Langton Capital – 2022-02-28 – PREMIUM – Tortilla, McColl’s, IPOs, online taxes, Peet’s Coffee, Dr Pepper & more:
Tortilla, McColl’s, IPOs, online taxes, Peet’s Coffee, Dr Pepper & more:
A DAY IN THE LIFE:
So, the start of another full week when the corporate news-flow could be relatively light but where there’s likely to be plenty more occurring on the world scene to keep the markets interested.
The market indicators swung from a suggested positive 100 this morning to their current minus 121 on geopolitics. There are just a smattering of news out this week. Revolution Bars tomorrow, Nichols & some economic stats. A bit early to see whether the crisis in Ukraine has impacted the numbers – and it will be hard if not impossible to disaggregate the impact of the various macro-events that have buffeted the markets over recent months.
And it’s the start of meteorological spring tomorrow. On to the news:
GENERAL THOUGHTS: THE MARKET FOR SHARE FLOTATION (IPOs):
PUBS & RESTAURANTS:
Cost of living crisis:
Inflation numbers will remain higher for longer as a result of the conflict in Ukraine, according to a number of observers. Bank of America has said that UK households could suffer the biggest annual decline in living standards since the 1950s. Inflation is already at its highest level in 30 years. It will rise further in April when the fuel cap increases and wheat prices have just hit 13 year highs. Gas prices, however, eased back on Friday. The RAC said petrol prices rose to four consecutive record highs last week.
• There are a lot of straws in the wind but, not to labour the metaphor, they are all blowing in the same direction. Energy, fuel & food prices are rising and no consumers will be able to go long without paying for one or more of the above. Nobody wants to be a Cassandra. But that doesn’t change the facts & Bank of America says ‘there is a lot of volatility. Energy prices have subsequently dropped very sharply today, so the numbers wouldn’t look as negative for real incomes. It’s a risk scenario based on where energy prices got to on Thursday. We’re substantially below that now but there is always a risk they could go up again.’
• This looks like bet-hedging. Prices are going up, there is little doubt about it. Stronger bodies (labour unions, companies with strong brands, monopoly suppliers etc) will do well but the weak (non-unionised labour, those on fixed income, companies selling generic products or those dependent on strong suppliers) will suffer. President Reagan said inflation is a thief and he was not necessarily wrong. The Resolution Foundation says the fighting in Ukraine will ‘broaden and deepen the living standards squeeze here at home.’ It says ‘the chances of low- and middle-income households getting some respite from the growing squeeze on living standards later this year are receding rapidly.’ This will have implications for discretionary spending.
• Investec says that family fuel costs could top £3,000 per annum. They are set to rise by 54% to £1,971 on 1 April. Another 52% increase, potentially some time ahead of next winter, would take a lot of cash out of consumers’ pockets.
Inflation – the impact on the consumer:
JP Morgan has said that UK inflation could hit 8%. It points to fuel and food price increases. Oil is at multi-year highs and it points out that Russia and Ukraine are major fertiliser exporters. Delivery costs and fertiliser prices will, all things being equal, impact many if not nearly all, other costs across the economy. The Bank of England, which said that inflation was transient and should be 2% this spring (then raised this to 5%, then 6% and latterly 7.25%) has been raising interest rates this year. This will feed through to prices when property costs are included. The fighting in Ukraine may dampen what would have been further interest rate increases in the coming months.
In a sign that companies are attempting to add more capacity, Motortransport.co.uk points out that heavy goods vehicle (HGV) registrations rose by 12.9% year-on-year in 2021, according to the Society of Motor Manufacturers and Traders. It says ‘growth in key industry sectors such as construction saw demand outstrip supply, with truck registrations surging from a locked-down 2020 fall of 32.2%. However, availability was hit by the global semiconductor shortage.
Online sales taxes.
