Langton Capital – 2021-09-16 – PREMIUM – C&C, Games Workshop, supply issues, inflation & other:
C&C, Games Workshop, supply issues, inflation & other:
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A DAY IN THE LIFE:
It’s amazing what a chunk a few meetings can take out of your day.
Still, it was great to meet people face to face and, with three such meets under out belt this week – actual, real, in the flesh meetings – we must have near doubled our physical tally since March last year and that brought to mind the story of the telephone.
Because, a bit like if you’re the only one in a meeting (or in the office or in London for that matter), the first telephone was utterly useless until it was joined by the second.
Anyway, there will be a lot of second guessing as to the intentions of colleagues as people continue their steady drift back to the office, that’s for sure. On to the news:
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PUBS & RESTAURANTS:
• In a bid to stop supply problems from getting even worse, the government has U-turned again and announced that it will delay the Brexit border red tape for EU imports from October and January next year until July 2022. However, the Food and Drink Federation (FDF) reports that as late as yesterday, its members were still being told to prepare for the – now shifted – October and January deadlines.
• Further comment: Shortages were much discussed at an industry conference yesterday with the consensus being that they may be with us for some time to come, certainly until the end of the year. Import checks are due to commence on the much-delayed date of July 2022, and that might keep the pot boiling. One speaker made an important point and that was that, if door staff was a part of your License agreement, you would have to close if you couldn’t get the staff.
• The operator said that this was, indeed, happening, and added that clearing a crowded pub or a club of younger customers at 9pm because the door staff weren’t available, was both hard to accomplish and damaging when it came to encouraging return visits.
• See also Finance & Markets below.
• Food chain Itsu has announced an 11% pay rise for its c1,000 store workers from 17 September. That’s more than 3x the level of inflation (and is 5.5x the rate of inflation before the newer rate was announced yesterday).
• Further comment. The BBC points out that ‘many firms are scrambling to retain staff with some supermarkets offering recruitment perks’ and this is the classic beggar-thy-neighbour behaviour that you would expect under those circumstances. Itsu says ‘our team members are the heart of our business and the face of our brand for our customers in-store.’
• Itsu confirms that poaching staff would not be an unanticipated result of this action when it adds ‘this announcement will only increase the number of people that want to join’. ob vacancies nationwide have hit record highs. The CBI has called for a more flexible policy on immigration to tackle the problem. Although important for business, that may not be a political imperative at the moment.
• The Morning Advertiser is polling (pub and restaurant company) readers to ask whether or not they will put prices up next month when VAT rises by 7.5pps. Some 67% of respondents said yes, they would be putting up prices by something less than 25%. Only 6% said that they would try to put prices up by more than 25%. Some 12% said they would put prices up but they didn’t know by how much yet, and only 15% said they would not put prices up at all.
• Further comment. It feels very much as though the trade will put prices up at the end of this month and again in April 2022. This is largely in response to the rises in VAT but will also be done to cover off rising labour costs (driven by both shortages and by relentless rises in the minimum wage). It isn’t certain that ‘this will cause inflation’ – but it is certainly the sort of behaviour that could embed it in the system. Indeed, the Bank of England’s argument at the moment seems to be that most of the factors are temporary – and the two rises in VAT may be ‘one-offs’ within that definition.
Working from home:
• The BBC has commissioned a poll showing that around 70% of respondents predicted that workers would “never return to offices at the same rate”. Whilst this may be what the workers want, there are concerns that it might impact productivity and promotion prospects and it is certain that, if enacted, it would reduce footfall for city centre hospitality outlets. The poll, by YouGov, found that half of ‘senior leaders’ thought ‘creativity and collaboration’ would be damaged.
Company & other news:
• C&C Group has updated on trading for its H1 saying that ‘FY2022 has delivered a strong return to trading, driven by the gradual easing of on-trade restrictions since April 2021 and boosted further by a strong consumer response; summer of good weather; the European Football Championship and ‘staycations’’. It says that ‘despite restrictions impacting indoor and outdoor hospitality in H1 FY2022, the Group is pleased to report an improved performance for the first half of the financial year.’ C&C says ‘with indoor and outdoor hospitality open across our core markets for the last
five weeks of H1 FY2022, we were pleased to serve 90% of the distribution
points in August 2021 versus August 2019.’ It says that group net revenue in H1 FY2022 is expected to be €657m, compared with €398m in H1 FY2021 and €896m in H1 FY2020 (pre-COVID-19).’
