Langton Capital – 2018-04-25 – Whitbread & Costa demerger, discounts & other:
Whitbread & Costa demerger, discounts & other:A DAY IN THE LIFE: I had one of those ‘embarrassment’ dreams the other night that was spookily linked to the day-job in that I was in a drinking hole somewhere, not too shabby and I couldn’t put a drink down without spilling it. I wasn’t drunk. At least that’s what I was telling myself but whatever glass I picked up mysteriously developed a rounded bottom such that, when I tried to put it down, it fell over and spilled. Everyone was tutting and groaning and, as I managed to spill a pint of blackcurrant juice on a posh looking lady’s white dress, I decided that it was time to leave. At that point, my legs refused to work and the other guests in the pub rose, started slow-handclapping me and filming me on their phones. I should stress that this was just a dream. On to the news: WHITBREAD F.Y. NUMBERS & COSTA DEMERGER: Whitbread has this morning reported full year numbers to end-Feb 2018. It cautions on the consumer and on near-term growth and confirms the demerger of Costa. Our comments are set out below: Headline numbers: • Whitbread has reported revenues for the year up by 6.1% at £3.3bn with underlying operating profit some 5.0% higher at £622m • Whitbread reports underlying PBT of £591m (up 4.5%) with underlying EPS of 260 vs 245p last year • The group is to pay a dividend for the full year or 101p against 96[ ;ast year • The group says it ‘has produced another strong financial performance this year’ • CEO Alison Brittain reports ‘we have accelerated delivery momentum in all three of our strategic priorities during the year.’ • Ms Brittain says ‘in the UK, we have increased revenues, profits, cash flow, dividends and return on capital, notwithstanding challenging market conditions.’ • The group says ‘with ongoing growth in coffee consumption and our increasing ability to win market share from the independent hotel sector, we are confident of further growth at a good return on capital in the years ahead.’ Divisional performance: • Whitbread reports Premier Inn grew LfL sales by 2.2% in the year. This reflects a slowing of momentum towards the end of the year. In H1 it was +3.6% • Costa reports sales on a LfL basis +1.2%. This represents a pickup from H1 at which time LfL sales were growing by 0.6% Premier Inn & Restaurants: : • In hotels & restaurants, Whitbread comments that it has seen ‘good revenue growth of 5.2% to over £2 billion from market leading occupancy and room growth’ • The group says ‘underlying operating profit increased to almost £500 million through disciplined cost action’ • The group maintains it is seeing ‘continued strong occupancy throughout the UK whilst adding significant new capacity’ • Overall, Whitbread maintains that it is ‘accelerating the competitive advantage as the UK’s best value hotel for business and leisure’ • Whitbread has added ‘more than 13,700 new rooms in the UK’ over the last 3yrs • It has a pipeline of over 14,700 rooms • Premier Inn Germany is the focus of much attention going forward Costa Coffee: • Whitbread reports Costa has seen ‘strong UK revenue growth of 7.3% delivered through disciplined delivery of new outlets’ • Costa is seeing ‘consistently strong growth of Costa Express with UK total sales increasing 18% to £210 million’ • The company maintains ‘underlying UK operating profit of £151 million as cost pressures and a challenging consumer environment are mitigated by the investment in new capacity and efficiency savings’ • The group is pushing food. The proposed demerger is discussed below. • Whitbread says, as shopping habits etc change ‘many of Costa’s stores in traditional shopping locations are experiencing declining like-for-like sales.’ • It is looking for newer locations and is attempting to mitigate the impact of declining footfall ‘through enhancing the overall customer offer and increasing average transaction values.’ Proposed demerger: • The company says it ‘regularly reviews the strategic direction of Whitbread and the structure of the Group.’ • It says ‘the Board has for some time been of the view that separating Premier Inn and Costa at the right time would enhance focus and enable value to be optimised for shareholders over the longer term.’ • It says both businesses ‘will soon be businesses of sufficient strength, scale and capability to enable them to thrive as independent companies.’ • It has decided upon a demerger. • Whitbread says ‘the Board has carefully considered the optimal timing of the demerger of Costa and concluded it will be pursued as fast as practical and appropriate to optimise value for Whitbread’s shareholders and is expected to be completed within 24 months.’ • The company says ‘regular updates on progress will be given as part of Whitbread’s standard financial reporting cycle.’ Company conclusion: • Whitbread Chief Executive Alison Brittain comments ‘Whitbread has produced another strong financial performance this year.’ • She says ‘we have accelerated delivery momentum in all three of our strategic priorities during the year.’ • The group says it remains ‘cautious on the consumer environment, especially on the high street, which we expect to remain challenging in the near term’ • Whitbread comments ‘our near-term profit growth may be lower than in previous years.’ • Re the demerger, Ms Brittain say ‘at the point of separation, both businesses will be able to take advantage of the structural growth opportunities available to them in the UK and internationally.’ • She says ‘Whitbread will remain the owner and operator of the UK’s most successful hotel business. A key priority will be continuing the development of Premier Inn by creating a business of scale in Germany to replicate the success we have in the UK.’ Langton Comment: • Whitbread has recently been the subject of breakup stories leading to Press reports that it was more a matter of when the company separated its main Premier Inn and Costa Coffee companies rather than if. • Today the group has confirmed that a demerger will happen. • This may take two years and, in the meantime, growth will be slower than it has been recently. • Much will ride on Germany if Whitbread ex-Costa is to remain an exciting growth company. The early signs are hopeful but it is still early days. • Cautious comments re trading and the confirmation of what had been widely expected may combine to lead to a little profit taking. • Whitbread’s shares have bounced sharply recently and, at around 16.5x this year’s earnings (with perhaps some downgrades to come), they are not prima facie cheap. Today’s update will cause some to reflect on this and, despite the fact that WTB has an impressive freehold estate, good brands and international ambitions, the shares could come under some pressure. PUB, RESTAURANT & DRINK PRODUCERS: • The Coca-Cola company has reported net revenue down 16% to $7.6 bn in Q1, driven by bottler refranchising. The group saw total unit case volume grow 3%, with growth across all category clusters and geographic operating groups. James Quincey, President and CEO of The Coca-Cola Company said: ‘We’re encouraged with our first quarter performance as we continue our evolution as a consumer-centric, total beverage company’. • The Pension Regulator is to take pub chain Samuel Smith and its chairman Humphrey Smith to court after the group failed to hand over documents linked to an ongoing investigation. • Nomad Foods has acquired Goodfella’s Pizza from Boparan Holdings subsidiary 2 Sisters Food Group for €225m. • ‘Negative traffic is the new norm’ for US restaurants, according to the co-founder of restaurant data service MillerPulse, although March proved to be a brief respite in what has been a tough first quarter of 2018. Over the quarter, industry traffic fell 2.2% despite same-store sales increasing 0.4%. • Co-founder Larry Miller added: ‘The last time traffic was positive for our group was February 2015. So, we’ve not had a month of positive traffic in over two years now. That’s pretty depressing… I think we’ve bottomed in that whole [restaurant] cycle. The unit growth rates are slowing, which is what we’ve been waiting for, and so eventually our traffic and unit development will come back in better balance, and we’ll start seeing a return toward flat traffic and then slightly positive traffic sometime in the next five years.’ • Burger King’s rdiscounts helped it to a 3.8% rise in like-for-like sales in the first quarter of the year, despite strong competition from McDonald’s. Burger King credited much of its resilience to a ramp up in its own cut price offerings — including two for $6 burger promotions — which helped drive system-wide sales across its 16,859 restaurants 11.3 per cent higher to $5.1bn during the quarter. • The Treasury has earmarked £5.5m to finance a crackdown on illegal lenders and ‘lowlife crooks’ who target vulnerable people. John Glen, economic secretary to the Treasury said: ‘These nasty lenders are nothing more than lowlife crooks taking hard-earned cash from the pockets of the most vulnerable.’ • Hamleys toy shop owner C.banner International is in talks to acquire a 51% stake in House of Fraser Group either by purchasing existing shares from Nanjing Xinjiekou or by subscribing for new shares. C.banner, primarily a manufacturer of women’s footwear, said acquiring the House of Fraser stake ‘would mark an important step towards the implementation of the company’s global branding strategy, which leverages the brand recognition effect of world-renowned brands.’ HOLIDAYS & LEISURE TRAVEL: • More than half of the British public will take a domestic holiday this summer, research from Travelodge has found. The UK economy will be boosted by £31bn by holidaying on British shores in the summer months. • Travelzoo and Thomas Cook are both reporting rising interest in the so-called ‘troubled trio’ countries of Egypt, Turkey and Tunisia. Travelzoo has observed increases in searches for deals so far this year of 43% for Egypt and Turkey and 133% for Tunisia. • HNA Group is seeking to raise $1.5bn by the end of 2018 for a new global acquisition fund that will focus on travel, aviation and real estate assets. • TripAdvisor has acquired Bokun, which provides business management software to the tours, attractions and experiences industry. • A government travel alert has been issued for British travellers to Toronto following this week’s van attack that left ten people dead and fifteen injured. The motive remains unknown at the time of writing. • The Caterer reports the average hotel room rate has exceeded £100 in the UK. Room rates have increased 3.4% year-on-year in 2017, and are averaging £100.58. OTHER LEISURE: • The Department for Digital, Culture, Media and Sport (DCMS) has received backing from the Treasury about limiting the maximum stake on fixed-odds betting terminals. Mr Hammond may be close to reaching an agreement with Culture Secretary Matt Hancock to raise levies on other forms of gambling to compensate for lost revenues occurring from the limit. • Ten Entertainment has completed the acquisition of sites in Leeds and Luton. • Alphabet shares (Google’s parent) dropped nearly 5% on Tuesday due to a surge in costs leading to the company’s biggest ever contraction in gross margins. • Casino operator Wynn Resorts beat expectations in the first quarter following gains at its Macau properties, with operating revenues from Wynn Macau were up nearly 12% to $618.2m and casino revenues up 10.5%, reflecting strength in the VIP segment. • Apple shares fell nearly 2% on Tuesday amid fears about soft demand for iPhones after South Korean chipmaker SK Hynix Inc said in its quarterly report that it expects smartphone demand to stagnate. This follows a similar warning last week from Apple supplier Taiwan Semiconductor Manufacturing. • Messaging service Whatsapp is banning under-16s from using its platform in the EU ahead of new EU data privacy regulations in May. The EU’s General Data Protection Regulation (GDPR), which comes into force on 25 May, will give people much more control over how companies use their information. They will also have the right to have personal data erased. FINANCE & MARKETS: • Government borrowing fell by £3.5bn to £42.6bn for the last financial year, the lowest level in 11yrs per the ONS. Chancellor Phillip Hammond has therefore beaten his target. • Government debt as a percentage of national income is still around twice what it was before the financial crisis • German growth forecasts have been lowered by the country’s government on the back of trade worries and a loss of momentum • Sterling little changed at $1.3968 and €1.1431 • Oil down a dollar at $73.85 • UK 10yr gilt yield unchanged at 1.53% • World markets: UK mixed yesterday with Europe up and the US down. Far East mostly down in Wednesday trade • Brexit: o Customs’ Union debate still to the fore o Bloomberg says leave supporters are ‘dialling back their rhetoric on the customs union as the campaign to force Prime Minister Theresa May to stay in gains momentum.’ PRIOR DAY LATER TWEETS: • Later tweets: Discounting more acute? Prezzo, Pizza Express, Bella Italia & Jamie’s offering 40%, 25%, 30% and 40% off food respectively. • Casual diners’ discounting more. Maybe not benefiting from the warmer weather? Wet-led will be doing better • PwC says shops closing on the High Street. No kidding? Not obvious where the new entrants will come from. Possibly residential? • In a sign that it thinks it may lose, Downing St has said that upcoming vote in Commons on staying in Customs’ Union ‘is not a vote of confidence’ • No10 says Commons’ vote on Customs Union ‘not binding’. A bit like the June 2016 referendum then? START THE DAY WITH A SONG: Yesterday’s song was Where Is My Mind by The Pixies. Today who sang: But you treat me like a stranger and that feels so rough, No, you didn’t have to stoop so low Have your friends collect your records and then change your number RETAIL NEWS WITH NICK BUBB:
