Marston’s (H1), Britvic & OTB (ditto), Gregg’s (Q1), wages, prices & other:

PREMIUM EMAIL – PLEASE DO NOT FORWARD:

A DAY IN THE LIFE:

I know it’s not as bad as the police saying things like ‘the male exited the establishment and proceeded in a westerly direction’ when what they mean is ‘the bloke left the pub,’ but why do people say ‘more than’ when they could say ‘over’?

It’s just a little thing but ‘more than 70,000 at Wembley’ could be ‘over 70,000’ and ‘more than ten quid’ becomes ‘over a tenner’ etc.

Of course, it wouldn’t work for those semi-ironic comments such as ‘more than happy’ as ‘over-happy’ has a kind of ‘over-medicated’ feel to it and somebody who is ‘more than competent’ isn’t necessarily ‘over competent’.

Indeed, ‘more than cautious’ seems somehow positive whilst ‘over-cautious’ isn’t but anyway, that’s enough of that. It’s a busy day so let’s move on to the news:

MARSTON’S H1 NUMBERS:

Marston’s has reported H1 numbers and our comments thereon are set out below:

Headline numbers:

• Marston’s has reported total revenues up 10.0% for H1 at £407m with LfL sales up 10.7% vs last year – and up by a more material 15% if last year is normalised to take account of the lower rate of VAT

• LfL sales are up by 17.9% vs the Covid-impacted H1 of FY20.

• Pub operating profit is up by 8%, reflecting higher energy costs, with the company reporting a marginal loss before tax of £2.9m (FY20: loss £6.1m) as a result of higher interest costs. Debt is down but bank rates have risen.

• The company is expecting to make a profit in its seasonally busier H2 and there is no change to guidance

Current trading:

• In the first 6wks of H2, MARS reports LfL (same VAT in both years) up 7.9% (vs the Coffer Peach Tracker up around 7.7%).

• Drink continues to outperform food and Marston’s sales have been ahead of the Coffer Peach Tracker in every month in H1

• MARS says it is ‘continuing to manage inflationary challenges within our control: energy costs secured with electricity fixed until end of H1 FY2024 and gas until end of March 2025; offsetting other costs through efficiencies and pricing strategies.’

• It adds that ‘trading patterns [are] normalising with encouraging consumer resilience.’ It adds that its ‘garden investment positions [its] estate well for the summer.’

• There is no change to guidance. The company reports that ‘operating profit [is] in line with expectations, with further cash generation and debt reduction expected.’

Balance sheet, cash, debt & cash flow:

• The company has generated cash of £12m in H1. The company tends to be cash negative in H1 but £24m of disposals (at a 39% premium to book value) turned the number around.

• Marston’s is guiding to between £50m and £60m of disposals in the full year, with the bulk of this coming off debt. Sales should be at a premium to net book value.

• NAV per share is 98p (down from 102p at the full year but up from 71p a year ago).

Company comment:

• CEO Andrew Andrea comments ‘the strategy which we outlined 18 months ago is progressing well and generating positive results which is pleasing.’

• He says ‘our H1 performance clearly demonstrates that consumers remain as keen as ever to celebrate – and socialise within – the Great British Pub.’

• Re the wider industry, the CEO says ‘the macro environment is becoming increasingly stable and recent evidence suggests that both the cost outlook, and consumer confidence, are steadily improving.’

• Mr Andrea reports ‘we continue to deliver upon our clear strategic objective to reduce debt and progress our path to profitability, albeit the seasonality of our trading profile means that the majority of the Group’s profit is characteristically H2 weighted.’

• He says ‘we have invested ahead in H1, to capitalise on the benefits of this in H2, and remain on track to meet our operating profit, cash generation and debt reduction targets for the year.’

• The company concludes ‘we look forward to delivering further positive progress as the year unfolds and remain confident that we have the strategy and the team in place to do so, maximising the opportunities open to us in the future and delivering shareholder value.’

fsLangton Comment:

• Sales are ahead of last year and ahead of the Coffer Peach Tracker. Costs are in line with guidance and, turning to margins, there should be some easing of pressures for both energy and food from around the middle of calendar Q2.

