Langton Capital – 2021-04-15 – PREMIUM – Deliveroo, current trading, Entain, coffee, Co news, travel etc.:
Deliveroo, current trading, Entain, coffee, Co news, travel etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
It’s interesting, isn’t it, that charts etc can seem to have a character in that they either look mournful and sad or upbeat and optimistic.
A ‘hedgehog chart,’ for example, is one featuring several lines where they get flatter the more you move along the X axis – which is typically time. The chart’s lines speak of reality crushing dreams and have the weight of the world on their shoulders. They suggest that a) everything tends to get pushed out to the right (see Hofstadter’s Law) and b) as the future arrives, it is frequently less wonderful than you had hoped.
A ‘J-curve’, on the other hand, is beloved by tech and biotech companies and it simply oozes optimism. However, that’s only because we read from left to right and, at the end of the day, it’s just a line on a sheet of paper. It doesn’t tell you anything about how much the curve will cost to ‘buy’ and its almost always charting sales which, the wags will tell you, equal vanity whilst profits equal sanity.
Both charts may be little more than illustrative of intentions but, if you’re going to have a discussion with your bank manager, you might prefer to pack plenty of the second alternatives and recruit somebody else, ultimately, to go back in the future to explain why life turned out like the first. On to the news:
ADVERTISE WITH US:
Langton’s free email now carries adverts. See front page of website for today’s copy & contact us for further details.
CHANGED EMAIL FORMAT:
The Premium Email is unchanged. The Free Email is written and pre-sent the evening before. It may not include breaking stories nor Langton comment. See Twitter for in-day comment. Let us know if you would like an example of the Premium Email.
DELIVEROO Q1 TRADING UPDATE:
Deliveroo has updated on its Q1 trading to end-March 2021 and our comments are set out below:
• The co says that ‘growth accelerated for the fourth consecutive quarter, with Group orders up 114% year-on-year to 71m and GTV (gross transaction value) up 130% year-on-year to £1.65bn.’ GTV gives an idea as to the size of the company’s operations but it is not the same as company revenue.
• Deliveroo adds that its ‘monthly active consumer base has grown 91% year-on-year to 7.1 million monthly active consumers on average in Q1 2021.’
• It says that its ‘full year guidance for GTV growth and gross margin [is] maintained.’
• CEO Will Shu says ‘we are delighted with the Deliveroo Q1 results. Demand has been strong in both the UK&I and International markets driven by record new consumer growth and sustained engagement from our existing consumers.’
• He says ‘this is our fourth consecutive quarter of accelerating growth, but we are mindful of the uncertain impact of the lifting of COVID-19 restrictions. So while we are confident that our value proposition will continue to attract consumers, restaurants, grocers and riders throughout 2021, we are taking a prudent approach to our full year guidance.’
A bit more detail:
• The company says that it ‘made significant progress during the first quarter, delivering strong year-on-year growth in both orders and GTV.’
• It says ‘the Company has experienced strong progress across the UKI and International segments.’
• In the UK, GTV was up by 142% to £852m in Q1 with orders up 121% to 34m.
• Internationally, GTV was up by 119% to £794m with orders up by 108% to 37m. The company says ‘Deliveroo has executed well against geographic expansion targets.’
• In the UK, ‘the Company set out a goal to expand consumer population coverage from 53% at the beginning of 2021 to reach two thirds of the UK population by the end of the year. As of the end of Q1 2021, Deliveroo has reached over 60% of the UK population, adding over 6m people to its coverage. This increased coverage is laying the foundation for future growth.’
Staff and other issues:
• Deliveroo says that it ‘works with [it doesn’t use the word ‘employs’] over 100,000 riders globally. In the UK, rider satisfaction is at an all-time high of 89% as of the end of Q1 2021.’
• The company also ‘works with over 117,000 restaurants as of the end of Q1 2021, and continues to increase the availability and choice to consumers on a neighbourhood by neighbourhood basis.’
