Langton Capital – 2021-07-14 – PREMIUM – DPEU, DP Poland, SSP, PepsiCo, 19 July, pub revenues & other:
DPEU, DP Poland, PepsiCo, SSP, 19 July, pub revenues & other:
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A DAY IN THE LIFE:
Judging by the time it takes my Freeview and Amazon Prime boxes to spark up and kick themselves into gear, I can only think that the speed of light has slowed down.
Because, though data’s meant to move along yon wires pretty smartish, nobody stopped to tell my various machines which seem to hark back to the age of steam and move at an appropriate speed.
Anyway, apropos nothing in particular other than the asymmetric nature of knowledge and the attitude of misplaced certainty that we see around us from time to time, who said:
‘No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.’
Clue, it wasn’t who I thought. Answer above the pubs section below. Commenting on the fragility of freedom, the author also said ‘liberty of any kind is never lost all at once…’
On to the news:
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DP POLAND – FULL YEAR NUMBERS & TRADING UPDATE:
DP Poland yesterday hosted a webcast for analysts in order to discuss its now historic 2020 numbers, its merger with Dominium and, of more interest, its current trading and the outlook for the enlarged company.
• The businesses are ‘similar’ and the merger has been relatively straight-forward. Dominium had a much larger dine-in business than Dominos. The merger broadly doubled the size of the company.
• Customer confusion has been removed. The company is the largest player in Warsaw, itself the largest market in Poland. Distance to customer has been reduced and costs cut. Regarding the consolidated numbers, EBITDA is more meaningful as the loss for the period reflects costs of historic dominium debt and a number of other non-cash items.
• The 2020 accounts (which are DPP alone, ex-Dominium) are less meaningful in that they are historic and do not address the future. Restaurants were shut by government decree twice in 2020 – but delivery thrived. DPP’s sales improved sequentially in each quarter of the year (pre-merger).
Merger benefits & strategy:
• There are achievable economies of scale in purchasing and in head office & other costs. Shortening the physical distance to customers reduces delivery costs and improves product quality.
• The company can adopt best practise across the 2 businesses. E.g. Domino’s took more over the Internet (and Dominium can move in this direction).
• The company has bought in another 10 franchisees, to make 17 in total. Over time, units will be returned to franchise. The store network has been upgraded and stores were bought in to enable this. The stores will be sold to franchisees thereafter. The group aims to own 20-25% of stores over time.
Current trading & Q&A:
• Delivery sales have been strong for the first 5mths of 2021, during which time, sit-down restaurants were closed. Indoor dining was allowed from June. Dine in is up 25% vs 2020 (in June alone) and down 24% on 2019. Delivery is down 2% on last year but up 11% on 2019.
• This is a confusing picture with a lot of moving parts. Trade is not ‘normal’. Students have not returned to university (due to online trading) but this should provide a boost later in the financial year. Office traffic and tourism is also yet to recover.
• Synergy benefits on ingredients and labour have been impaired by higher inflation. Sales prices have been raised, meaning that this should still, net-net, be a positive.
• The 10% growth in average order size? New products, salads, sauces etc.
• The company does not plan to dual list. It accepts liquidity is low. It is concentrating on proving positive momentum. There are no capital raises planned in H2. The co has a ‘satisfactory cash balance.’
• The targeted openings should be financed from cash flow and from senior debt. ACP ‘does not want to be diluted’. Debt may be accessible once the repositioning has been completed. There may be bolt-on acquisitions.
• The co is ‘well-positioned’ should there be another lockdown. Nobody wants to hear this but, looking at what’s just happened in The Netherlands, it is worth bearing in mind.
The author, writing in the 1760s, was Scots philosopher, David Hume.
PUBS & RESTAURANTS:
19 July removal of restrictions: Go to work but don’t go to work, party hard but don’t party hard…
• Restrictions are to be removed and staff will not (in many circumstances) have to self-isolate from the middle of next month – but there are a lot of unknowns. Not least, how operators and customers will react in the light of their new-found freedoms. The Guardian reports that ‘senior doctors have warned of “potentially devastating consequences” after Boris Johnson confirmed on Monday that he would press ahead with lifting most remaining Covid restrictions in England on 19 July.’ The battle lines are being drawn and the bear traps are baited. The ‘exit wave’ (which pre-supposes there is an exit to the pandemic) could see 200 people a day dying later in the year.
