A Day in the Life:

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Find previous emails at https://www.langtoncapital.co.uk/daily-notes/ 

So the dog and I worked to clear what we laughingly call our patio of leaves over the weekend.

And quite hard work it was too in all that wind and I must say that, as the dog’s contribution was confined to dancing around me and barking – he’s convinced that the broom head is a live animal and that the handle is a chew toy – I did more than my fair share of said work.

Indeed I sometimes think that the dog views all of his co-habitants chez nous as rather foolish. Because we work to keep the place tidy (when we should be sleeping), we cook our food (when we should be wolfing it down and snarling at each other) and we slump in front of a goggle-box in the evening (when we should be lying on the floor, chewing up cushions and spitting bits of stuffing onto the carpet).

But I suppose we’ll have to agree to disagree on how best to live our lives.

Anyway, it’s the second week of December. Christmas is just around the corner and, for those out there who feel inclined to send Langton presents of food and alcoholic drink but are hesitating to do so for fear of embarrassing us then our suggestion is don’t worry, we’d get over it. On to the news:

The News:

Pub, Restaurant & Drinks Producer News:

• Conviviality announces appointment of Mark Aylwin as MD of Matthew Clark to replace Steve Thomson. Diana Hunter, Chief Executive Officer of Conviviality Plc, says ‘I am delighted to appoint Mark as Managing Director of our Matthew Clark business. He has a wealth of experience in food and drink wholesale and is ideally placed to develop the Matthew Clark business with our customers and suppliers.’ She adds ‘I am pleased with the progress we have made since the acquisition and the integration is ahead of plan. The key hires required to deliver our synergies are in place ahead of plan and all the teams in both businesses are working well together.’

• The government has released the second part of its pubs code consultation and says that Parallel Rent Assessments are no longer required due to MRO. Its statement reads: ‘The government considers that a PRA as a separate remedy to the MRO option process is not required because the core intention of the PRA comparison of a tied rent alongside a free-of-tie rent, in other words, in parallel – will now be provided for within the MRO option process itself.’

• The Scottish Beer & Pub Association has drawn attention to the fact that, one year on, the change in Scottish drink drive laws has ‘put pressure on pubs.’ CEO Brigid Simmonds adds: ‘We would like both the UK and the Scottish governments to help pubs in other ways, with strong support for further reductions in beer duty during this parliament, and tackling the huge business rates burden faced by community and high street pubs, including further extension of the Small Business Bonus Scheme, and support for a new rate of VAT on pub and restaurant meals.’

• Admiral Taverns says it has completed its turnaround after releasing FY results showing turnover up 2.2% to £78.4m and underlying EBITDA up 5.3% to £24.9m. The group says it is the first time in eight years in which it has reported absolute growth in turnover, operating profit and EBITDA.

• Admiral: Kevin Georgel, CEO, commented: ‘The last six years marks a transformational period for Admiral Taverns. Following a restructuring of the businesses in 2009, the Group’s management team was strengthened and a new strategy outlined to develop and maintain a sustainable, well invested estate of freehold pubs at the heart of their local communities.

• Admiral: ‘Our strategy has remained unapologetically consistent and, despite the challenges presented to the industry by impending Government legislation, we remain passionately committed to being the best operator of wet-led community pubs in the sector.’

• Honest Burger has been named the second fastest growing private company in the UK by the Sunday Times. Sales are up by 206% over the last 3yrs

• The Times has reported that Domino’s Australia franchise owner has approached the UK business with a view to buying its troubled German franchise. Domino’s Pizza Enterprises holds the master franchise rights for Australia, New Zealand and Japan, in addition to France, Belgium and the Netherlands. The Times reports ‘the woes of the German business are in sharp contrast with Domino’s success in Britain, where it has about 850 stores. In October it reported a 14.9 per cent leap in like-for-like UK sales in the third quarter and hinted that it could soon raise its target for store openings above the present target of 1,200.’