Other areas of expansion:
• Deliveroo Plus is the group’s subscription service. Deliveroo Editions is the kitchen only (no sit down) operation. The company ‘continued to bring partners such as Shake Shack and Dishoom to more Editions sites.’ Deliveroo Signature is the white label operation.
Outlook and guidance:
• Deliveroo says ‘growth across monthly active consumers, orders and GTV was very strong. It is difficult to say how much of this growth has been driven by the special circumstances of the current lockdown restrictions in some of our markets.’
• Some, we would suggest. And not an insignificant amount. Deliveroo says it ‘continues to operate in an uncertain environment given that the timing and impact of these restrictions being lifted in the coming weeks and months remain unknown.’
• It says it ‘expects the rate of growth to decelerate as lockdowns ease, but the extent of the deceleration remains uncertain.’
• It says it ‘is being prudent and maintaining the guidance set out in its Prospectus for full year annual GTV growth of between 30% to 40% and gross profit margins (as a % of GTV) of 7.5-8.0%.’
• We said the below earlier this week and the comments remain relevant:
• It was only two weeks ago, on 27 March, that the Sunday Times, running what it believed was a scoop, felt able to write that ‘Deliveroo is poised to swerve around doubters in the City and roar towards a blowout float this week, despite mounting concerns about its use of gig-economy workers.’
• It would be glib to say that the paper found out quickly that this was an early (and unintentional) April Fool’s joke. Deliveroo was not poised to raise its price range, but rather to lower it to 390p to 410p. It would then issue shares at the bottom of the range and its shares would lose more than a third of their value from there.
• What happened? Despite reported attempts by advisors to support the shares, they fell on issue and they have since fallen further.
• It has been called the worst IPO in London’s history and, in simple money-lost terms, this is likely true.
• Reputations (Goldman, JP Morgan, Rishi Sunak, assorted reporters & analysts etc) will have taken a dent and, though the advisors may have to suck it up, others, including shareholders, may bear a grudge.
• True, Facebook fell on its IPO but, as a scalable model that is now in profit to the tune of tens of billions of dollars, it is a different animal.
• The fundamental issue: Several reasons for the failure have been suggested. Market turbulence, hedge funds shorting the issue, the threat to the gig model, the reopening of restaurants, pricing, the dual share structure etc are on that list.
• But we would suggest that the single major issue is that the business is not profitable and costs will rise alongside revenues in a way that they do not with true tech stocks such as Google, Facebook and the like.
• Whilst some fixed costs can be apportioned over a larger revenue base, marginal costs, i.e. the cost of delivery, will rise in line with sales.
• Hence, we believe it is much more important for this sort of business to show that its model is fundamentally capable of making profits in its current shape.
• This is arguably not proven for Deliveroo. The company made huge losses last year with the same ‘tail winds’ that Just Eat has mentioned as a positive. Restaurants are about to reopen.
• We could see vertical integration as a large part of the model going forward and this will not be without risk. If Deliveroo buys capacity (via purchasing restaurant companies or by building dark kitchens – which could be a more competitive market going forward) we may have a £5bn restaurant company on our hands that owns a lot of bicycles.
• Arbitrage hedge funds tend to sell acquiring companies and buy their targets – and one can see why.
PRIVATE COMPANY ACCOUNTS:
G1 Group Holdings PLC:
• Major Glasgow based bar & hospitality venue operator G1 has reported numbers for the year to 31 March 2020 to Companies’ House. Whilst the numbers are very historic, the accounts were signed on 30 March 2021 and the company does mention the disruption to trade caused by Covid.
• The numbers. As mentioned, the numbers were only impacted towards the very end of the period by Covid. Nonetheless, the company reports revenues very marginally higher at £132.5m (2019: £132.2m) with PBT lower at £13.6m against £14.1m in the prior year. The company did not pay a dividend for the year. Shareholders’ funds rose from £77.3m to £83.7m and accumulated profits stand at £82.8m, up from £76.7m at the end of the prior financial year. Intangible assets total only £1.1m, the remainder of the group’s assets being comprised of fixed and current assets, less the debt raised to fund them and creditors.