• Further comment: As with seatbelts, crash helmets, drink-driving, carrying under-12s in the front seat of a car etc. there will be many people who don’t behave in the way they are recommended to behave. It’s human nature and, to pretend otherwise, is somewhat disingenuous. Still, it’s hard to deny that 100% of people die of something and there is exhaustion setting in with regard to restrictions.
• Late night operators: One of the biggest changes will be for operators that could not open – and now can. This goes for small venues, where distancing made it impractical to open and, more importantly, for night-clubs. Mask-wearing here just isn’t going to happen and Sajid Javid has a point when he says that it might be less harmful to re-open in the summer than in the winter (when infected people might be more likely to spread Covid in enclosed spaces post-infection). Still, with an unrestricted R rate of 7, there will be an impact.
• Michael Kill, CEO of the Night Time Industries Association, says ‘the decision to go ahead with reopening on July 19 is the correct one.’ Though it may be correct, that’s an opinion, rather than a fact. Mr Kill goes on to say ‘after 16 months of crippling restrictions, businesses in the night time economy are ready to play our part in the safe reopening of society.’ He says ‘there are some important hurdles ahead for our sector, including changes to the isolation rules which have the potential to throw the recovery off course, but for those businesses that have made it this far in the pandemic, I feel confident that the sense of community and togetherness the sector has shown to this point will help us overcome these challenges.’
• Further comment: The BBC reports ‘a senior industry spokesman’ talking on Covid passports in nightclubs as saying ‘government guidance on whether nightclub owners should make their customers show Covid passports is “disingenuous and unclear.”’ It adds ‘one proprietor called it “unworkable”’. Managing queues of fuelled up youngsters has never been easy. Sky says ‘nightclub owner REKOM UK (formerly Deltic, formerly Luminar) has said it will not be asking for vaccine passports at its doors when it reopens venues.’ It quotes CEO Peter Marks as telling the PA news agency that reopened nightclubs would operate in the same way as pubs are. He says he was “thrilled” nightclubs would be able to reopen “at full capacity and without any requirement for a negative COVID test, something we believe would create a barrier to both customer enjoyment and getting the industry back on its feet’.
• The above is a result of the difference between a recommendation and a requirement. The latter can always be interpreted in more than one way.
• First minister Nicola Sturgeon has said that the whole of Scotland will move to level 0 on 19 July, but she adds that hospitality will face a midnight curfew. Ms Sturgeon says ‘this reflects the fact that indoor hospitality, despite the sector’s sterling efforts – and I want to pay tribute to those – does remain a relatively risky environment, particularly late at night when people might be less likely to follow rules.’
Trading & the consumer:
• S4labour reports ‘the Euros-Finals weekend saw sales fall by 3.9% compared to the same week in 2019. However, hospitality sales were up 10.3% on the previous week.’ It says ‘the breakdown indicated food sales increased by 1.6% but drink sales were down 9.1%.’ Although up against good weather comps in 2019 (typically helpful to wet sales), this seems a little counter-intuitive. S4labour says ‘it’s ‘s clear that speaking to our customers, a lack of staffing resulting from Brexit, COVID restrictions and Track and Trace are affecting staff availability. This is leading to a squeeze in the labour market for an industry that is heavily dependent on people. Hence, hampering the ability to trade.’
• Further comment: Also commenting on footfall, Wireless Social disagrees, saying ‘UK hospitality footfall rose significantly on Sunday 11th July for the EURO 2020 Final.’ It says there was a ‘a 129% increase in footfall compared to the previous Sunday (4th July).’ It adds that ‘high street pubs saw the biggest impact; with sports clubs enjoying a 62% increase, closely followed by pubs (up by 53%), and bars (up by 20%).’ CEO Julian Ross says ‘while it’s tough to take that England came so close to lifting the trophy, it’s really encouraging to see people getting out and supporting hospitality venues on what was the biggest night for English football in 55 years.’ He adds ‘our data has been showing for some time now that consumers are eagerly returning to visit hospitality venues and, with Freedom Day just around the corner, we’re hoping that we’ll start to see footfall figures edge closer
• One in five workers in the hospitality and retail sectors are reported to be self-isolating per industry leaders. The Commons business select committee heard UKH relate the problems that the sector, with its young staff, is facing. Some 60% of hospitality staff are under 30.