The BBPA has responded to the Online Sales Tax Consultation released by the government saying ‘we welcome the Chancellor’s decision to open a consultation on Online Sales Tax which we have been calling for as part of fairer taxation review. Pubs currently overpay rates by £570million relative to their turnover and an urgent rebalancing is needed.’ CEO Emma McClarkin says ‘within our response we will be recommending the introduction of an Online Sales Tax explicitly used to reduce the burden of rates from physical properties, especially those ones that cannot shift to digital platforms, like the great British pub.’
• The BBPA says ‘we agree with the stated aim that this should not be a penalty on digital shopping, but rather a welcomed attempt at a fairer tax structure which recognises our modern economy.’ Ms McClarkin says ‘we urge the Government to support the sector’s recovery by tackling the unfair business rates system and continuing to reduce the punitive tax burden on our sector to ensure the sustainability of brewing and pubs, and help us regenerate our high streets, towns and villages up and down the country.’
• Online sales companies may seem like a legitimate target but, with transfer pricing channelling profitability offshore in some cases, revenues rather than profits may be the obvious target. And here a) any tax would increase inflation and b) margin will be critical. Online operators may be able to argue that their margins are thin and that any revenue tax could push them into loss. But, as their opponents may respond, they would say that, wouldn’t they?
Sapient Corporate Finance’s Peter Hansen has told the MA Leaders Club conference at Fabric nightclub that further lockdowns will not be announced not least because the government “cannot afford it”.
• Mr Hansen says the government ‘has pumped a ton of money into the system, but government largesse is about to end.’ On a brighter note, he says that corporate activity is back (or it was back, before the Ukraine invasion) and he adds that ‘every time the industry is shut down, it bounces back when it reopens. Customers are desperate to get back to the pub and are tired of staying at home. This has not gone unnoticed by real estate investors, who are looking for resilient assets, especially freeholds.’
The London Borough of Hammersmith and Fulham has not renewed its cumulative impact policies for Fulham and Shepherd’s Bush.
• Poppleston Allen says the ‘Council was unable to collect evidence regarding the CIAs as they had planned to in 2020 [due to Covid, so it] took the view that any evidence that would have been gathered during the pandemic would not have been an accurate reflection of how the day and night-time economy would operate in the future and would likely lead to misleading or inaccurate conclusions being drawn from the assessment.’ It says ‘as a result, both CIAs expired in April 2021 and the Council can no longer rely on the evidence that was used previously to support the implementation of their CIAs. However, applicants in these areas should take note that the absence of a CIA does not prevent the responsible authorities or residents from making representations on the grounds that a premises may give rise to a negative cumulative impact in the area.
Austrian Wine reports that the 2021 Niederösterreich (Lower Austria) vintage has ‘pronounced notes of stone fruit and a creamy, mellow mouthfeel’.
COMPANY & OTHER NEWS:
Tortilla has this morning announced a strategic partnership with Compass Group. It says ‘through the strategic partnership, at least 14 Tortilla sites will be opened by Chartwells [a part of Compass] on a franchise basis across their estate of universities over the next five years.’ It says ‘this is the latest in Tortilla’s continued expansion into new locations and formats beyond the high street, following the opening of sites at Gatwick Airport and Leeds Skelton Lakes Services, in partnership with SSP Group plc.’
• Tortilla CEO Andy Naylor says ‘we are excited to partner with Chartwells Universities and launch new sites across the UK. In recent years, we have been successful in adapting the brand for new locations and formats, and this will be another opportunity for us to showcase our ability to bring Tortilla to customers across a breadth of locations. This is an important agreement for us and will support our long-term UK growth ambitions, while driving consumer awareness within a key target demographic.’
The MCA reports that Tim Hortons will open four drive-thru restaurants in the UK, located in Oldbury in Wolverhampton, Mansfield, Teeside and Portadown. The business opened two drive-thru sites last week taking its total estate to 48 sites.
World Coffee Portal reports that Paris Baguette is set to open its first UK site, located at the Battersea Power Station Development in London. In July 2021, the bakery and coffee chain announced its intention to operate 100 US stores by the end of 2021.