• The group has performed well over the Bank Holidays but, as always, the weather has been a more material factor. It was not good in March (which is in these figures) but has been tolerable since.

• Marston’s is little impacted by train strikes. Elsewhere, pressures should abate.

• The market remains challenging and difficult to read but MARS has indicated that it is beating market sales, is generating cash and cutting debt. The NAV is substantial and units are being sold at above book value.

• Would-be shareholders may be cautious in their approach to consumer stocks in general but, when a degree of discrimination between one consumer stock and another returns, Marston’s, with its predominantly freehold estate, strong asset backing and current positive trading, is well-positioned to prosper.

PUBS & RESTAURANTS:

Labour costs & wage growth:

The ONS has this morning reported on wages and employment levels for the three months to end-March. It says that growth in employees’ average total pay (including bonuses) was 5.8% (down from 5.9% in the three months to Feb) and growth in regular pay (excluding bonuses) was 6.7% in the quarter compared to last year (up 6.6% in the quarter to Feb)….’

• The ONS reports ‘average regular pay growth for the private sector was 7.0% and for the public sector was 5.6% in January to March 2023. A larger growth for the public sector was last seen in August to October 2003 (5.7%).’

• It says ‘in real terms (adjusted for inflation), growth in total and regular pay fell on the year in January to March 2023, by 3.0% for total pay and by 2.0% for regular pay.’

• Re the tightness of the labour market, the ONS says ‘the unemployment rate for January to March 2023 increased by 0.1 percentage points on the quarter to 3.9%. The increase in unemployment was largely driven by people unemployed for over 12 months.’ It adds ‘the economic inactivity rate decreased by 0.4 percentage points on the quarter, to 21.0% in January to March 2023.’

• The ONS says ‘in February to April 2023, the estimated number of vacancies fell by 55,000 on the quarter to 1,083,000. Vacancies fell on the quarter for the 10th consecutive period and reflect uncertainty across industries, as survey respondents continue to cite economic pressures as a factor in holding back on recruitment.’

• Langton: fewer vacancies speaks to the tightness of the labour market (which may be lessening). This was the whole point of putting interest rates up. The key is to slow the economy – and therefore kill off inflation – without killing the economy itself.

Inflation (food prices):

The National Farmers’ Union warns that higher food prices are here to stay, with President Minette Batters saying ‘I don’t see the situation changing any time soon. While the war in Ukraine continues, pressure on gas prices is going to remain higher….’

• Langton: The NFU clearly has an interest in the future of food prices and, whilst that doesn’t mean that its comments are wrong, they maybe have to be taken with that in mind.

• Brexit, trade difficulties and restricted access to labour could have permanently moved the dial but other factors even, hopefully, including the war in Ukraine should flush out of the numbers in due course.

• Should the NFU be correct, this state of affairs would have negative implications for discretionary spending as consumers would have less of a surplus after paying for essentials. Dissaving could plug a gap like this for a little while but it would not be a permanent solution.

On the same subject, supermarkets are being investigated by the CMA over high food and fuel prices (see comment on fuel below). ASDA says ‘the UK has one of the most competitive markets for food in the world, and as global prices begin to fall we are confident that the competitive nature of the industry will help food inflation fall as a result.’

And it must be the food manufacturers and retailers lucky week because PM Rishi Sunak is also to meet with industry leaders to discuss how the UK can improve its food market…

• Langton: After operating relatively well for centuries, maybe it will welcome the advice. Or maybe it will see this as crowd-pleasing or intrusion or interference with the market. The PM says ‘supporting our farmers and food producers must, and always will be, at the heart of our plans to grow the economy and build a more prosperous country.’

Footfall:

Springboard reports that footfall in the week ending 14 May was -18% compared to the same week pre-pandemic. The large decrease was primarily driven by the week being bookended by bank holidays which impacted all three key destination types.