• C&C says that its operating profit for H1 FY2022 is expected to be €16m, compared to a loss of €12m in H1 FY2021 and a profit of €66m in H1 FY2020. It says ‘our off-trade channel has continued to perform well; Bulmers growing its share of cider on an MAT basis versus a year and two years ago. In addition, Tennent’s has broadly maintained MAT share versus a year ago and grown share versus two years ago.’ The company says that net debt at end-August was €246m. The company says ‘with the gradual easing of restrictions in the UK on-trade from April 2021, the Group returned to profit and underlying cash generation in May 2021, demonstrating the inherent strength of C&C’s business model.’
• Further comment. C&C says ‘trading performance continued to improve from May 2021 and Irish outdoor hospitality reopened from June 2021. Our key distribution businesses, Matthew Clark and Bibendum, returned to profitability in June and remained profitable over the key summer trading period. The Group discontinued the use of government furlough support schemes in June 2021.’
• Re supply shortages, it says ‘the UK is experiencing a shortage of heavy goods vehicle drivers, however, with the Group’s distribution network controlled inhouse, we have been partly insulated and as a consequence have broadly met customer demand through the peak summer trading period.’ It says ‘we continue to work closely with our partners to meet the resurgence in demand.’
• Re inflation. C&C says ‘while there is general upward pressure on input costs and in our distribution business as we manage industry wide capacity constraints, our exposure to commodity inflation is largely mitigated in FY2022 through our long-term
supply contracts and partnerships. We remain on track with the initiatives to deliver the €18 million in annualised cost savings announced in May 2021.’ C&C CEO David Forde says ‘despite sector challenges, our business has shown its inherent strength and cash generation capability in the first half of FY2022. As the on-trade has progressively re-opened, we returned to profitability and worked closely with our customers to meet the resurgence in consumer demand.’
• C&C’s comments on shortages and inflation are a) very likely correct but b) are also typically ‘human’ in that problems tend to be acknowledged for the wider economy, but there are always a raft of reasons why they don’t apply to ‘me’. The same is true with confidence measures (GfK and others). The confidence for one’s own situation is almost always higher than it is for the economy as a whole meaning that, across the whole constituency, virtually everyone thinks they are ‘above average’. This clearly can’t be true.
• C&C chairman. Sky reports that outgoing Marston’s CEO Ralph Findlay is to become chairman at C&C, the company behind brands including Magners and Bulmers. Sky says ‘the appointment is expected to be announced in the coming weeks.’ Sky adds that C&C and Marstons both declined to comment.
• An MCA interview with David Page, chairman of Fulham Shore, reveals that the company is currently benefiting from a depleted retail sector, and from having retained most of its workforce. Page also said the company has its eyes on eventually opening up to 250 sites in the UK.
• In the interview, Page also suggests that many good sites, previously occupied by retailers, are now becoming available at much reduced rental levels. Fulham Shore is reportedly achieving rental deals that are 40% lower than they were pre-Covid.
• Further comment: David Page says ‘not only are the rental deals 40% cheaper, but we are also being given long rent-free periods. Two or three years ago, the normal rent-free period was three months. And now we are getting rent frees of between 12 and 18 months because of our covenant.’ He adds ‘we are being given cash to open restaurants. And we have opened a restaurant for nothing, where the landlord paid for the rebranding work, and now that restaurant is taking £40,000 a week.’
• Page told the MCA ‘a business such as ours which is selling food at about £12 per head could have operated up to 400 sites in the UK. However, with so much competition, high streets changing, and online activity, it is more likely that we can open up to 250 sites.’ He adds ‘delivery has doubled from what it was two years ago,” states Page, suggesting it is, in large part, responsible for the double-digit overall sales growth that Fulham Shore as a whole is currently experiencing. Pre-Covid delivery represented 15% of sales, now it is up at 30%, post the removal of all trading restrictions.’
• The FUL chairman tells the MCA there are currently no issues with supply, having secured the supply of many products such as tomato, flour and wine several months in advance. He says with trading volumes up between 20 and 30% currently, Page indicates that the company is managing to keep input costs under control, “because you you’re getting a lot more goods from your suppliers and therefore able to keep prices the same because you’re giving them more volume.” The group will update on trading (again) at its AGM on 29 September.