• Boohoo.com: Ahead of today’s finals from the fast-growing Online fashion business Boohoo, the share price has been under a bit of pressure, but nothing seems amiss, as the results show strong progress, with adjusted EBITDA and PBT both up 60%, to £57m and £51m respectively. Mahmud Kamani and Carol Kane, the joint CEOs, say: “The group made great progress during the year, integrating a new company, PrettyLittleThing, and a new brand, Nasty Gal, into the boohoo group. Revenue from boohoo continued to grow strongly, whilst there has been an exceptional performance from PrettyLittleThing, and Nasty Gal exceeded our estimates in its first year”. And the outlook seems bullish: “Trading in the first few weeks of the 2019 financial year has made a strong start. Group revenue growth for the next financial year (FY19) is expected to be 35% to 40% with adjusted EBITDA margin between 9% and 10%”. • John Lewis Watch: The Easter calendar distortions have yet to fully work through, so the main impact on John Lewis last week wasn’t necessarily the hot weather, but yesterday’s weekly sales update from JLP (for w/e April 21st) revealed that gross sales were 1.7% down (c3% down on a LFL basis, on our calculations). Fashion sales were up by 3.7% gross, but Home sales were down by 1.8% gross and Electricals were down by 6.2% gross, versus strong comps. Over the last 12 weeks, with one week to go in Q1, John Lewis is now running up by only 1.7% gross (c0.7% up LFL). • Waitrose Watch: Over at Waitrose, momentum picked up last week, thanks to the hot weather. Gross sales were up by 7.4% in w/e April 21st and the cumulative outcome for the last 12 weeks is now +1.3% gross, which is c0.5% up LFL.
• Retail Sales Watch: All the focus in the sector now is on how well April will turn out on the High Street, after the recent heatwave (see the JLP sales above), but we haven’t seen the final word yet on how good the outcome was for March…The Office of National Statistics (ie the ONS, aka the “Planet ONS”, in our parlance) reported non-seasonally adjusted total Retail Sales by value up by 5.2% last month (ex-petrol), driven by the early Easter and strong Small Retailer sales, whereas the BRC-KPMG measure of gross sales (which focuses on Large Retailers) was up by only 2.3% (up by 1.4% LFL). So, who was right? The ONS? Or the BRC? Well, the consultancy group, Retail Economics (RE), which is run by Richard Lim (who used to run the monthly BRC-KPMG Retail Sales survey) has just come out with its own overview and their estimate is that gross Retail sales rose in value by2.6% last month,
• Job Watch: Having flagged yesterday that the ebullient John King has just been appointed to run the struggling Aussie department store chain Myer, we’ve been asked what he’s been up to since he stepped down as CEO of House of Fraser three years ago. And the answer is “For the last three years, Mr King has been living and working in the United States where he has consulted to a variety of US-based retailers and has been actively involved in a number of start-ups”. We wish him the best of British luck at Myer, but his successor at HoF, Nigel Oddy, looks to have the better new job, as CEO of the fast-growing discount chain The Range since about this time last year. The Range is still rumoured to be thinking about an IPO and, in 2/3 years’ time, it will be interesting to see if the Online fashion business Matches also goes for an IPO, following its recent private equity takeover and • News Flow This Week: Tomorrow brings the N Brown finals, the Carpetright CVA meeting, the French Connection/Toast EGM and the infamous CBI Distributive Trades survey for “April”. Then first thing on Friday we get the monthly GFK Consumer Confidence index, closely followed by the Travis Perkins (Wickes) Q1 update. |
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