• City Pub Co has raised in excess of £8m via the launch of a 6% Convertible Preference Share offer

• Costa said to be making a move into the lunch market via the launch of its Costa Fresco offer. It will include more salads, quiches and cakes. The group recently announced an initiative to sell salads provided by Chop’d.

• Rail fares in England, Scotland and Wales will rise by only 1.1% from 2 Jan, the lowest rise for six years.

• The US boasted 4,144 breweries as of the end of November – a record amount and a ‘remarkable achievement’ according to the Brewers Association. Breweries are opening at a rate of over two a day and some fifteen states are now home to more than 100 breweries, with IPA remaining the style most commonly sold by independent craft brewers.

• Brewers Association chief economist Bart Watson said of the US brewing industry’s outlook: ‘Craft breweries are a part of their communities, operating in neighbourhoods and towns, returning us to a localised beer culture. There are still thousands of towns currently without a brewery, but with populations potentially large enough to support one.

• ‘With beer lovers continuing to desire more full-flavoured, innovative options from small and independent local breweries, ample opportunities exist for well-differentiated, high-quality entrants in the marketplace.’

• Whitbread has appointed Chris Kennedy, chief financial officer of ARM Holdings, as a non-executive director from 1 March 2016. Sam Mellis is due to step down from Whitbread’s board from 1 October next year, following nine years of service. Richard Baker, Chairman of Whitbread PLC said: ‘I am delighted to announce the appointment of Chris Kennedy as a Non-Executive Director. As well as having a strong financial background, his recent experience in an online, international, consumer-facing business with pricing models similar to those at Premier Inn will add significant value to the Whitbread Board.’

• Stonegate Pub Company will reopen The Swan in Haslemere this week once its £400,000 refurbishment is completed.

• Stonegate has also announced that it has relaunched The Castle Grounds pub in Coventry after a £300k refurbishment

• M&C Allegra’s Food To Go Tracker Q3 2015 shows food to go’s popularity continues to grow with consumers aged 18-34 growing 3% y-o-y.

• The 5p plastic bag charge has driven a remarkable 78% drop in the number of carrier bags taken home by Tesco shoppers in England.

Travel & Hotels:

• Luxury travel operator Simpson Travel has bought French villa specialist Dominique’s Villas and Italian company Cottages to Castles. The two acquisitions represent a combined 340 properties across Italy and France.

• McDonald’s Hotels has sold land and two hotels to the total of £100m in a further move to reduce debt

• CVC Capital Partners has taken a 40% stake in Moto, the UK’s largest motorway service station network

• EasyJet is reported to have cancelled 176 flights to Sharm el Sheikh in November alone. Flights remain suspended

Other Leisure:

• 888 has updated on FY trading saying it ‘has continued to deliver a very encouraging performance in line with the Board’s expectations.’ It says ‘as a result of the continued trading momentum in the second half of the year, the Board anticipates that adjusted EBITDA for the Period will be at the top end of the range of analysts’ current forecasts.’ Executive chairman Brian Mattingley says ‘building on our very encouraging first half performance, 888 has continued to trade well through the second half of the year, driven by notably strong performances in Casino and Sport. Underpinned by our quality brands, leading technology and CRM expertise, 888 remains very well positioned to deliver long term sustainable growth.’

Finance & Markets:

• UK manufacturing may be slowing towards the year end reports EEF. It says there is a mood of “gathering gloom”

• US added 211k jobs in Nov, a development thought likely nail down an interest rate rise when the Fed meets on 15 + 16 of this month

• World markets: UK & Europe down on Friday but US markets higher. Far East higher in Mon trading

• Oil price re-testing recent lows. Price down to around $42.70 per barrel

• UK new car registrations +3.80% in November on an annual basis.

• European Central Bank Governing Council member Jan Smets says that the latest action by the ECB to push up inflation is proportionate. Smets commented: ‘If markets expected another thing that’s their view, but I would like to invite them to look at the figures, to look at the results, to look at the links between what we are doing and what is happening in financial markets and the real economy and to have confidence that these links will be reinforced by the measures taken yesterday.’

