FSTA meeting, premiumisation, profit recession, Wadworth, rates & other:

PREMIUM EMAIL – PLEASE DO NOT FORWARD:

A DAY IN THE LIFE:

I was thinking about Venn Diagrams the other day.

Specifically, how one option need not necessarily exclude another. Or indeed any number of others. How a dog can have both fleas and lice, for example. How a politician might be both mad and bad. Or a low energy version could be both incompetent and a liar because the one doesn’t exclude the other, not by a long chalk.

And, in finance, there are some very dangerous combinations. Being an idiot isn’t a crime, for instance, but perhaps being both persuasive and an idiot should be.

But anyway, not sure where I’m going with this and, as it’s a Friday and the sun is shining, maybe we’d better move on.

Have a great weekend and here’s the news:

FULLER’S – FY RESULTS, ANALYSTS’ MEETING:

Fuller’s has this morning reported its full year results and our comments thereon are set out below:

Headline numbers:

• FY23 was a 53 week period, comps are for a 52 week period.

• Revenue up 33% to £336.6m from £253.6m last year. The extra week in FY23 contributed £5.7m of revenue.

• The company reports that ‘like for like sales in the year grew by 17.5% compared to prior year, with Central London growing by 40.1%.’

• It reports adjusted EBITDA up 17% YoY to £51.8m.

• Adjusted profit before tax significantly increased by 76% YoY to £12.7m. The extra week in FY23 contributed approximately £0.3m to this. FY24 market expectations are around the £19-20m mark.

• Fuller’s announces adjusted EPS of 16.1p (2022: 9.79p) and is to pay a full year dividend of 14.68p (2022: 11.31p).

• The company says that the directors’ valuation of the total property portfolio in May 2022 amounted to £995.6m, some £400m above book value and implying a NAV per share of £14.07.’

Trading:

• Fuller’s analysis of its managed revenue shows drink sales increased by 35.4% YoY to £179.9m. On a LfL basis, drink sales were up 20.5%.

• Fuller’s said it expects the LfL sales growth in drinks to continue, driven by bespoke events and its long-term partnership with Asahi.

• Food sales were up 25.9% YoY to £91.4m, and up 10.1% on a LfL basis.

• Accommodation sales materially increased by 53.9% to £33.7m, and up 24.7% on a LfL basis. In central London, LfL sales were up nearly 80%.

• Central London trading is improving, with the company saying people are ‘electing’ to be back in their offices and that companies are pre-booking pubs for parties.

• Fuller’s said it is not only seeing strong sales on Tuesdays, Wednesdays & Thursdays, but that Fridays are back in annual growth and Saturdays are very strong in the West End and the City.

• The company said that tourism is rebounding and that transport hubs are returning to busy trading patterns, with the exception of the days impacted by train strikes.

• Regarding train strikes, Fuller’s said the cost of this was around £4m. If a deal were to be agreed with the unions to end the strikes, then this could flow back to profits.

Costs:

• FY23 saw energy costs increase by £6-7m, but company initiatives saw energy usage fall by 14%. If energy costs abate the company said perhaps £5-6m of this cost could come back to profits.

• Fuller’s issued staff pay increases of between 6-11% during the year, as the inflationary environment persists.

• The company said its exposure to drink price inflation has been relatively modest due to its long-term deal with Asahi.

• Food price inflation has been ‘stubbornly high’ but ‘there is a broad expectation that the high levels of food inflation will reduce during the coming year’.

• Fuller’s is forecasting food inflation to fall to around 8% by the end of the year, the CGA Prestige Foodservice Price Index currently has it at 21.4% YoY as at April 2023.

Conversions:

• The company converted 2 tenanted sites to managed during FY23 and plans to do 1 in FY24.

• On the other hand, Fuller’s converted 4 managed sites to tenanted during FY23 and plans to do 23 more in FY24. Fuller’s claims these conversions will deliver £1m in incremental profits.

• The company said it wants managed sites to be making north of £20k sales per week. The managed sites being converted to tenanted are trading at around £15k per week.

Balance Sheet Items:

• Net debt at the year-end was £132.8 million (2022: £131.9 million) ‘with cash generated by the business funding investment in the estate and returns to shareholders.’

• The company acquired 3 sites during the year for £5.7m, saying that it ‘will continue to seek out acquisitions to acquire assets and businesses.’

• The company made £16m of disposals in FY23, representing 6 non trading sites and 3 trading sites, generating a profit on disposal of £12m.

