were advised not to undertake non-essential travel or contact with each other on 16 March last year and the first lockdown was imposed from 23 March. S4labour says ‘the hospitality industry lost just over £89 billion in revenue through the full year since March 23rd 2020, when the hospitality industry was first instructed to close. This is equivalent to 68.9% of annual revenue, representing an average decline of half a million per site across the U.K.’
• Langton comment. S4Labour also points out that the financial pain was not evenly spread. Units suffered more if they relied on tourists, domestic visitors and commuters. They were doubly-impacted if they were wet-lad and unable to offer a takeaway option. S4Labour says ‘the data shows that while there were huge declines for both wet and dry led sites, it was drink led sites that were particularly hard hit, slipping 78.6% in like-for-like revenue compared to food-led venues where the decline was limited to 62.1%.’ It says ‘there was a less marked difference between London and non-London sites, however, it was noticeable that wet-led venues in the capital suffered an 84.4% decline in sales, with little opportunity to offer takeaway or delivery during almost all variation of restrictions.’ Interestingly, ‘Scotland fared worse than England, with a 77% loss in revenue, and wet-led pubs in
Covid – the staycation market:
• The government has put the cat amongst the pigeons by saying over the weekend that foreign holidays may not be possible this year. See premium email.
• If the UK population is vaccinated, and then travels overseas in its millions, the only virus that individuals will be able to catch will be one that they can catch.
• It wouldn’t be right to say that they would be hard-wired to seek out the variant that would do them most harm but this isn’t as stupid as it sounds. We know that millions of travellers will be inoculated against some, hopefully most, variants of Covid-19 but, as concerns re the South African variant confirm, there are doubts as to whether they will be immune to absolutely everything.
• There would be a degree of self-selection going on and anything that an inoculated person brought back would, by definition, be capable of infecting an inoculated person. An such a variant could therefore move through an inoculated population and do no end of harm.
• The mood music over the weekend definitely seemed to have changed. The fear of undoing months of hard work is a real one and foreign holidays could be put on ice. However, whilst we all want to get back to normal, for the staycation industry, including UK pubs and restaurants, this is potentially ‘good’ news.
• We may see UK holiday accommodation for the summer selling out in short order. There could be significant price hikes but, as holidaymakers in question would a) still be in the UK and b) would spend less on travel and accommodation than they would have done if they had taken a flight-inclusive holiday, there should be more money around this summer than there would be in a ‘normal’ year.
Other Covid news:
• The Centre for Economics and Business Research has found that the first year of Covid has cost the UK economy in total some £251bn. Unless there is an immediate bounce back to pre-Covid levels of output, there could be a tail of further costs in future years. The CEBR says the north-south gap would widen unless steps are taken to prevent this. S4Labour, see comment above, says that the hit to hospitality was some £89bn.
• CGA reminds readers that 76% of consumers are ‘likely to visit a venue with outdoor seating within a month of reopening. A third (33%) plan to get back within a week, and 12% intend to return on the first day they can.’ Some 24% are unlikely to return until at least 17 May, when venues can trade inside again.
• Some observers in Scotland suggesting that celebrations following Glasgow Rangers’ victory in the Scottish Premiership sparked celebrations that may have led to a resurgence in Covid infections and may potentially be a factor that slows down the momentum towards re-opening North of the Border. This impacted Glasgow but there are fears that the whole of the Central Belt could be lumped together.
Company & other news:
• Sky reports that Deliveroo’s founder, Will Shu, will ‘sell millions of pounds-worth of shares in the food delivery app as part of a blockbuster stock market debut that will see him become one of Britain’s wealthiest technology entrepreneurs.’ Mr Shu has around 6.2% of the company. Sky says ‘people close to the company said this weekend that Mr Shu had yet to make a final decision about the size of any share sale, although one insider suggested it was likely to involve less than £50m of Deliveroo stock.’