Keurig Dr Pepper reports full year sales up 9.2% to $12.7bn, driven by growth for its cold beverage portfolio. The company’s Q4 net sales rose by 8.7% to $3.4bn, with its brands Canada Dry, Dr Pepper, Sunkist, A&W, 7UP and Squirt CSDs, Mott’s and Snapple led the Q4 net sales performance.
• The company says ‘we finished 2021 with exceptional top-line momentum, driven by robust consumer demand across our portfolio and our third consecutive year of double-digit adjusted EPS growth. Despite ongoing macro and Covid-related challenges, we successfully delivered our merger commitments on or ahead of the targets we set four years ago.’ CEO Bob Gamgort says ‘we head into 2022 with confidence in the stronger, faster-growing business we have built, poised to continue to drive outsized long-term value creation in an environment that we expect to remain challenging for some time.’
In the US, JDE Peet reports full year sales up 5.2% to €7bn, with its European consumer packaged goods (CPG) business’ sales up 2.6% to €3.6bn. The company noted ‘particularly strong contributions from the German, French, Polish and Danish markets.’
• CEO Fabian Simon says sales performances in Australia and South East Asian markets had been less good due to stricter lockdown measures but China delivered ‘strong double-digit performance.’ Mr Simon says ‘I am very pleased with JDE Peet’s’ performance in 2021. We delivered on all our commitments, in a high-quality way, in another year of unexpected global disruptions.’ He adds ‘this year, we became a nimbler global coffee & tea pure player our brands emerged stronger. This gives me confidence that JDE Peet’s can successfully navigate’ the exit from the pandemic.
Alibaba reports Q4 revenue growth of 10%, its slowest rate since going public in 2014, to 242.6bn yuan. Analysts on average had expected revenue of 246.37 billion yuan, according to Refinitiv data. Customer management revenue, a key metric which tracks how much money merchants spend on ads and promotions on Alibaba’s sites, fell 1% year-on-year.
The Mail on Sunday has suggested that Burger King UK’s £600million flotation has stalled due to investor nervousness concerning the invasion of Ukraine and associated uncertainties. BK UK had appointed advisors at Investec, Peel Hunt and Bank of America. Sources tell the Mail the IPO has ‘been delayed, but not indefinitely. It’s market conditions. You have such a big sell-off. The sentiment right now is really difficult.’
Monster Beverage Corporation – with a comment on inflation & supply issues.
Monster Beverage Corporation has reported financial results for the three- and twelve-months ended December 31, 2021 saying ‘the Company achieved record fourth quarter and full-year net sales, with annual net sales exceeding the $5.5 billion mark for the first time in the Company’s history, notwithstanding the impact of the COVID-19 pandemic on the Company.’
The company says ‘despite certain challenges in the 2021 fourth quarter, the Company achieved solid results overall.’ It refers to supply issues when it says ‘during the 2021 fourth quarter, the Company continued to procure additional quantities of aluminium cans from suppliers in the United States and abroad in response to increased consumer demand.’ This will beggar the company’s neighbours.
• Monster CEO Rodney Sacks says ‘we are pleased to report record net sales for the 2021 fourth quarter, despite the ongoing impact of the COVID-19 pandemic, particularly of the Omicron variant.’ He says ‘in the fourth quarter of 2021, we expanded distribution of our brands in certain international markets.’
• Co-CEO Hilton Schlosberg comments ‘we are pleased with the results for the Company in what was a challenging fourth quarter. We continued to experience challenges meeting demand in the United States and EMEA in the fourth quarter, largely as a result of a shortage in aluminium cans, the availability of co-packing capacity and procurement difficulties in other inputs. The shortage of shipping containers and global port congestion continues to impact our operations.’