• OPEC members failed to agree an oil production ceiling at last Friday’s meeting, paving the way for more price wars in what remains an oversupplied market. With oil prices already less than half what they were a year and a half ago, OPEC nations are struggling to break even. Banks say prices could fall as far as $20 as overproduction is likely to continue for years to come and the world is already struggling to store all the excess oil.

• Greece’s parliament narrowly approved the 2016 budget by eight votes, 153 to 145, which includes €5.7bn in public spending cuts. Of that figure, €1.8bn is set to come from pensions and another €500m will come from defence. It also includes tax increases of just over €2bn.

Leisure – The Week Ahead

The LRI outperformed the wider index for the first time in several weeks rising an impressive 4.4%, as the UK FTSE All-Share registered a 1.61% decline last week following comments from the ECB which subdued global markets.

Pubs

The biggest riser by some margin last week was Greene King whose shares were up some 17% last week following their Wednesday interims.  The group saw total revenues including Spirit up by 49.2% at £917.7m with operating profit up by 46.1% to £180.2m, PBT £121.3m (+46.9%) and adjusted EPS is +15.4% at 34.5p.

M&B rose 5.26%, rebounding from an almost 9% fall last year following its final results, with Marston’s share price slightly underperforming its peers rising 1.87% following a 7% rise last week.

In the London Pubs were mixed last week with Young’s seeing modes 0.16% share price growth over the week, but Fuller’s down 1.51%, reversing the recent trend which has seen FSTA outperform its closest rival over the past few weeks.

Other Leisure

Several of the other leisure companies more than recovered from last week’s gains.  Merlin was up 5.17% following a fall of 0.97% last week, while Whitbread was up 3.2% after falling 1.31% last week.  Merlin recently suggested that a weak Euro was hurting its London business, so the Euro rally on Friday should be welcome news for them,

Cineworld was up 6.76% following a 2.95% fall last week while Patisserie Holdings was up 6.95%, perhaps a delayed reaction to Friday 27 November’s full year numbers, where the group saw revenue up 20% and PBT up 29.2%. Will Brumby – will.brumby@langtoncapital.co.uk

Langton Food Retail Index – The Grocer’s Dozen

Greggs (+6.74%), Ocado (+4.14%) and Poundland (+5.25%) all helped the FRI beat the FTSE 100 in a week in which a slew of data and comment cast light on continuing supermarket underperformance.

Grocers

The big supermarkets had another poor week, with Tesco (-4.27%), Sainsbury’s (-4.33%) and Morrisons (-4.33%) all losing ground.

Sainsbury’s CEO Mike Coupe was under no illusions in an interview with Reuters, during which he said that although the market incumbents have closed the price gap to Aldi and Lidl, his company at least is braced for a continuing fall in market share, sales, profit and asset values. Sainsbury’s has narrowed its price gap from 38% to c20%, although research into the French grocery market suggests a gap of just 5% to 10% is required.

Coupe’s gloomy prognosis echoes his subdued H1 commentary and mark another disappointing week for the UK’s listed supermarkets.

The CEO accepts that the ‘ultimate end game (is) to get to a point where the profit margins of the discounters are squeezed to the point where their German lords and masters prefer to spend their capital in the US, China, eastern Europe, anywhere but the UK,’ – a costly and painful endeavour that shows no signs of being accomplished soon.

Coupe added that the industry must break out of its food deflationary spiral and begin to see higher levels of consumer spending in order for business to pick up. These are trends beyond the operators’ control, which show no signs of letting up in a hurry, and put pressure on Sainsbury’s investment case.

Tesco added to the gloomy tone, with losses at its 60-strong Giraffe chain of restaurants growing to £4.1m as a result of pre-opening costs of 14 new units and impairment charges on existing sites, despite a nearly 24% increase in sales to £55m for the 53 weeks to 1 March. The retailer says it remains focussed on a ‘greater emphasis on larger formats, malls and travel hubs.’