Working from home:

The FT over the weekend highlighted the impact of the office property market quoting CoStar as saying that over 100m square feet of office space was now vacant in the UK, up 65% on pre-Covid levels and some 2/3 of the space is over 20yrs old. Hospitality has its own issues but the above puts the issue in a wider context…

• The FT reports that ‘the uncertain future demand for office space, given the popularity of hybrid working in the wake of the pandemic, has made workplaces the epicentre of anxiety about the wider commercial property market, which has been buffeted by rising interest rates. In the UK, older offices in peripheral locations are the most threatened.’

• Langton: Hospitality is dealing with reduced footfall driven partly by the above. The sector will be adding to Property’s miseries by demanding rent reductions and, if landlords do not want to see even more voids, they may have to give ground.

• And there may be no respite in the short term. The FT quotes PGIM real estate as saying ‘the pace at which assets are becoming stranded assets is actually accelerating quite a lot.’ The firm’s Raimondo Amabile says ‘we should not underestimate how fast this can go, since the office market has represented a big part of the investment market.’

• The vacancy rate in the West End, meanwhile, is as low as 3%, showing that consumers are going somewhere, even if it is not to the office. Operators with estates spread across various geographies are likely finding some units holding up and others remaining in the doldrums.

Government support, Zombie companies etc.:

Foodservice analyst Peter Backman reports that ‘almost 15,900 ‘accommodation and foodservice’ businesses that would have failed in more ‘normal times’ were kept alive during covid – in the period between March 2020 and June 2022.’ He says ‘although 2,150 of them have since failed that still means another 13,750 companies are set to fail….’

• Langton: That isn’t entirely uplifting though PM Rishi Sunak, when chancellor, said it would not be possible to keep every struggling company afloat.

• Mr Backman is looking at company ‘births’ and ‘deaths’ in normal times and, since normality, though a bit different, does seem to be returning, it is entirely possible that more companies will fail and, with the HMRC and other creditors getting more aggressive at the same time as taxpayer support has been reduced, it is indeed likely.

• Mr Backman reiterates ‘there are still 13,750 companies that would have failed in the pre-covid era. And since the headwinds are still ongoing, it seems reasonable to expect these businesses to fail in the not too distant future. If we give them until the end of the year until they have all failed, that means we can expect 1,500 failures a month until the end of 2023.’ Insolvency numbers have certainly begun to tick upwards.

On the same topic, law firm Higgs LLP has suggested that insolvencies in the hospitality sector could hit record highs this year. It says there is a ‘perfect storm’ of cost pressures….

• Langton. The phrase ‘perfect storm’ is perhaps both overused and tedious but it’s hard to deny that it pretty accurately describes the problems faced by the hospitality industry. Restricted access to labour post Brexit, commodity price rises, utility costs and the rest have hurt margins at the same time as demand, though it has bounced, has come under pressure.

• Lauren Hartigan-Pritchard, head of restructuring and insolvency at Higgs LLP says ‘company insolvencies are at record levels across the board and unfortunately hospitality is high on the list.’ There’ll be money in it for someone, advisors most likely but, combined with Peter Backman’s comments on zombies and potential wave of collapses that may be coming, the outlook is somewhat challenging.

• The survivors, of course, should expect to take market share and, as hospitality should remain a premium-to-GDP growth industry, there should at least be something of a market to take.

Planning:

The Campaign for Real Ale has suggested that making it easier to develop houses could fail to prevent more pub closures as change-of-use applications may be waved through….

• CAMRA says ‘the goal of bringing disused pubs back into use is one shared by CAMRA but it is vital High Street Rental Auctions are used to support and rejuvenate urban pubs, not to turn valued community venues over to the highest bidder.’ CEO Nik Antona says ‘we know pubs can increase and expand footfall on the high street and give communities a place to come together but we need Government to understand this too.’

• Langton. Cruel though it is, if customers don’t use it, they will lose it. The flip side is that supporting that which is difficult, expensive or impossible to support, may not be a focus of government spending at a time when there are so many other calls on the public purse. CAMRA says ‘our locals are a vital part of both our social fabric and our local economies’.

• And indeed they are. Mr Antona’s opinion is that ‘they deserve to be protected as community assets, which is why more and more local people up and down the country are taking over their local as a community-owned pub when it is faced with closure, demolition or conversion.’ Others may have different opinions.

Cost of living crisis.