• Fuller’s capex was £25m in FY23, with the company guiding to capex of £20-25m in FY24.

• The company spent £4.8m in share buybacks in FY23, with the Board saying it will ‘keep further share buybacks under review in line with its capital allocation framework.’

Current trading:

• Fuller’s stated that trading in the first 10 weeks of FY24 saw LfL sales up 13.9%, and said that there is ‘clearly a strong LfL recovery to take place, not only this year, but next year as well’.

• This recovery could generate an additional £5-10m in profits.

• FY24 profit guidance & medium term profit targets

Langton Comment:

• This is a positive statement, upbeat in tone with considerable YoY progression in the numbers.

• Today’s announcement suggests that trading has delivered positively and that the outlook is improved. Fuller’s appears to be optimistic that there will be further LfL growth in FY24 and FY25.

• The train strikes will doubtless have taken the shine off this year’s financial numbers but, should the dispute be resolved, there is room for improvement in FY24.

• Should the train strikes end and energy costs subside, the flowthrough to FY24 profit would be substantial.

• The company is open to making acquisitions and is being proactive in converting lower-end managed sites to tenanted.

• However, there could be concerns that these lower-end units will struggle in the high cost environment once they are tenanted.

• As commented previously, Fuller’s has a wonderful 92% freehold estate.

• FSTA shares have reacted positively to the results, regaining some of the ground lost earlier in the year.

• The NAV should help to support the shares and, with trading currently positive, the shares may find further support from these levels.

PUBS & RESTAURANTS:

A ‘profits’ recession:

Some numbers out there are looking good but, as one moves down the P&L account, they often get steadily worse…

• Whilst the rise in the rate of VAT on food and non-alcoholic drinks means that taxation is taking a larger proportion of the cash going into operators’ tills, inflation is helping to push revenues higher.

• Net-net, ‘better’ operators may be able to drive increases in revenues but profits could be another matter as a number of headwinds will be weighing on margins.

• And it’s windy out there. Headwinds (to profits if not to revenues) include double digit increases in wage bills, removed subsidies via Business Rates, sharply higher utility bills, higher food costs and other.

• The above could make it very, very hard to beat pre-Covid profit figures even when sales are driven above 2019 or early-2020 levels.

• With interest rates rising, returns on other assets might have to go up rather than down. That does suggest that, unless the market is prepared to ‘look through’ short term margin weakness as temporary, share prices could come under a bit of pressure.

• Caveat. The above economic forces are akin to pushing on a piece of string. We’re pretty sure that the force is in the direction we have suggested but the outcome in terms of share price movements is far from certain.

Openings, closures:

Lumina Intelligence believes that new hospitality openings will outpace closures in 2023…

• Its Eating Out Market Report ‘indicates a positive turn in the UK dining sector, with new openings expected to outnumber closures. This upturn is forecasted to continue from 2023 to 2026.

• The foodservice analyst says ‘after three consecutive years of decline, 2023 is forecasted to see more new openings than closures in the UK eating out market, marking a period of growth.’ It adds that ‘a compound annual growth rate of +0.3% is expected in the UK eating out market from 2023F-2026F, driven primarily by expansion in coffee shops, fast food, and sandwich & bakery channels.’

• It suggests that, currently, various market players are leveraging growth opportunities across different formats and locations, including travel hubs, high streets, and out-of-town locations.’

Business rates:

Shadow business secretary Jonathan Reynolds has told a UK Hospitality conference that the planned review of business taxes under a Labour government would include hospitality units…

• Mr Reynolds cautions ‘you will appreciate those commitments are hard to make in opposition, especially with the fiscal situation we will inherit. But I can assure you we are listening.’ He says ‘our review of the business tax regime, looking at increasing certainty and investment, will include the hospitality sector.’ He says his party would look at easing access to overseas labour.

Other news:

In the US, Bud Light sales have continued their steep decline since the beginning of April accelerating from 6.9%, to 17% and then from May hitting figures of around 23 to 25% for each week….

• Bud Light remains the largest beer by market share, at 9%, but rival Modelo has become the US’s number one selling beer, with a market share of 8%. The decline in sales is due to a conservative uproar over its partnership with transgender social media influencer Dylan Mulvaney.

COMPANY NEWS:

Brewer and pub company Wadworth has reported revenue for its year to end-December up from £25.1m to £36.3m…

• It reports EBITDA of £3.64m, up from £1.65m in the prior year but says ‘the effects on the hospitality and brewing world of a high inflationary environment have been significant.’