• The BBC reports the IFS as saying that employers are planning the lowest number of job cuts for over six years, and this despite the looming end to furlough. ONS data shows a similar move. The IFS says ‘the data suggest that there is no spike in redundancies coming in July or August. The labour market is in a much better position than anyone expected at the start of the pandemic, and it shows how well the furlough scheme has worked.’ This should help consumer confidence which, in turn, should be positive for both consumers’ ability and willingness to spend.
Other Covid news:
• Working from home: Changes are not immediately apparent but British Land says it has collected 99 per cent of the rent due for its offices in June. This may reflect retail park traffic more than office footfall.
• Meanwhile, the BBC reports that many businesses are to take a cautious approach when it comes to taking staff back to the office from Monday. It says ‘many businesses said they will opt for a staggered approach for employees.’ Accountants Deloitte says it will increase office usage to c50% of capacity from next week and it expects to stay at that level until September. NatWest will only be bringing back “priority workers” in the short run.
• Competition in delivery. In the US, Grubbub has launched a guarantee promising discounts on future orders if its consumers do not get on-time delivery at the lowest available delivery price. Grubhub positions this as ‘protecting the reputation of its restaurant partners’ rather than as taking a swipe at the competition. It may be both things. NRN reports ‘if a diner finds a better price for their order on another third-party delivery platform, Grubhub will make up the difference up to $10 and offer an extra $5 in Grubhub Perks.’
• The Bank of England says that the UK’s banks will have a critical role to play in supporting firms and households as furlough unwinds. The Bank’s Financial Policy Committee says that debts have built up over the pandemic and adds that there are a number of “debt vulnerabilities.” No kidding? The Bank also points to bloated asset prices (brought about, it has to be said, by its own policy of QE) and says that ‘in some markets asset valuations appear elevated relative to historical norms.’ If it is referring to the UK housing market then a) it should maybe say so and b) it could be expecting some sort of negative wealth effect if valuations fall.
Company & other news:
• SSP has announced that CEO Simon Smith has advised the company of his intention to step down from his role ‘to pursue a new opportunity at a Private Equity backed business. He is expected to leave the Group at the end of 2021 and, in the intervening period, will continue with his existing responsibilities and support an orderly transition.’ The company says it will now ‘commence a process to identify Simon’s successor, and the search process will consider both internal and external candidates.’ SSP says ‘as reported at the Group’s Interim Results last month, the business has begun to see a recovery in passenger demand, led by domestic and leisure travel, most notably in North America.’
• SSP adds that ‘current trading is in line with expectations, with third quarter sales at 27% of 2019 levels, and sales in the most recent week at 42% of 2019 levels, compared with 30% at the beginning of June. The outlook for the rest of the financial year remains unchanged.’ Chairman Mike Clasper says the ‘team have done an excellent job in steering SSP through the enormous challenges presented by the pandemic, acting very rapidly to protect the business and its cash flow, create a more flexible operating model and strengthen the balance sheet.’ He says ‘SSP has a very clear strategy and significant competitive strengths, placing it in an excellent position to take advantage of the many opportunities for growth that will be presented by the recovery in the travel sector.’
• DP Eurasia has updated on trading for the first 6mths of the calendar year saying that it has seen ‘strong momentum achieved with unprecedented demand in Turkey.’ The company says that the number of stores is up by 35 units to 789 with group system sales up by 58% across the group and up by 72% in Turkey. Comps in 2020 were notably weak.
• DPEU CEO Aslan Sarang says ‘trading performance across the Group has continued its strong momentum throughout the first half of the year, as highlighted in our last trading update in May.’ He says ‘our Turkish operations have seen unprecedented demand during H1 2021 with a May/June like-for-like growth rate of 70.3%, driven mainly by delivery and, also, tailwinds from a temporary reduction in the VAT rate to 1% from 8% which was extended until the end of July.’ He says that home delivery has leapt in popularity but it ‘is still too early to regard the shift being a permanent change in demand.’
• DPEU says ‘the increasing franchisee demand since the middle of last year has resulted in 16 store openings in Turkey since the beginning of the year with a very strong pipeline for the second half of 2021. In Russia, we have also added two stores in the first half.’ It concludes ‘the Group is emerging from the pandemic with strong momentum. Whilst the Board is conscious of the potential continued risks posed by the pandemic, we remain on target for our 2021 guidance in our markets and the Board expects the full year adjusted EBITDA for 2021 to be in line with expectations.’