Looking at petrol and diesel prices, the Competition and Markets Authority has said that the invasion of Ukraine does not explain all of the current higher level of prices. The CMA says that some factors are down to the retailers…

• The CMA says ‘whilst the level of engagement with the study has varied across supermarkets, we are not satisfied that they have all been sufficiently forthcoming with the evidence they have provided.’ That might gee them up a bit. The CMA adds ‘given the concerns we have about a market of such importance to millions of drivers it is vital we get to the bottom of what is going on.’

• Langton. This might be crowd-pleasing but a glance at wholesale prices compared to pump prices does give grounds for some concern. And fuel prices impact transport costs and therefore feed through to inflation. Sky News says the CMA found evidence indicating “at least one” supermarket has “significantly increased” its internal forward-looking fuel margin targets.

Other news:

Wine. WSTA CEO Miles Beale claims the government has failed to support the UK wine industry, instead delivering ‘opportunistic’ duty rises and ‘ill-thought out policies….’

• Beale said ‘at a time of out-of-control inflation and a cost-of-living crisis for UK consumers, the Government has taken the decision to add to those inflationary pressures and to make goods even more expensive for hard-pressed consumers’. The government is increasing all alcohol duty by 10.1%, due to take effect from 1 August this year.

Tips: The Employment (Allocation of Tips) Act 2023 will come into effect in 2024 and is expected to put £200 million back into the pockets of workers each year. Under the new law, all tips and service charges will belong to the employees, and businesses will not be allowed to use them for any other purpose….

• Langton. Nothing is that simple. £200m cannot be imagined from thin air. It will either have to come from operators’ margins or from increased prices to consumers and, with so many other prices rising, it is perhaps likely to be the latter.

COMPANY NEWS:

Britvic has reported H1 numbers saying that revenue rose by 7.9% to £794m with PBT up by 21.2% at £54.4m. The company reports EPS of 22.8p, up 17.5% and it is to pay a H1 dividend of 8.2p, up 5.1% on last year…

• CEO Simon Litherland says ‘we have delivered an excellent start to the year’ and adds ‘we have successfully mitigated the impact of the challenging inflationary environment, while continuing to offer consumers great quality and value at affordable prices.’

• He says ‘looking ahead, we will be activating a series of exciting marketing and innovation campaigns this summer. We have a fantastic portfolio, a well-invested business, and a very talented team, so I am confident that we will continue to make further strong progress this year and beyond, creating value for all our stakeholders.’

Gregg’s has updated on Q1 trading, saying that LfL sales growth was 17.1% in Q1 (partly reflecting the impact of Omicron in early 2022). It says it has opened 63 shops and shut 26. The company sees ‘no change in inflation expectations’ and its expectations for the full year are unchanged…

• GRG says it ‘performed strongly in the first 19 weeks of 2023 as we progressed our strategic growth plan against a challenging macroeconomic backdrop’ it says ‘menu development continues to support our strategic growth objectives. Sales of hot food and snacks including chicken goujons and wedges are showing particularly strong growth.’

• The group reports that total sales in the 19 weeks to 13 May 2023 were £609 million (2022: £495 million). Re the outlook, it says ‘we have made a good start to the year with sales in line with plans and continued progress on our strategic initiatives. Looking ahead, whilst we expect the macro backdrop to continue to be challenging, we are confident in making further progress.’

• GRG says ‘although we expect to see ongoing material cost inflation, we have good forward cover on key commodities. Consumer disposable incomes are likely to stay under pressure, but we remain confident that our outstanding value proposition continues to be compelling.’ The group concludes ‘whilst uncertainties continue, the Board’s expectations for the full year outcome are unchanged.’

Engaged Capital, which has around a 6.6% stake in Shake Shack, is reported by the Wall St Journal to be pushing for three seats on the board of the company. That seems a little hefty for an investor that, after all, does not own the other 93.4%.

Asahi Group has reported Q1 numbers showing total revenue up by +7.9% year on year, mostly price-driven. Core operating profit was up by +24.3% year on year, down to ‘improved cost efficiencies and improvements, despite cost pressures….’