• Restaurant Group warned of price rises as it struggles with supply chain strains and worker shortages. Andy Hornby, CEO, told Sky News that inflation was ‘inevitable’. Perhaps looking for a reason to explain the 10.5% drop in the shares, commentators have alighted on the company’s comments on inflation and supply problems.
• In an interview with the Radio Times, Jamie Oliver said he is considering a return to restaurants.
• Virtual restaurants. Chick-fil-A in the US, although it may mean little to us this side of the pond, is to debut three virtual restaurants: Flock & Farm, Garden Day and Outfox Wings, from its Little Blue Menu delivery kitchens. Orders can be mixed and matched across the brands.
• Dave & Buster’s in the US has reported record Q2 revenues and says ‘the second-quarter results we announced earlier today are compelling proof that this team’s extraordinary efforts have succeeded.’ It says that revenue was $378 million, an all-time high that beat 2019’s revenue by $33 million, and compares with just $50.8 million during the second quarter of 2020.
• Coffee chain Dutch Brothers in the US is to list its shares at $23. This compares with the earlier-spoken-of range of $18 to $23.
• Sterling higher at $1.3833 and €1.1713. Oil price up at $75.63. UK 10yr gilt yield up 4bps at 0.74%. World markets mostly slightly lower yesterday with London set to open around level as at 7am.
• Strong performance from fizz and wines from Piedmont and Tuscany drove Italian wine exports, up 16% to €3.3bn in H1 2021. The leading export market is the US, where Italian sparkling wines are up 75% on the 2015/18 average.
• In the US, Amazon has increased its average starting wage for warehouse and transportation workers to $18 an hour as it plans to hire 125,000 new staff. According to Reuters, Amazon is also offering welcome bonuses of up to $3000.
• Advancis LTD, which trades as Buddy Loans, has entered administration. As per a website notice, the FCA are working closely with the lender to ensure customers are treated fairly and in line with the FCA guidance.
• Drinkaware, UKH and a number of other bodies are supporting the UK’s first National Hospitality Day this Saturday on 18 September. Drinkaware says this is ‘a chance to recapture the enthusiasm that people have for meeting up with family and friends in a regulated environment.’ It says the Day ‘has the potential to develop occasions that create repeat visits and help rebuild an industry that has been decimated by COVID.’ UKH says ‘our venues have been through hell over the last 18 months and the majority are still struggling to get back on their feet, even with restrictions now lifted. National Hospitality Day will rightly be a great celebration of everything we love about our sector, reminding customers of the intrinsic role hospitality plays in the social fabric of communities – and helping to raise money for our fantastic industry charities.’
HOTELS & LEISURE TRAVEL NEWS:
• Travel Weekly reports that ‘bosses of the UK’s biggest tour operators expect the changes to the traffic light system they have asked for are likely to be “watered down”’. Jet2holidays CEO Steve Heapy said he had two main asks: a “simplification of the traffic light system” and “PCR tests to be scrapped”. He says ‘we are massively more pessimistic than other countries and it needs reforming.’
• TravelSupermarket data shows that package holiday prices to Spain this September and October are as much as 38% cheaper than pre-pandemic levels. Breaks to Majorca are down 15% on average; Crete by 14%; and Costa del Sol and the Algarve down 14%.
• Further comment: Ultimately, this is going to put downward pressure on staycation prices and volumes. The hospitality industry, excluding the suppliers of accommodation themselves, are interested mostly in the volume of staycationers – but also in the price – as what is taken from the holidaymaker in accommodation fees cannot also be spent in pubs and restaurants. If the accommodation providers take the hit in terms of lower prices, then this could still work well for the ancillary service providers.
• Pierre & Vacances are offering an early booking ski holidays discount of up to 20% across French Alpine and Pyrenean resorts. The deal from the self-catering specialist covers bookings for stays of four days or more this winter.
• Manchester Airports Group chief executive Charlie Cornish has accused the government of “procrastination” in its approach to international travel and the traffic light system. He says ‘people should be free to travel again to low risk destinations without having to take any tests – whether that is PCR or lateral flow.’ He says ‘the cost of these tests has made an overseas holiday unaffordable for many families, despite the low risk now associated with international travel.’
• Games Workshop Group has updated on trading for the three months to 29 August 2021 saying that it ‘was in line with the Board’s expectations. Sales continue to grow but, as with other businesses, we have seen pressure on freight costs and currency exchange rates.’ The company says that it has ‘also today declared a dividend of 25 pence per share. This is in line with the Company’s policy to distribute truly surplus cash. This will be paid on 5 November 2021 for shareholders on the register at 1 October 2021, with an ex-dividend date of 30 September 2021. The last date for elections for the dividend re-investment plan is 15 October 2021.’