• He adds ‘we continue to experience shortages in the availability of co-packing capacity for certain of our products. We believe that some of the increased costs we are experiencing are likely to be transitory, as we begin to decrease our reliance on the use of imported aluminium cans, as well as increasing our inventory levels in proximity to our customers, thus reducing the excess costs of long-distance transportation and freight.’
China Post opened its first ‘Post Coffee’ store in the Xiamen International Trade Building on 14 February. China Post has a network of 54,000 post offices across the country, and the new coffee concept has the slogan ‘drink a cup of coffee and write a letter to the one you love.’
The Royal Lion Hotel in Lyme Regis is to close for refurbishment after being bought by Dorset based brewer & pub co Hall and Woodhouse.
The convenience market. Sky reports that ‘McColl’s Retail Group, one of Britain’s biggest convenience store chains, is racing to secure new funding to stave off a collapse that could put thousands of jobs at risk.’ It says the retailer is ‘working with advisers on attempts to find a buyer or third parties willing to inject fresh capital into the business.’ The company has commented this morning.
• Sky reports ‘Wm Morrison, which agreed to a £7bn sale to the private equity firm Clayton Dubilier & Rice last year, is understood to be monitoring McColl’s situation closely with a view to possibly acquiring hundreds of its stores out of insolvency.’
• McColl’s comments this morning saying it ‘confirms it remains in ongoing discussions with its lending banks, as previously announced on 29 November 2021, towards a longer-term agreement in relation to the balance of the facility. The Group has received the necessary agreement to roll forward its financial covenant test periodically, and continues to receive credit support from its key commercial partner to enable these discussions. The Group continues to believe that a financing solution will be found that involves its existing partners and stakeholders. A further update will be made as and when these discussions conclude.’
• The company says its Morrison’s roll-out is on track. It says that its financial headroom has been ‘absorbed’ by slow trading. It says its numbers are in line with prior guidance and says ‘since the start of the new financial year, there has been a tangible improvement of product availability in stores. However, the business saw a material step-down in footfall due to the surge in COVID-19 cases relating to Omicron, particularly over the Christmas period, impacting trading. While demand has since picked up, revenues in the first quarter are behind expectations.’ The group says ‘despite this, the Group delivered two-year like-for-like sales growth of 5.9% in the 11 weeks to 13 February 2022, in line with the neighbourhood convenience market. The Group is starting to experience strengthening margin as impulse product sales recover, and has taken further mitigating actions, including a
LEISURE TRAVEL & HOTELS:
Clear Sight comments on the international travel market saying that holidays are ‘back on the menu’. It says ‘the proportion of Brits booking an international holiday rose to its highest level in two years during January. Consumers’ comfort with the idea of getting on a plane recovered sharply, though still remains 20+ points below the pre-pandemic norm.’ It says that staycation bookings have hit new highs.
• Clear Sight says ‘while we appear to be seeing the green shoots of recovery for international holidays, nearly twice as many adults booked a UK holiday during January – the highest incidence since start of tracking. Comfort with the idea of staying in hotels (in particular), but also other types of paid for accommodation jumped significantly as Omicron-driven fears receded.’
• It’s not clear yet if the situation in Ukraine will dampen demand for travel, particularly internationally. Domestically, Clear Sight says ‘visitors’ comfort with the idea of going to gardens / country parks, theme parks, zoos, museums, historic houses, aquariums, indoor play centres rose significantly in all cases.’ It says there have been drops in other areas adding ‘the proportion of the population visiting shopping malls, restaurants and pubs dipped slightly in January, relative to December – with seasonal factors likely to be at play. All of these out-of-home sectors record improvements in consumers’ comfort with the idea of engaging, with restaurants and shopping more or less back to the pre-pandemic norm.’
BA cancelled short haul flights from Heathrow over Friday and into Saturday due to a computer problem. Long haul flights operated as planned.
The ECJ has ruled that British nationals living in the EU should be stripped of their EU citizenship now the UK has left the bloc.