• Asahi CEO Atsushi Katsuki reports ‘we made a good start to 2023, achieving strong first-quarter revenue and core operating profit growth despite significant ongoing cost pressures. We achieved this by advancing our ‘premium strategy’ and by enhancing unit prices through the implementation of prudent pricing strategies.’ He adds ‘although many uncertainties remain in the operating environment, especially in how global inflation may play out, we’re confident in the resilience and growth potential of our businesses.’

Per MCA, Stonegate CEO David McDowall is looking to capitalise on demand for customer experiences with pre-booked events…

• McDowall said ‘The core of this business is delivering a great wet-led pub experience…Asset optimization is the core of value creation at Stonegate, and Craft Union is a great example of that where we are seeing some great results.’

Fuller’s has announced the return of ‘Opera in the Garden’, featuring 24 performances across 24 of its pubs from 18 June to 31 July. Tickets can be purchased from Fuller’s website.

Henkell Freixenet reports FY 2022 revenue up 8.5% to €1.2bn, making the company the top global sparkling wine producer with a global market share by value of 9.5%, according to IWSR data…

• Dr. Andreas Brokemper, CEO, said ‘Currently, we are the market leader for Cava in 104 countries, the market leader for Prosecco in 38 countries, and the market leader for sparkling wine in 33 countries’.

HOLIDAYS & LEISURE TRAVEL:

On the Beach has reported H1 numbers saying that revenue rose by 38% to £73.2m with the group loss before tax reduced from £7m to £6m. The group reports that ‘trading momentum has continued since 1 April 2023, and comparator periods will start to soften as we annualise widespread airline and airport disruption experienced during Summer 2022…;’

• On the Beach reports ‘we are encouraged by the continued momentum in our expansion areas as well as recent positive signs of recovery in our core value customer base.’ It says ‘the Group typically generates a greater profit in the second half of the year and we are confident that the upfront investment into the brand and proposition will ensure both top and bottom line growth in the second half of the year.’

• CEO Simon Cooper adds ‘the travel sector continues to recover post-pandemic and the Group has experienced significant increases in demand for its holiday product, particularly the Premium 5* offer.’ He says he is ‘pleased with the Group’s performance in the first half and I am confident that the right building blocks are in place for Shaun [the new CEO designate] and the team to continue to deliver growth across the business and I remain excited about both the near term and longer term opportunities for On the Beach.’

Canadian private equity firm Brookfield is reported to have put UK holiday village company Center Parcs up for sale. The FT reports that the sale could raise between £4bn and £5bn. Brookfield bought Center Parcs in 2015 for around £2.4bn…

• Sky News reports that Barclays had been appointed last year to advise on the future of the upmarket holiday villages. By the end of last year, Center Parcs was reporting occupancy rates of 97.3%, in line with pre-COVID levels. Neither Center Parcs nor Brookfield would comment.

TUI is reported set to open 21 new travel branches across the UK in a move that runs against the trend over the last decade or so for more holidays to be booked online. TUI’s Belinda Vazquez says ‘there is no doubt that the high street has changed over the last few years but we are seeing a resurgence of people wanting that face-to-face interaction, especially since the pandemic leaving consumers looking for expert advice and reassurance’.

Hotel transactions: Property consultancy Knight Frank reports Q1 transactional activity doubled compared to the previous quarter, but deal volume remained significantly below the five-year quarter average of £1.2bn…

• Knight Frank points out that operationally, the UK hotel market continued to perform strongly, with RevPAR returning to, or exceeding pre-pandemic levels.

Travelodge reports revenue +25% vs 2019 levels to £909.9m in 2022, with Jo Boydell, CEO, pointing to ‘strong demand for events and short staycation breaks throughout the year as well as for essential business travel…’

• Boydell added ‘the budget hotel segment has proven resilient as consumers  continue to search for great value options within the marketplace’.

• Langton: This applies to both Travelodge and to quoted market leader Whitbread (Premier Inn). A glance at the rate cards of the budget operators (at least for York & London) and one can see just how and why P&L accounts are so much healthier. But the question has to be, with working week nights in both of the above markets nearer £200 than £100, can this last?

