Langton Capital – 2022-05-26 – PREMIUM – Tipping points, normality, Hostmore, DP Eurasia, city centres & other:
Tipping points, normality, Hostmore, DP Eurasia, city centres & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
My app said there was a 4% chance of rain yesterday mid-afternoon in The Smoke and, like a fool, I believed it.
But I then found myself, shirt-sleeved as I was, darting like a thief from one bit of cover to the next in the Barbican to avoid coming undoubtedly last in what would have to be the world’s weirdest and frankly least attractive wet T-shirt contest.
Still, I made it to the shops and back with nary a scratch and my dignity intact. We’ll keep it brief this morning so on to the news:
QUESTION OF THE WEEK?
What will win out, premiumisation or the consumer hunt for value? Or will the market polarise between the two?
Answer of the Week comes tomorrow, Friday, so comments please in by close, Thursday.
PUBS & RESTAURANTS:
Interesting to note that M&S has announced that it will shut 32 more stores as it shifts away from town centres. The company said failed local authority or government policy meant that town centres had ‘lost impetus’ and spark concerns for the future of the high street. M&S also announced a decision to fully exit Russia, after temporarily pausing deliveries in the light of the war in Ukraine, at a cost of £31m. New EU tariffs and border costs relating to Brexit had cost £29.6m in profits and £15m in lost trade.
• The days when M&S was THE major draw in a city centre may have gone but the stores remain a magnet for shoppers in a way that no end of tattoo parlours, cash for gold shops and nail bars do not.
• And the clientele is different. It may well linger in town, buy coffees, need to fuel up with sandwiches and the like and therefore, if M&S is no longer there, ancillary spend may also fall.
• This is not all down to what M&S chooses to either do or not do, of course. And, though we’re not retail analysts, we seem to remember M&S saying it would de-prioritise shops were it did not have on-site parking – largely city centre sites – some considerable time ago.
• Nonetheless, the parting shot at councils for their failure to revitalise town centres has to be considered a negative for those hospitality operators with sites in the same locations.
Levels of business.
ClearSight has updated on the recovery of the UK hospitality market, saying that ‘rail & bus travel is close to pre-pandemic levels in terms of participation but not yet journey volumes.’ It says that ‘outbound holiday and air travel markets see an uplift in demand – but significant challenges remain.’ ClearSight adds ‘UK holidays and paid-for accommodation are recording a strong recovery in 2022 with growth in booking activity during April boding well for the summer.’
• It says that ‘consumer engagement with retail, dining, pubs, cinema and gyms is relatively stable, broadly in line with the pre-pandemic norm – despite fears of a slowdown linked to the cost of living crunch’ and it concludes that there is ‘good news for visitor attractions, with both outdoor and indoor sites registering further month-on-month increases in participation.’
• ClearSight says ‘out-of-home leisure verticals such as dining, pubs, cinema and gyms have recorded a strong recovery in terms of UK consumer participation – which is now comparable to pre-pandemic and with few signs of any residual comfort gap.’
Stay in a Pub has reported ‘that 44% of all bookings made in April and May have been from overseas. European visitors are coming from Germany, Belgium Switzerland, and the Netherlands, and significant numbers are traveling long haul from the US, Canada, and Australia.’
• Interestingly, Stay in a Pub says that ‘the average booking window for this inbound travel is 75 days, taking stays well into July and August and even before expenditure on food and drinks consumed during their stay, the average booking value for each property is £220.’
• CEO Sophie Braybrooke says that it’s ’great to see the increase in bookings from international visitors.’ She adds ‘before the pandemic, around 17% of our bookings were from overseas, so seeing the numbers swell proportionately and in real terms is great news for the sector.’
Potential travel problems:
Commenting on the RMT vote for a national strike this summer, UKHospitality CEO Kate Nicholls says ‘a national rail strike would further jeopardise hospitality businesses working hard to rebuild following the pandemic, in the face of rising costs and a fall in consumer confidence.’