• The company adds ‘our results were behind our expectations for the year as we could not have predicted the Russia/Ukraine conflict and the impact on costs that this would have across every cost line, with the most extreme being our utility costs which have increased by £725k versus the prior year.’

• Langton. A number of companies have suggested that calendar 2022 started with a promise but got progressively more challenging as the year progressed. Omicron blighted the early part of the year but then trading improved only to see Russian troops invade Ukraine with the result that the price of energy and a number of other commodities shot up.

• Operators owning their own assets – and therefore free of property landlords – will be in a better position to weather periods of tough trading. Re its managed houses, Wadworth says ‘it has been a very challenging year with conversion to profit impacted by increases across every cost line.’ The company says ‘utility bills have been the biggest issue. The teams were all tasked with reducing utility consumption where possible, but we still ended the year with a cost increase of over £500k versus FY21.’

• Elsewhere, post-Brexit and Covid ‘labour shortages were particularly apparent in the kitchen and this resulted in a number of pubs having to shut for two days a week and agency chefs used at inflated costs.’

Mark Derry, executive chairman of Heartwood Collection, tells the MCA that the last year has ‘not been particularly easy’ despite the company acquiring 11 freehold sites….

• Mr Derry says Heartwood aims to reach around 60 sites, including up to 500 bedrooms, by 2027. The coming year could see it add another 8 or 9 sites.

• The Black Swan in Henley, Arden, in Warwickshire, will be the company’s second freehold site. The group aims to have four pubs with rooms in operation later in the year. Derry says ‘we don’t have much experience in that area, but our investor has so we talked to them about it and both agree that it’s well worth us trying to step up to that challenge.

Moroccan Costa Coffee franchisee, Goldex Morocco, aims to reach between 30 and 40 outlets within the next five years. Goldex currently has 2 Costa Coffee units in Morocco and plans to open 5 more in 2023 and a further 7 in 2024.

Breal Group has acquired the business and assets of London-based Brick Brewery for around £318k. The London-based private equity firm purchased Black Sheep Brewery out of administration last month.

Not over till it’s over. The Joint Administrators of Harrogate-based Bleiker’s Smoke House advise that the purchaser of the business’s assets has not paid the agreed amount….

• The purchaser confirmed that it was unable to pay the £125k owing, and requested that the sum be paid in monthly instalments of £5k. The FSA has also announced that it was investigating the company over allegations of food fraud.

HOLIDAYS & LEISURE TRAVEL:

The ONS GDP report shows that the UK travel agency and tour operator sector is still 22% behind pre-pandemic levels, despite the economy as a whole now being marginally ahead…

• Consumer-facing services in April were 8.7% below their pre-coronavirus levels, with 11 of 13 industries lower than February 2020.

Luton airport saw passenger numbers rise to 1.5 million in May, with year-to-date passengers at almost 6.2 million, up 45% YoY….

• Amsterdam, Dublin, Istanbul, Lisbon and Paris were particularly popular with passengers flying out for bank holiday weekend city breaks, with 3 bank holidays in May.

Sky News reports that proxy advisor ISS is recommending Saga shareholders to reject the payment of a six-figure bonus to CEO Euan Sutherland, calling it ‘inappropriate’…

• Mr Sutherland, a former boss of Superdry and the Co-op Group, was awarded a £386k bonus for last year despite the ongoing suspension of the company’s dividend and issuing a profit warning.

The Croatian Tourist Association has reported that the country is expecting a record year for tourism following Croatia’s inclusion in the free-movement Schengen area…

• The Tourist Association says ‘so far, we have recorded nearly 5 million arrivals and over 17.5 million overnight stays, which is a 20% rise from the last year.’ It adds that ‘based on these results, we can expect a positive continuation of the main tourist season and…of the whole year.’

FINANCE & MARKETS:

Former Bank of England governor Mark Carney has suggested that UK interest rates will need to remain relatively high for a number of years…

• Mr Carney, who was governor between 2013 and 2020, told the Peston show on ITV that “big tectonic shifts in the global economy” mean the cost of borrowing will remain elevated. Speaking first of gilts, Mr Carney says if government sees a rise in its interest rates, then it’s a “good working assumption” that everyone else will too.

The European Central Bank has raised interest rates across the Eurozone for its 8th meeting on the trot. Rates are at 3.5%, their highest in more than 20 years.

RETAIL WITH NICK BUBB:

Early send.