• Hawthorn has revealed its latest package of support for Pub Partners and Operators ahead of the reopening of pubs in England on 12th April, and Scotland on the 26th. The company says rent will be capped at around 30% until the end of May, before increasing to 50% in June and 75% in July before returning to 100% in August in-line with the expected gradual increase in trade. Hawthorn also says it is ‘providing additional packages of support for its Operator Managed pubs, with around £550,000 worth of support to be paid to Operators at both trading and non-trading pubs, with funds covering labour costs, and being invested in outside areas to increase capacities.’
• Canadian restaurant brand, Tim Hortons, has announced that it is to open its first drive-thru restaurant in Yorkshire, in Sheffield. The unit should be open from early summer.
• Texas Roadhouse in the US has announced that President Jerry Morgan will also assume the title of Chief Executive Officer of the Louisville-based restaurant company. The promotion is effective immediately. Kent Taylor, the founder, CEO and Chairman of the Board, died last week.
• Accolade Wines has announced the purchase of Australian wine company Rolf Binder Wines.
• SIBA has awarded its Brewery Business of the Year award to Signature Brew
HOTELS & LEISURE TRAVEL:
• The likelihood of overseas holidays this summer took a knock over the weekend with Defence Secretary Ben Wallace telling Sky there was a risk that holidaymakers might bring back variants. Wallace then told the BBC that booking an overseas holiday would be ‘premature’. Shadow foreign secretary Lisa Nandy said she would not be booking a foreign holiday’. Nonetheless, Jet2 has registered a ‘rise in holiday booking confidence’ across potential travellers. Much of Europe is moving towards a third lockdown.
• Langton comment: The holiday conundrum. Travel Weekly reports that ‘industry figures have criticised a senior cabinet minister and a leading scientist for refusing to rule out the government extending a ban on foreign holidays.’ This could be a little tone deaf as a) ministers can’t really promise to do, or not to do, anything and b) there is a legitimate fear that, even if the UK population is inoculated against one (or several) variant, it may not be immune to them all. Dr Mike Tildesley, of the Scientific Pandemic Influenza Modelling group, which feeds into Sage, saying that overseas holidays this summer were “extremely” unlikely. It will be interesting to see how travel company and airline shares open this morning.
• Princess Cruises and P&O Cruises will require passengers on their UK coastal sailings this summer to be vaccinated.
• STR reports that US hotel comps are easing with the week to 13 March the least bad in a year. Numbers will shortly be well ahead of 12mth ago comparatives.
• Entail PLC has announced that its offer to buy Enlabs has been accepted ‘by shareholders holding in total 65,856,834 shares, corresponding to approximately 94.2% of the total number of shares and votes in Enlabs.’ Entain says it has extended the acceptance period until 13.00 CET on 1 April 2021.
• 888 has announced that it will give a presentation on its full year numbers for the 12 months ended 31 December 2020 online at 5.30pm today. It says ‘the presentation is open to all existing and potential shareholders. Questions can be submitted pre-event via your Investor Meet Company dashboard up until 9am the day before the meeting or at any time during the live presentation.’
• UK video games industry body UKIE says that the size of the UK video games market grew to a record £7bn last year as lockdown drove growth. Top sellers during lockdown have been Animal Crossing & Call of Duty amongst others.
• The owner of the Fortnite and Houseparty video games, Epic Games, is reported to be finalising a $1bn fund raise that will value the company at as much as $28bn.
FINANCE & MARKETS:
• The ONS has reported that the government borrowed £19.1bn last month, the highest figure for February since records began in 1993. Borrowing was £17.6bn higher compared with February last year.
• The IFS has suggested that Britain could be headed for a new era of austerity. It says ‘plans can change but, as things stand, for many public services, the first half of the 2020s could feel like the austerity of the 2010s.’ PM Boris Johnson has ruled out austerity and tax rises. The Treasury says ‘this is categorically not a return to austerity.’