• UKH says ‘a lack of commuter trains bringing people into towns and cities will further set back the recovery of our high streets and will also deter people from going out in the evening – especially women and vulnerable people who may rely on trains to get them home and feel safe late at night.’ Ms Nicholls adds ‘furthermore, as we come into the crucial summer months, disruption on the rail network will discourage both UK and international tourism.’
• UKH adds ‘strikes would inevitably damage our already fragile hospitality businesses, which would have a negative knock-on effect to the wider UK economy.’ This seems patently correct. In the past, tube and bus strikes have caused major issues for hospitality operators, particularly in London.
Food & farming:
Supply issues – a lack of labour, transport or other difficulties, for example those faced in getting grain out of Ukraine – have been responsible for inflation rather than an excess of demand. Demand, rather than supply, will be clobbered by rising interest rates.
In the meantime, a House of Commons committee has reported on Labour Shortages in the Food and Farming Sector, has concluded that labour shortages ‘caused by Brexit and accentuated by the pandemic’ have been impacting food supplies.
• The BBC reports on a shortage of fruit pickers. It adds that the government has issued 30.000 seasonal worker visas, but quotes some in the horticultural industry as saying that it needs 80,000 or 90,000 workers.
Petrol prices have hit a new high of 170.4p a litre with diesel hitting 181.4p a litre.
• The RAC calls this ‘another unfortunate landmark’ and it says ‘while wholesale prices may have peaked for the time being last week they are still worryingly high which means there’s no respite from the record-high pump prices which are so relentlessly contributing to the cost-of-living crisis.’ It calls for government action on fuel costs later this week.
The Caterer reports that restaurants are cutting back on fried dishes and taking premium products such as scallops off the menu due to increasing costs. General manager of The Terrace restaurant in Yarmouth, Tom Fahey, said ‘ People love crispy deep-fried things, [but] it means you use a huge amount of oil.’
• Menus are likely to evolve, at least to the point where customers kick up a fuss. And, when they evolve, they are likely to do so in a direction that saves the operator money. If substitute products are available, then they may be used. The prices of said substitutes will also likely rise, of course, but moving away from products that cost more is going to happen. This isn’t an issue for some operators but it might be more difficult for, say, fish and chip shops in this instance, where substitution is less easy.
DPEU says trading is in line:
DP Eurasia has updated on trading for the four months to end-April, saying that the number of stores is up by 41 on the same period last year (to 816) with total sales of 1.035bn TRY. The company says that ‘group system sales increased 56.5%, with a like-for-like growth of 36.1%, driven by excellent demand in Turkey.’ DPEU adds that ‘growth [has been] achieved despite the challenging comparatives in both Turkey and Russia.’
DPEU says that Russian online system sales rose and the company had a ‘good liquidity position at Period-end with TRY 67.8 million cash and an undrawn bank facility of TRY 172.6 million.’ The company adds that it ‘is still unable to provide meaningful guidance for the full year ending 31 December 2022.’
• CEO Aslan Saranga says ‘we have started the year well despite the headwinds of high inflation and geopolitical tensions. Owing to management’s experience in navigating volatility, Group system sales remained in strong growth at 56.5% with a solid 36.1% like-for-like performance versus a year ago.’ He says ‘our Turkish operations were robust with system sales growth of 54.9%, or 47.6% LFL. We are pleased with this LFL performance, given it is set against a tough prior comparative.’
• The CEO adds ‘while responding to high inflation via price increases on sales to both consumers and franchisees, we remain committed to providing the best value for money proposition and ensuring our franchisees remain profitable.’ He says ‘we believe that we are well positioned to succeed in this environment and deliver long-term sustainable growth.’
• DPEU says ‘in Russia, we have returned a flat like-for-like performance as a result of a strong comparable period and the sustained conflict in the region. However, trends improved since our preliminary results release and our average like-for-like growth in April was 8%.’ It says ‘we continue to monitor the situation in the region closely while the safety and welfare of all the Group’s employees and customers remains our primary priority.’