IAG, owner of BA, has said ‘a strong recovery is underway’ and it expects its operating result to be profitable from Q2 2022. The company reported an operating loss of €2.8bn in 2021, compared with a loss of €7.45bn in 2020, with passenger revenue rising by 5.9% to €5.8bn.
Viking Cruises has cancelled all 2022 departures on its Kiev, Black Sea & Bucharest itinerary as Russia invades Ukraine. The line said it was also evaluating 2022 itineraries that call in Russia with the view to modifying them where necessary.
Russia has banned British airlines from landing in Russian airports and from crossing the country’s airspace. Russia said the move was a response to ‘the unfriendly decisions by the UK aviation authorities’.
The RMT union has announced three days of Tube strikes next week, due to a pay and pension plans row with the mayor. Industrial action will occur on Tuesday, Wednesday, and Thursday.
• While these things do have a habit of getting called off, any transport disruption across London will not help the capital’s hospitality operators as they attempt to rebuild after Covid. There is a lot of finger-pointing going on but, to frustrated would-be travellers, that is academic. TfL says it is ‘extremely disappointing that the RMT is planning to go ahead with this action. We haven’t proposed any changes to pensions or terms and conditions, and nobody has or will lose their jobs because of the proposals we have set out.’
Marriott International has signed a management agreement with Cola Holdings and The Westbury Hotel Limited to bring the St. Regis brand to Mayfair. The St. Regis London is expected to welcome its first guests in 2023.
The MCA reports that Lane7 has 18 sites in legals across the UK, with the boutique bowling concept targeting 6 openings a year over the next 5 years.
In response the Russia’s invasion of Ukraine, Formula 1 has cancelled the Russian Grand Prix and UEFA has relocated the Champions League final to Paris.
FINANCE & MARKETS:
Sterling mixed at $1.3361 and €1.1975. Oil price higher at $102.62. UK 10yr gilt yield up 5bps at 1.49%. World markets better on Friday but mood soured over the weekend & London set to open down around 121pts.
The Russian rouble has fallen by 30% against the US dollar after the announcement of new sanctions. The currency is trading at another record low.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): As flagged by the BBC News website summary, the same photo – of Ukrainian soldiers lying or kneeling on a bridge in Kyiv, guns at the ready – appeared on many of the front pages of Saturday’s papers. The Daily Mail claimed that the image is a “sight you never thought you’d see in a modern European capital”, whilst the FT ran with “Russian forces descend on Kiev” and the embattled capital of Ukraine was the focus of most of the other headlines: “The battle for Kyiv” said the Daily Telegraph and “Battle to save Kyiv” said the Times, whilst the Guardian had “Kyiv on the brink” and the Daily Mail called Kyiv “the City of Courage”. The Times and the Telegraph both highlighted that Western leaders fear that Vladimir Putin could use devastating thermobaric bombs (as trialled in Syria) because “fierce resistance” by Ukrainians has slowed down the Russian
• Saturday’s Press and News (2): In terms of Retailing stories, Friday’s news that John Lewis is scrapping its longstanding “Never Knowingly Undersold” price-matching promise got plenty of coverage. The FT ran the news as an article on its Company pages, but the other papers saw it is a general story for the News pages, which, coincidentally, often also carried adverts for the new John Lewis discount brand, Anyday. The Guardian and the Telegraph both quoted our view that the move was long overdue and that nobody quite understood what the slogan meant anyway…The Telegraph also had a detailed Business editorial about the move by John Lewis (headlined “Flying the White flag on prices will pay off”) , arguing that “Ditching the never knowingly undersold pledge is risky, but it may help John Lewis get its true identity back” and that “The focus should now turn to addressing customer
• Saturday’s Press and News (3): In other news, the acquisition of the collapsed Studio Retail business by Frasers Group was picked up by the Times and the Telegraph, with the latter quoting our view that non-Frasers shareholders will have been dismayed to hear that the share listing had been not only suspended but cancelled. Both papers noted the statement put out by Mike Ashley on Friday afternoon, criticising the management of Studio Retail and calling for the Business regulators to investigate the collapse. The Times and the Telegraph also both flagged that the Treasury issued a consultation paper on an Online sales tax on Friday, although no early move by the Chancellor is thought likely. The Times also flagged that the Chinese Online fashion giant Shein has postponed plans for an IPO and that Ben Francis, the boss of the British sportswear brand Gymshark, has poured cold water on
• Sunday’s Press and News (1): The main front-page focus in the Sunday papers was obviously on the Russia/Ukraine crisis, with the Observer flagging that “The world shuns pariah Putin”, whilst “Terror stalks the streets” was the Sunday Times’ headline, as it described the Ukrainian volunteers who are hunting “traitors and Kremlin spies”. The Sunday Telegraph led with the headline “Fierce resistance slows Putin’s advance in Ukraine”, while the Mail on Sunday devoted its front page to launching an appeal to help Ukrainian refugees (“Mail’s SOS for the innocent victims of war”).