• Company comment. Brian McGhee, chairman, writes ‘over the last three years, we have viewed the EU referendum result, namely Brexit, as possibly the most disruptive influence for Tourism and Leisure. The departure from the EU has of course become a reality, but from March 2020 onwards the crushing impact on the leisure and hospitality industry has been from the COVID-19 pandemic. The economic constraints in the attempts to stem the development of the pandemic have been severe.’
• However, the financial year under review ‘was the most successful year the Group has enjoyed. Inevitably that was dented by the material impact on the Group’s performance in February and March 2020 from the effects of the public on their usual routines prior to and at the start of the Covid related restrictions.’ The impact in the financial year to end-March 2021 will have been much greater. Looking ahead, the chairman says ‘we have uncertainty on timings and constraints.’ He concludes ‘we know we have banking and supplier support, and have plans to flourish from all the discontinuity.’
• G1 has drawn up its accounts under the going concern principle. It says it has ‘completed a thorough assessment of the impact of COVID-19 including downside scenarios.’ It says ‘as there is a reasonable expectation that the company and Group have adequate resources to continue in operational existence for the foreseeable future and meet all obligations, the directors have concluded this does not represent a material uncertainty with regards to going concern. The financial statements have therefore been prepared on a going concern basis which presumes the realisation of assets and liabilities in the normal course of business.’
PUBS & RESTAURANTS:
Comments on reopening:
• Whilst it would be unwise to take three days’ trading and extrapolate it too far, there are some strong trading numbers coming back from some operators. This may be somewhat selective (in that journalists etc may be more likely to hear from operators doing well than from those doing poorly – or who remain shut) but, for the moment, trading looks to be a) existent and b) not bad.
• CGA has released figures for trade on Monday only saying that LfL sales were up by 60% on the same day in 2019. This is good as far as it goes – but there will be a lot of closed units excluded from these figures. CGA says ‘this is a good start for the hospitality sector, which is currently limited to trading outdoors. Around 41,100 premises in Britain have outdoor space – some 38.2% of all sites.’ It says ‘the first day of trading after England’s lockdown showed a fairly solid performance and demonstrates how consumers were keen to enjoy their first drink out – with like-for-like drinks sales up nearly 115% for outlets that were open compared with the equivalent day in 2019. Food sales didn’t fare quite so well, at 12% below 2019 levels, but this is understandable given that operators can currently only trade outside.’
• The Guardian says ‘celebration was in the air as England welcomed the return of outdoor drinking and dining.’ It says there remains ‘a wider sense of nervousness within the hospitality sector as businesses tried to operate at significantly lower capacity and with some confusion over the rules.’ Boris Johnson has urged people to “continue to behave responsibly.” The BBPA says ‘we should remember that those opening will be loss-making, with the ability to trade beyond break-even coming with the removal of all restrictions.’
• Sky says ‘sales at pubs, bars and restaurants that were able to reopen on Monday were sharply higher than pre-pandemic levels with consumers keen to have their first drink out in months.’ Separately, Springboard suggests visits to shopping destinations more than doubled compared with the previous Monday. Sky quotes Lloyds Bank as saying that debit card spending was up by 157% on Monday compared with the same day in the previous week. Lloyds Bank says ‘it’s a really encouraging sign of consumer confidence but we will wait to see how strongly this initial demand will be sustained over the coming weeks.’
• Langton comment: So far, so good. But there are a lot of caveats. A small sample period, not all pubs open, Easter & school holidays distorting figures, bizarre weather, a feeling of bravado mixed with cabin fever etc. However,, those suggesting that there is ‘pent up demand’ and a ‘wall of money’ waiting to be spent will have been understandably heartened by early trading. We would make a few points.
o The level of trade we’re hearing back ranges from minus 100% for closed units through to treble or more vs a normal Monday. Monday’s a quiet day, as a rule.
o Drink is outperforming food but, for very well-prepared food pubs (with covered and heated outside areas), trading is strong.
o It won’t be long before we see camera phone footage of packed beer gardens with social distancing struggling to keep up. it’s just too easy copy for journalists to ignore.