• Sterling a little weaker at $1.385 and €1.1645. Oil up a little at $64.30. UK 10yr gilt yield down 4bps at 0.84%. World markets lower on Friday & London set to open down around 20pts.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-page headlines of the Saturday papers were rather mixed: the FT went with “Government draws up plan to save Liberty if Gupta’s GFG collapses” as its main story, although it also flagged that “Scramble to produce Covid-19 jabs derails supply of regular US drugs”. The Guardian ran with an exclusive about the news that billionaire tax exiles, the Saudi royal family and the ruler of Dubai are amongst the undeserving recipients of Government-funded furlough money (“The unlikely recipients of furlough millions revealed”). The Times went with the surge in Covid cases in Europe (“Alarm over new wave”) and the Telegraph focused on the view of Kate Bingham, the “UK vaccine tsar”, in an interview in the Telegraph magazine: “Europe’s stance on Oxford jab irresponsible, says vaccine tsar”. And the Daily Mail returned to the row about the costly makeover of
• Saturday’s Press and News (2): In terms of Retail stories, the cupboard was pretty bare, although the Times had an interesting feature on “The lockdown winners who saw chance to triumph over tragedy” (with Ocado, Moonpig, Gymshark and Deliveroo amongst the companies mentioned), whilst the Guardian had a good feature on the demise of Thorntons (“Death by chocolate: How Thorntons lost its High Street battle”), including a photo of the first shop that opened in Sheffield in 1911, called “The Chocolate Kabin”. In terms of the stockmarket reports, the Telegraph flagged that Burberry was hit on Friday by the reports of new lockdowns in Europe, whilst the Daily Mail noted that Halfords was not helped by its acquisition of Universal Tyres and the Times led with the news that the embattled Hammerson was hit by broker downgrades: “Shopping centre owner taking its turn on the down
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were pretty varied, with the Observer going with “Revealed: grim list of sex abuse claims against Met officers” and the Sunday Times highlighting an investigation into the system of hereditary peerages (“Revealed: The truth about the peers who are born to rule”). The Sunday Telegraph went with a story about the future role of the Army (“SAS takes fight to meddling Russians”) and the Mail on Sunday focused on the EU vaccine war (“EU loses plot on vaccine”).
• Sunday’s Press and News (2): In terms of Retail stories, one of the main articles on the front page of the Sunday Times Business section flagged that the owners of Iceland have extracted almost £150m from the booming supermarket business since the start of the pandemic, whilst refusing to repay nearly £40m of Business Rates relief. That is not new news, however, whereas the Mail on Sunday highlighted that the M&S Food boss Stuart Machin has been widely tipped to be appointed the next CEO of Asda, although the ambitious Trevor Strain of Morrisons is also well fancied. The Mail on Sunday also noted that several big fund managers are baulking at the “ludicrous” £7.5bn valuation put on Deliveroo and had a rather uncritical interview with the former boss of John Lewis, Andy Street (the man responsible for opening a “white elephant” flagship store in Birmingham), who had the nerve to
• Sunday’s Press and News (3): 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 (“The deepest recession, but also easily the weirdest”), in which he highlighted that incomes have actually grown over the last year, thanks to the furlough scheme and that the big question is now how much of the involuntary savings mountain gets spent. And we also give the usual shout-out to the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“Relations with the EU desperately need improving. Frost cannot do it”), in which he highlighted that the adversarial style of the EU Minister, David Frost, is counter-productive and that many small UK traders now find it easier to sell to the US than to the EU.
Today’s News: The week has kicked off with the strong Kingfisher finals (for y/e Jan), whilst Deliveroo has announced a higher than expected price range for its IPO, along with a strong current trading update: the £3.90 to £4.60 rang implies an estimated market capitalisation at admission of between £7.6bn and £8.8bn, whilst gross transaction value growth has accelerated to +121% in Jan/Feb. Kingfisher has also announced a strong current trading update, with Q1 21/22 LFL sales up 24.2% so far, although, given the strong comps coming up, it is guiding to H1 overall of “low double-digit LFL sales growth”, with H2 LFL sales planned to be between -15% and -5%.
This Week’s News: Tomorrow brings the McColl’s finals and the Pendragon finals are on Wednesday, whilst the belated ONS Retail Sales for February are out first thing on Friday. Over in the US, the GameStop Q4 results are out after hours tomorrow evening.