FINANCE & MARKETS:
• Whilst the Bank of England maintains that inflation isn’t a problem, it seems that many others have the opposite view, including, perhaps the ONS. The Office for National Statistics reported yesterday that UK inflation rose from 2.0% in July to 3.2% in August, the highest rate since March 2012 – and at the fastest rate since these records began being kept in this form in 1997. VAT is due to rise by 7.5pps on food and non-alcoholic drinks in pubs on the first of next month (and by another 7.5pps next April) and, on the basis of our conversations, most operators are going to pass this on.
• The ONS says that higher prices in transport, restaurants, hotels and for food and drinks pushed up the index. Used car prices also rose by 4.9% between July and August, and have increased cumulatively by 18.4% since April this year. Global supply problems in semi-conductors have restricted new car builds and demand has spilled over. Many students of economics will recognise that too much money and too few goods will lead to rising prices.
• Further comment. Certainly, some of the increase may be temporary. EOTHO may have depressed prices last August but, with VAT rises to come, we would not be too quick to dismiss cost pressures as a problem. If the Bank of England (or anybody else) can ‘solve’ supply problems, then inflationary pressures may abate. The postponement of further Brexit red tape at the UK border re imports may prevent the situation from getting worse (at least for a while), but they do not move the dial the other way.
• The NIESR says that, despite the rise in the headline number, ‘the rise in underlying inflation was more limited. Our measure of underlying inflation as measured by the trimmed mean, which excludes 5 per cent of the highest and lowest price changes increased to 1.6 per cent in August from 1.4 in July, cautioning against panic regarding the surge in headline inflation number recorded in August 2021.’ We understand what the NIESR is doing here but, if the big risers that you are excluding are bigger than the ‘big’ fallers you cut out, you may get a false picture.
• In a ‘softening up’ comment, the NIESR does say ‘there are important transitory factors that will boost headline inflation in the next few months. The imminent reversal of the 2020 VAT cuts, with the first hike scheduled in October 2021, as well as the scheduled increase in the OFGEM household energy price-cap in November 2021 will have the most pertinent effects in the short-term. We believe annual consumer price inflation will remain elevated in 2021 before peaking around 4 per cent in the first quarter of 2022.’ This is possible but, on 1 April 2022, VAT on food in pubs & restaurants does go up by another 7.5pps.
• Stagflation. It’s a little early to call this, to say the least, but The Times says there’s ‘a whiff of the 1970s about today’s Britain: the biggest rise in taxes for a generation, the biggest state as a share of GDP since the Sixties, shortages in shops, increased bureaucracy for businesses, cronyism in government. Even the unions look poised for a comeback.’
• The ONS has reported that house prices fell by around £9k in July. The annual rate of inflation has dropped from the record 13.1% seen in June to 8% in July.
RETAIL WITH NICK BUBB:
• Today’s News: As well as the JLP interims (due at 7.45am), today has brought the THG interims, the Wickes interims, the Co-op interims and the belated Superdry finals. The THG interims cover the 6 months to end June and trading was strong, with revenues up 45%, but there is no change to the full-year guidance and the main interest will be in the news that THG is to demerge its Beauty business next year. The Wickes interims also cover the 6 months to end June, with revenue up 33%, but adjusted profit before tax increased by 221% to £46.5m, ahead of the guidance of around £45m, and the company says that “we now expect to deliver full year adjusted profit before tax towards the upper end of market expectations”. The Co-op interims cover the 26 weeks to 3 July and are a bit mixed, with Food sales down by 2.8% (up 6.5% on 2019 levels). The Superdry finals are for y/e April and the business
• Today’s News (2): In other news, Games Workshop has announced today that trading for the three months to 29 August was in line with the Board’s expectations (“Sales continue to grow but, as with other businesses, we have seen pressure on freight costs and currency exchange rates”). Dixons Carphone has formally changed its name to Currys, with the ticker changing today from DC to the odd-looking CURY. And the ASOS Capital Markets Day on Sustainability (“Fashion with Integrity”) today (which begins at 9am and sets out ambitious new 2030 ESG goals) will give management a good chance to differentiate the business from Boohoo, as well as to address the recent concerns about the competition from the fast-growing Chinese based Online fast fashion business, Shein.