Hostmore profit warning. Slower sales, lower margins:
Hostmore, which operates the Friday’s chain of restaurants in the UK, has updated on trading update for the 20 weeks ended 22 May 2022 and revised its guidance for FY22. The company says this is ‘a challenging consumer environment’ but it maintains that it is ‘well positioned with a strong and resilient balance sheet.’ The company says that ‘LFL revenue for the 20 weeks ending 22 May 2022 is c.6% lower than 2019, with dine-in sales remaining in line with the market benchmark data.’
Hostmore adds that ‘management actions, including pricing adjustments and hedging of utilities, [are] limiting [the] impact of lower volumes on margins.’ The group has opened two units in the period and expects to open three this financial year. Re Current Trading, the company says that it is inline ‘with the market benchmark data, with LFL revenue for the 20 weeks ending 22 May 2022 c.6% lower than FY19 as a result of a more challenging consumer environment.’
• Hostmore says ‘we believe this is primarily a result of consumer confidence weakening significantly since Russia’s invasion of Ukraine on 24 February 2022 which is contributing to the current cost of living crisis.’ Re the Outlook, Hostmore says ‘the challenging consumer environment means that we are taking a more prudent view on trading for the remainder of year, including the assumption that LFL dine-in volumes, as compared to FY19, may reduce by 8% for the rest of FY22.’
• The company says, however, that ‘improved customer satisfaction scores demonstrate the success of our investment in improving the quality of our customer offer and now provides a strong basis for appropriate pricing adjustments, in line with broader sector announcements, to mitigate approximately half of the impact of the lower volumes now anticipated.’
• Hostmore says ‘food and beverage input cost inflation impacting the sector is currently approximately 10%. We have partially mitigated the impact of this cost inflation by fixed utility and supply contracts; however, the combination of cost increases and lower volume will result in an EBITDA margin (pre-IFRS) in low double digits (%) for the current year compared with our medium-term targeted level of mid-teens, which is retained.’
• CEO Robert B. Cook says ‘we are not where we expected to be, however, I am able to report a financial performance which, regardless of the arduous challenge and extreme economic headwinds being encountered presently, allows us to confidently continue with our development strategy.’
• He adds ‘our ambition remains that of almost doubling the size of our existing portfolio brands over the medium term as economic conditions improve. Our relationship with landlords, coupled with a prudently managed balance sheet, provides the basis for confidence in the success of our strategy over the longer term.’ The CEO concludes ‘whilst we remain ever mindful of the ongoing economic challenges, the management team remains focused on delivering the appropriate returns to the benefit of all stakeholders.’
McDonald’s UK and Ireland invests over £250m in restaurant redesign as consumers increasingly look for greater speed, efficiency and choice in how they order their food. In 2022 McDonald’s will introduce Convenience of the Future in 200 restaurants with 800 conversions planned over the next four years.
EG Group reports a £215.7 million net profit for the first three months of the year with the company claiming it is well placed to weather the current inflation and cost of living crisis. CEO Zuber Issa said ‘The strong performance in foodservice was supported by UK acquisitions from 2021 that contributed £32m of gross profit across the quarter…our belief [is] that food service represents the biggest opportunity for EG Group globally.’
SA Brain has put the freehold and leasehold investment of 99 pubs on the market for a price reflecting a NIY of 5.75%. The company has agreed to sell 95 of those assets in one property portfolio to Song Capital and partners.
Duration brewing has launched a £1m crowdfunding campaign to fund an immersive taproom and expansion at historic its priory site.
The Famous Grouse is launching a new premium spirit with a Sherry Cask Finish. The drink is billed as a ‘blend of festive flavours including chocolate, almonds, dried fruits and sweet spices’.
Surrey-based brewer, Big Smoke Brew Co, and Airport Retail Enterprises have announced the opening of two new independent craft beer and food destinations at Heathrow’s Terminals 3 and 5 this summer. The Oceanic in Terminal 3 and The Globe in Terminal 5 will serve Big Smoke’s core range of beers and gins.