• PepsiCo yesterday reported Q2 numbers and raised its earnings forecast for the full year. The company said the pandemic had depressed demand for its drinks but commented that vaccination levels were such that demand was returning. PepsiCo said net revenue in Q2 rose by 20.5 per cent year on year to $19.2bn, beating analysts’ forecast of $17.96bn. Net income was $2.36bn, up from $1.65bn a year ago. The company says it expects 2021 adjusted earnings per share to increase 11 per cent on a constant currency basis. It had previously guided to earnings growth in the high-single digits.
• Moët Hennessy has agreed with Italy’s Campari to invest in wines and spirits e-commerce companies and create a European ecommerce player in the sector.
• South Africa is to extend its alcohol ban, the fourth it has imposed during Covid, for two more weeks.
• Unite has said that Amazon is price gouging on certain products. It may be doing the same on costs, paying tax etc.
HOTELS & LEISURE TRAVEL NEWS:
• Alix Partners has commented on business travel panel discussion saying that ‘the extent to which business travel will recover on pre-pandemic levels remains unclear: predictions range from between a 10% to 50% contraction of the industry. A number of mitigating factors will determine just how hard this hit will be, and not all of them come from COVID-19.’ The sector is also under pressure from environmental lobby groups and by the widespread availability (and now use) of meetings software such as Zooms, MS Teams and the like. Recovery is unevenly spread. Alix Partners says that the US is recovering relatively quickly.
• Sky reports that the UK’s train and bus operators will not require passengers to wear face masks on services in England from 19 July. Airlines have indicated that they will still require face coverings. Sadiq Khan has said that face coverings will remain mandatory on the London transport network.
• DFDS, which has a vested interest in the outcome, has commissioned research finding that people now feel safer when traveling. It says 15% of UK respondents have booked an overseas trip. This compares to 25% in Germany (where, it should maybe be pointed out, there are nine, easy-to-cross, land borders).
• Further comment: A feature of cross-border travel does appear to be shorter lead times. This is entirely understandable but it will imply higher prices. Travel companies are less sure how much resource to commit and flexibility can cost money. If the customer will pay this, then margins can be maintained. But the customer only has so much money, so this will put a downward pressure on volumes. If, however, the customer refuses to pay a higher price, margins will be damaged.
• Italy has confirmed its ban on cruise ships from entering Venice. Ships under 25,000 tons will still be allowed to dock.
• The Scottish government is to remove quarantine restrictions on fully vaccinated travellers coming back from amber destinations from July 19.
• In a sign of near term recovery, Munich Airport says that passenger traffic is “beginning to soar once again.” It hopes to handle over a million passengers this month.
• STR reports that London hotels in June recorded their highest occupancy levels since the start of the pandemic.
FINANCE & MARKETS:
• CPI in the US has risen to 5.4% in the month to June (it was 5% in the year to May) on the back of higher petrol and second hand vehicles prices. Inflation is now at its highest level since 2008. Markets are becoming a little concerned that the Fed may have to raise interest rates before inflation becomes too entrenched.
• Estate agent Knight Frank says that the number of properties transacted in the first week of July was 60pc below the five-year average for this time of year. This comes after that reimposition of stamp duty on most properties at the beginning of this month.
RETAIL WITH NICK BUBB:
Today’s News: Following the surprisingly bullish update from Howdens yesterday, the Dunelm Q4 trading update today is also very strong, although the scale of the profit upgrade is not so great…Over the 13 weeks to 26 June total sales more than doubled, up 102% but 2-year growth was as much as 44% and Dunelm note that although sales in the weeks following re-opening on 12 April were exceptionally strong (partly reflecting pent up demand), sales also remained robust for the remaining weeks of the quarter despite the delay in the usual Summer Sale event. With gross margins also higher than anticipated in Q4, Dunelm expect that profit before tax for the full year will be c£158m, slightly ahead of analyst forecasts of £149m-153m. Dunelm CEO Nick Wilkinson says “With many exciting developments in the pipeline to make us the first choice for home, and grow our customer base and frequency, there
This Week’s News: Tomorrow brings the ASOS Q1 update and the French Connection AGM. Friday brings the Burberry Q1 update (and possibly the Frasers finals), along with the Homeserve AGM.