• Sunday’s Press and News (2): In terms of Retail stories, the main revelation was the Sky News scoop that the embattled convenience store group McColl’s is racing to raise fresh capital to prevent the business from crashing into administration, as noted by the Mail on Sunday (which highlighted that Morrisons is eyeing a bid) and the Sunday Times (which noted that the Issa brothers/EG have pulled out of rescue talks). The Mail on Sunday also flagged that the boss of the beleaguered Boohoo, Mahmud Kamani, is weighing up a deal to take the business private, after the recent share price plunge. The “Tipster” investment column in the Sunday Times looked at the recent slump in the share price of Made.com (“A furniture retailer made for millennials”) and said the shares are a Buy. Finally, the new Sunday Times column by Julian Richer (of Richer Sounds) was headlined “Capitalism can be ghastly,
• Sunday’s Press and News (3): In terms of all the Economics comments in the Sunday papers, we give our usual shout-out to the column by the Sunday Times Economics correspondent David Smith, on the economic impact of the invasion of Ukraine by Russia (“War will slow our recovery but shouldn’t finish it off”), in which he noted that even before the invasion, UK consumers were feeling gloomier and the question now is whether they will keep spending. We also enjoyed the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“Moscow won’t even blink at being denied access to Swift payments”), in which he argued that “The trouble with sanctions is that the sanctioner often ends up paying as big a price as the sanctioned”).
• Today’s News: The ABF (Primark) pre-close update today covers the 24 weeks to March 5th and trading at Primark has been strong, with sales well over 60% ahead and only 4% below pre-Covid levels. In the core UK market, LFL sales are expected to be 9% below two years ago and stores in retail parks and town centres continue to outperform destination city centre stores, with LFL sales in retail parks ahead of pre-Covid levels. Primark also flag that “we are also on track to launch our new, improved customer-facing website in the UK by the end of March, and across all our markets by the autumn. The new website will showcase many more of our products and will provide customers with product availability by store”. In other news, the embattled McColl’s has issued a detailed response to the press speculation yesterday, flagging that although revenues in the first quarter are behind expectations
• BDO High Street Sales Tracker: We should make our normal caveat at this point, that the weekly BDO High Street Sales Tracker for medium-sized Non-Food chains is statistically flawed, is skewed to the recovery sector of Fashion and is currently facing the very weak lockdown comps of a year ago…but we must still flag that, for what it’s worth, the latest survey shows continuing strong momentum. In the w/e Feb 20th Total BDO LFL sales (including some Homewares and Lifestyle retailers, as well as the Fashion retailers) were up by c61% on the year before (despite a c19% slump in Online sales), whilst Fashion sales alone were up by c81% LFL.
• This Week’s News: Tomorrow brings the Travis Perkins finals and the latest monthly Kantar grocery sales figures. On Wednesday we get the Hotel Chocolat interims, the Music Magpie finals and the Just Eat finals. The embattled shopping centre landlord Hammerson then reports its finals on Friday.