Foodsteps has raised $4.1m in seed funding, led by Octopus Ventures, to expand its sustainability platform and attract new talent. Companies can upload recipes onto the platform, which has a database of 3,000+ ingredients containing impact information on each ingredient’s carbon footprint and provides recommendations on improving sustainability.
Majestic Wine has said that it expects to break all records in its sales of sparkling wines over the Jubilee weekend.
Trian, the largest shareholder in burger chain Wendy’s Co., is reported to be exploring options that could include taking over the whole company. Trian is controlled by Wendy’s chairman Nelson Peltz.
• Wendy’s issued a statement, saying ‘the Wendy’s Co.’s board of directors and management team regularly review the company’s strategic priorities and opportunities with the goal of maximizing value for all stockholders.’ It says ‘consistent with its fiduciary duties, the board will carefully review any proposal submitted by Trian Partners.’
HOLIDAYS & LEISURE TRAVEL:
Travel Weekly reports that limited delays at airports are expected over the half-term and Jubilee bank holidays, despite a ‘narrative of disruption’ in the media being forecast. Travel Weekly’s source suggested delays at UK arrival halls next week should be manageable, but warned delays are likely this summer.
• Travel Weekly quotes a ‘source’ as saying that ‘Dover is already warning of delays and Eurostar has had one-and-a-half-hour queues at St Pancras this week.’ The source goes on to say that ‘there will be photos of queues at airports and a narrative of disruption.’ But it says ‘a lot of travellers will be pleasantly surprised. Airports are in a relatively good place.’
• The source points to ground handlers as still being ‘the big worry, particularly at check-in. But we’re seeing security staff recruits come through.’ It says ‘check-in is taking longer because of document checking. Countries are removing restrictions, but a lot retain requirements. Passengers need to think what they can do to be ready for check-in.’
The RMT has said that its demands for a pay rise are “not unreasonable.” It is possible that the largest rail strike in more than ten years will be upon us shortly. The union says that some of its members ‘are in the third year of a pay freeze this year.’
Travel Weekly has reported that Travel Counsellors has recorded its second-highest sales week in its history earlier this month.
The sale of Chelsea FC has been given approval by the UK government following the proposed takeover by the Todd Boehly / Clearlake Consortium. The Premier League Board approved the proposed takeover on Tuesday.
Elon Musk yesterday tweaked his bid for Twitter. He is now pledging an additional $6.25 billion in equity financing to fund the deal. Mr Musk had suggested he could lower his bid.
FINANCE & MARKETS:
The ONS has reported that monthly number of house sales in the UK fell in April for the first time since the end of the stamp duty holiday. On the Market says that it is ‘clear the frenetic pace of the housing market has subsided.’
David Malpass, head of the World Bank, has warned that the war in Ukraine could cause a global recession. He says ‘the idea of energy prices doubling is enough to trigger a recession by itself.’
UK car production fell again in April by a further 11 per cent.
Fed minutes from its May meeting were in line with forecasts and still seem to suggest that future 50-bp rate hikes are ‘likely’.
Sterling mixed at $1.2569 and €1.1757. Oil price lower at $114.51. UK 10yr gilt yield up 2bps at 1.91%. World markets better yesterday. London set to open around 14pts lower as at 6.30am.
DP Eurasia reports today on its first 4mths’ trading. AG Barr’s AGM is Friday. See also Trading Statements on the right.
RETAIL WITH NICK BUBB:
• Today’s News: The shock news that the JD Sports boss Peter Cowgill has been pushed out, “with immediate effect”, was announced just before the close last night, at 4.18pm and immediately sent the shares crashing by c6%, so it will be interesting to see how investors feel in the cold grey light of dawn this morning. It was obviously known that the company had decided to separate the roles of Chairman of Chief Executive, but it is not clear why Peter felt unable to step back into one of those 2 roles or why an internal candidate could not come forward as CEO. It is hard to avoid the view, however, that the controlling shareholder Pentland put its foot down on the need for a shake-up of corporate governance. In other news, there is no sign of the expected Ted Baker finals today (after Monday’s news that the company had selected one favoured bidder and that it was not the long-time suitor