• Indeed, the marginal profitability of a price rise for a hotelier is 100%. The cost of ‘turning a room’ (shampoo, clean sheets & towels, labour etc) is fixed and everything else is profit. But this can move in both directions and, if demand softens, profits could come under a lot of pressure.

LyvInn will open its first hotel on 15 May, located in Frankfurt. The project is backed by funds managed by Blantyre Capital Ltd with long-term committed capital in excess of €2.3bn. LyvInn was founded by Navneet Bali, former CEO and Chairman of Meininger Hotels and is looking to expand across Europe.

OTHER LEISURE:

Days after the UK has sought to block the deal, EU regulators have approved Microsoft’s $69bn bid to buy Activision Blizzard. The move will be the biggest deal ever in the gaming industry…

• The EU says ‘the commitments fully address the competition concerns identified by the Commission and represent a significant improvement for cloud gaming as compared to the current situation.’

• UK regulators took the opposite view and have attracted criticism from a number of investors and free marketeers. The split in regulators’ opinions could colour where companies make investments in future.

• Activision Blizzard CEO Bobby Kotick comments ‘the EC conducted an extremely thorough, deliberate process to gain a comprehensive understanding of gaming.’ He says ‘as a result, they approved our merger with Microsoft, although they required stringent remedies to ensure robust competition in our rapidly growing industry.’

• Mr Kotick says ‘we intend to meaningfully expand our investment and workforce throughout the EU, and we’re excited for the benefits our transaction brings to players in Europe and around the world.’ Microsoft adds ‘the European Commission has required Microsoft to license popular Activision Blizzard games automatically to competing cloud gaming services. This will apply globally and will empower millions of consumers worldwide to play these games on any device they choose.’

FINANCE & MARKETS:

Sterling up at $1.2528 and €1.1509. Oil price higher at $75.53. UK 10yr gilt yield up 4bps at 3.82%. UK market set to open down around 8pts.

RETAIL WITH NICK BUBB:

• Today’s News: Ahead of today’s Boohoo finals, the share price had slumped back below the 40p mark, so the shorts were expecting more bad news about Online fast fashion trading, following the badly-received update from ASOS last week, and…they will lap up the news that H1 revenues are expected to decline by 10% to 15% as a result of the management action being taken to focus on profitable sales. But in the second half of the year, the group expects to return to revenue growth, “as it benefits from the investments being made across price, product and proposition under the “Back to growth” strategy” and adjusted EBITDA for FY24 is expected to improve year on year to between £69m and £78m, in line with market expectations. There is better news in the Greggs trading update, with 17.1% LFL sales growth in the first 19 weeks of 2023, but in part this reflects the impact of Omicron in early
2022 and the Board’s expectations for the full year outcome are unchanged. We have also had the Shoe Zone interims and the Land Secs finals.

• Today’s Press: According to the invaluable Guardian morning email briefing, “Tory MPs tell Braverman: quit the PM pitch and stick to the day job” is the lead this morning on the Guardian front page, where Rishi Sunak and Volodymyr Zelenskiy are shown having a hug. The same picture is on the front of the Daily Telegraph, where the top story is “Ministers warned of sharp rise in immigration by election”. That picture is also on the Times’ front page, but the splash is “Fifth of all taxpayers will now be in 40p band”. The i’s headline to accompany the Rishi-Volodymyr photo is “UK backs Ukraine to join Nato”. “Gove’s blast at Starmer bid to ‘rig’ elections” is the Daily Mail’s lament on Keir Starmer thinking about giving foreign nationals the vote. “Suella: white people should not feel guilty” says the Daily Express. The Metro mashes up themes from Braverman’s speech – immigration, and
Britons being up to picking their own fruit – with “Suella’s picking timebomb”. The Financial Times leads with “Erdoğan on course to retain power as Turkey election heads for run-off”.

• News Flow This Week: Tomorrow brings the JD Sports finals, the Watches of Switzerland Q4, the British Land finals and the Greggs AGM. Thursday then brings the Burberry finals and the Next AGM. The monthly GFK Consumer Confidence index is out first thing on Friday and, over in the US, JD’s big rival Footlocker announces its Q1 earnings at around mid-day.