Meanwhile, data subsidiary Dunhumby suffered a 9% slide in pre-tax profit to £85m in the year to 28 February despite sales rising 29% to £341m, with the business’ debt ballooning from £15m to £97m as a result of its buyout of the Sociomatic online advertising data service. Tesco abandoned the idea of selling Dunhumby in October when bidders were only willing to stump up £600m for the data business rather than the proposed £2bn.

The troubles don’t stop there for the UK’s largest retailer. Last month it revealed that coffee shop chain Harris + Hoole saw pre-tax losses grow to £25.6m from £12.8m in the year to 1 March 2016, despite receiving substantial loans from its parent company. NutriCentre sales have also fallen and losses have expanded from £2.2m to £8.3m as the list of supermarket-related casualties continues to grow.

Even with Tesco shares languishing at 52-week lows of 161.93p, the retailer’s problems are extensive and considerable downside risk remains.

Highlighting the industry’s tough conditions and capping a miserable week for the supermarkets, Morrison’s also looks set to be relegated from the FTSE 100, suggesting downward share price pressure will continue. Jack Brumby – jack.brumby@langtoncapital.co.uk

Retail Roundup from Nick Bubb:

Saturday Press:
There was not a lot of Retail news on Friday for the Saturday papers to cover, although there were quite a few references to the weak VW sales in the SMMT new car sales figures for November, together with a few articles about the “Small Business Saturday” promotion for independent retailers. The Independent flagged that Mike Ashley’s choice as a new Director for the Findel Board, the Sports Direct adviser Benjamin Gardener, is “tainted by role in USC collapse” and the Times had a snippet on the news that John Lewis allowed a BBC2 film crew to film their preparations for Christmas in a documentary that will be shown on Dec 23rd, whilst the FT had a big article about the way in which Ikea is experimenting around the world with new small store formats and collection points for Online orders. Finally, the Daily Express had its traditional gloomy front
page story about “the weather (the headline was the “Wildest Storm of the Year”) and for once it was right to warn of the flooding etc caused in the North-West by “Storm Desmond”.

Sunday Press (1):
The main story in the Sunday papers was the continuing Sunday Times focus on the future of Homebase and Home Retail, with a front page Business story that the French DIY chain Leroy Merlin is now looking at a bid for Homebase and a separate article about the way in which private equity predators are circling Home Retail as both “Argos and Homebase keep on struggling”.  The Sunday Telegraph revealed that Mike Ashley of Sports Direct has made his daughter’s 26-year old boyfriend, Michael Murray, a Director of several of his private holding companies, whilst, ahead of Sports Direct’s interims next week, the Observer flagged that Mike Ashley is fighting battles on many fronts and that although JD Sports’ good trading seems to bode well, “JD steers clear of deals and rows and sticks to boring old retail”. The Observer also flagged that
ahead of next Thursday’s Ocado trading update “Ocado seems to have been left on the shelf” and that if there is no Overseas contract news “the old fears about its viability will return”. The Business editorial in the Observer noted that Online retailers were the big winners from “Black Friday” and that it is a worrying sign for the rest of the High Street that even retailers with a high-quality Online business such as John Lewis struggled a bit.

Sunday Press (2):
There were a couple of feature interviews: Andy Clarke of Asda trumpeted that “I was right to ignore Black Friday” in an interview with the Mail on Sunday, noting that there is still a lot of unsold Electricals stock around at other retailers and that Asda is putting the money that it saved into other punchy deals ahead of Christmas, like £10 champagne. And Michael Ward, the MD of Harrods, was interviewed in the Sunday Telegraph and criticised the Government’s efforts to relax visas for visiting Chinese tourists and slammed the SNP’s decision to block a relaxation of Sunday trading hours as “incredibly short-sighted”. In other news, the Sunday Times highlighted that Jigsaw has reported record results for y/e October, its second full year under Peter Ruis, and also noted that Andrew Killingsworth is considering selling a stake in his Yours
Clothing chain and that Long Tall Sally is also weighing up its future, whilst the main Business story in the Mail on Sunday was that former Tesco boss Terry Leahy has said that Business Rates reform is more than 10 years overdue.