o The BBPA suggests open units will be trading at a loss. We do not believe this will be the case. Not always and nor, even, in most instances. Freehold sites may be better placed than those with leases.
o Indeed, reopening may kick-start discussions with landlords. This will something a number of operators will have been postponing for some time.
o We’re all in this together. Yes, but that means little. The pandemic has, is and will impact operators and customers differently. City centre units will struggle as will those with no outside space. Leasehold sites will have tighter post property cost margins than freehold sites etc.
o Regarding customers, younger people may bounce back quicker but, as the stats keep telling us, this is where most of the job losses have impacted.
o Not opening now is odd (unless there are legal or practical reasons why an operator cannot do so). It is ‘live-fire’ training for staff and will blow the dust off equipment etc. And customers who get used to visiting a pub now, that is open, may not visit its rival in four or five weeks, when it chooses to open.
• The BBPA has reacted to reports of leaked Government proposals for calorie labelling on pints of beer in pubs saying such proposals ‘are ludicrous – and especially outrageous at this difficult time. After more than a year of being forced to close fully or operate under severe loss-making restrictions, now is not the time to heap burdensome and expensive regulation on our pubs.’ It says ‘our pubs are on their knees and the Government already knows this. Calorie labelling would be kicking pubs and brewers when they are down.’
• Langton comment: This is arguably seeing apples and talking about oranges. Just because the pub industry has had a tough time doesn’t mean that ‘other stuff’ such as ESG, health & provenance issues will cease to exist. Having said that, the BBPA is likely right to say that now might not be the time to impose additional red tape. The BBPA is on a more constructive footing when it says ‘we must remember that after so much enforced isolation, the pub has an important role to play in tackling loneliness and improving mental health.’
• UKH also comments on the calorie labelling proposals (not confirmed at this stage) saying ‘if true, these proposals are absurd at a time when pubs and other hospitality businesses are struggling to survive. The last thing the sector needs after prolonged periods of forced closure is unnecessary red tape that creates yet more burdens for operators, who are simply desperate to get back to running their businesses. The labelling of food and drink is a complex area and we’d urge the Government to work closely with the industry on workable solutions that strike a balance between meeting public health objectives and not creating additional business burdens.’
• Allegra comments on the coffee shop industry saying ‘Covid-19 has severely disrupted sales across the continent, but the branded coffee shop segment stabilised in terms of outlets, growing 0.9% to 39,308 sites. However, some of Europe’s largest markets saw net store closures, with the UK, Germany and Turkey contracting by 1.9%, 3.1% and 6.9% respectively.’ Whether this is a pause for breath or the first signs of indigestion is not yet clear. Allegra says ‘eighteen out of 40 European branded coffee chain markets contracted during 2020 as Covid-19 caused significant disruption to out-of-home sales.’
• Allegra says ‘major chains continue to dominate the European coffee shop market. The three largest branded coffee chains in Europe – Costa Coffee, Starbucks and McCafé – comprise 8,756 outlets, holding a combined 22% share of the European branded coffee shop market and collectively expanding by 250 outlets.’ Looking to the future, Allegra says ‘despite lingering uncertainty over further national lockdowns in Europe, most industry leaders are anticipating improved trading later in 2021. With the UK and many Eurozone economies forecast to rebound in 2021, 60% surveyed expect trading conditions to improve over the next 12 months, with just 20% forecasting a further deterioration in trading.’
• The Resolution Foundation has reported that younger people are bearing the brunt with regard to job losses. It says ‘this pandemic has created a highly generationally unequal unemployment surge, and widened pre-existing gaps between different ethnic groups. Young people have sacrificed their livelihoods in order to save the lives of others from Covid-19, and putting their careers back on track must be a priority for the Government in the months and years ahead.’
• Langton comment. This will have an impact on spending patterns but it should also put downward pressure (or minimise upward pressure) when it comes to wages in the hospitality industry. Pressure from this direction has been a major issue over recent years and it could have been (and maybe still will be) exacerbated by the exit from the UK of large numbers of EU workers. The job losses, many of which have been felt in the hospitality industry, could provide a pool of labour going forward.
• At the other end of the age spectrum, Age UK has said that the need to download apps & use QR codes etc could discriminate against older pub and restaurant customers who do not have smart phones.
• Diageo has purchased vodka-based drinks company Loyal 9. Diageo says the ready to drink market in the US was worth over US$7.8 billion in 2019.
• Hackney-based distillery East London Liquor Co is to launch a £750,000 crowdfunding campaign.
• Naked Wines has updated on full year trading to 29 March saying ‘the Group delivered strong performance across all three geographies, particularly the US, driven by a significant increase in demand for its direct-to-consumer wine subscription model, and from an accelerated shift in consumer behaviour toward online wine purchases due to the COVID-19 pandemic.’
HOTELS & LEISURE TRAVEL:
• Whitbread is to add two locations to its network of hub by Premier Inn hotels this spring with openings in Soho and Shoreditch. The openings take the portfolio of hub by Premier Inn hotels to 11 locations across London, with more than 2,000 bedrooms. Whitbread comments ‘Soho and Shoreditch are the kind of locations that strike at the heart of what hub by Premier Inn is all about – providing smart, stylish and great value hotel accommodation in the most exciting and connected parts of the city.’
• Easy Jet boss Johan Lundgren has said he thinks Euro destinations such as Spain, Italy, Greece and Portugal will be on the government’s “green” list it is confirmed next month. This could be wishful thinking. when foreign travel resumes next month. Meanwhile, Heathrow has said that long queues caused by Covid checks are becoming “untenable”. It says some queues are up to 6hrs. Put this alongside the Easy Jet comments and you have the makings of an ongoing problem.
• Travel Weekly reports industry leaders as saying any 17 May reopening of international travel is likely to be ‘soft’. Jet2 has jumped the gun and won’t be flying until late June. Some leaders are concerned that working capital swings will work against them in the start-up phase.
• Easy Jet says it could make losses of between £690 million and £730 million over the winter.
• The government has been accused of aiming to restrict international travel by the use of expensive tests, quarantining and long queues at airports. Aviation minister Robert Courts says this is not the case.
• Entain has updated on Q1 trading saying it has made a ‘strong start to the year with growth across major Online markets.’ The company CEO Jette Nygaard-Andersen says ‘this has been another very successful and productive quarter with Entain making excellent progress across a number of our strategic priorities.’ The CEO says ‘we saw excellent growth across all our major markets other than Germany where regulatory changes have impacted the market.’ The company says ‘with some easing of Covid restrictions, we are delighted to be welcoming customers back into our shops’ and adds ‘in line with our expectations, the momentum from the end of 2020 has carried into 2021. Although Covid creates some near-term uncertainty, by maintaining our focus on the customer, providing them with great products and services, we remain confident and excited in our long-term prospects.’
• Five year old fitness company Tempo is reported to have closed a $220m Series C financing round in the US.
FINANCE & MARKETS:
• Sterling a little weaker at $1.3733 and €1.1501. Oil higher at $66.62 and UK 10yr gilt yield up 5bps at 0.82%. World markets mixed yesterday with London set to open up by around 10pts as at 7am.
RETAIL WITH NICK BUBB:
• Today’s News: A bumper bundle of news, with updates from AO.com and the recently floated Fix Price, as well as the scheduled THG finals/Q1 update, the Travis Perkins/Wickes Q1 update, the Deliveroo Q1 update and the Naked Wines finals. In the world of “bricks and mortar”, Travis Perkins has reported an encouraging start to the year, with Wickes up nearly 20% LFL and the Wickes demerger on track for completion on 28th April. Turning to the world of “Online pure play”, the recently floated Deliveroo has reported that order growth accelerated to 114% in Q1, but full year guidance is maintained, given the uncertainty about how far consumer behaviour will change after lockdown. THG has reported 58% Q1 sales growth, but it has maintained its 30%-35% full year growth guidance.