Primark Watch: We flagged on Friday that, given the impact of the mild autumn weather on recent Fashion sales, that it would be interesting to see ABF’s AGM trading update on Primark on Friday morning, but, alas, the update was much shorter than usual and ABF simply said that the new-year had generally started well, without giving any divisional detail. We will now have to wait until the Q1 update on January 14th (aka “Super Thursday”) for more news on how Primark is trading.

Grocer Watch:
Poor old Morrisons notched up a rare win in the widely followed Grocer “33” weekly supermarket pricing survey in Saturday’s magazine, with its £60.52 basket £1.76 cheaper than its nearest rival Sainsbury (before a “Brand Match” voucher of £0.95) and £2.87 less than Asda. The Tesco basket came to £65.83, but that was before a hefty £4.33 cash-back via their “Brand Guarantee Scheme”. This week the Grocer examined how far “Pick Your Own Offers” make a difference for Waitrose and even on a best case scenario their expensive £71.58 basket would have been only £3.22 less. The separate Grocer “Mystery Shopper” weekly survey on Store Service and Availability was won yet again by Sainsbury, as their revamped 40,000 sq ft supermarket in Beckenham topped the rankings, albeit with a modest score of 70 out of 100, in another low-scoring
week. Interestingly, the famous Waitrose store in East Sheen in south-west London scored only 60, despite getting top marks for shop floor service, losing points for the aisles being clogged with cages and lengthy checkout queues…

News Flow This Week: Things get busier this week and the BRC-KPMG Retail Sales figures for November are out first thing tomorrow morning (the City expects modest 0.5% growth in LFL sales). The House of Fraser Q3 is on Wednesday. Then Thursday brings the Sports Direct interims, the Darty interims, the Mulberry interims and the Ocado Q4 update.

Nick Bubb – nicholas_bubb@hotmail.com

Friday Wrap:

This was produced for distribution Friday afternoon: So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following:

Restaurant Group director sells shares…

• So when can a director safely sell shares and not run the risk of observers suggesting that other shareholders should maybe follow suit?

• Well perhaps never.

• Or at least not while employed but this will cause problems for directors who want to move house, who get divorced or who otherwise find themselves with too many eggs in one basket.

• And CFOs, as a genre, are likely to be towards the conservative end of the spectrum suggesting that we perhaps should not read too much into yesterday’s announcement.

• However, a glance at the 5yr chart for RTN shares does seem to suggest that the golden period was between mid-2012 and early-2014 during which time the shares were benefiting from both higher earnings and an expanding PER.

• Going forward, it is hard to see RTN’s rating expanding much further suggesting that share price progression could be confined to EPS growth

• In order to ascertain the total return, of course, one would need to add in the dividend, which currently stands at around 2.6%.

• On the downside, any multiple contraction would need to be deducted from EPS growth plus dividend and, at around 20x earnings and will only modest asset-backing, RTN’s shares look relatively fully-valued

Last mover advantage…

• We have been banging on about evolution for some time now.

• Today we ran a couple of stories on the serviced-apartment market.

• It looks as though growth here will outstrip that in the wider hotel market by some margin for the foreseeable future.

• Hence better to be in one market than the other.

• But that, of course, is easier said than done.

• The Shanghai sewage system, for example, may be more efficient than the 200yr old versions we have in London or Manchester – but you can’t simply move from the one to the other

• And this carries across into leisure businesses – particularly those businesses, i.e. most of them, that involve long term commitments either through the purchase of freeholds or long-term lease contracts

• So new 1) entrants in old industries (Franco Manca, GBK, Nandos etc.), 2) disruptive models in old industries (e.g. Domino’s Pizza etc.) or 3) new tech stocks (Deliveroo, Just Eat, Hungry House, Airbnb, Uber etc.) may be better-positioned.

• It just comes down to price.

• You may pay 100x revenues for a 1/10 chance of making 10x your money but that’s effectively a zero-return and anything lower is worse.

Interest rates…

• So Mr Draghi fluffed his lines.

• Well he didn’t, really, but ‘underwhelming’ seems to be the word of the day. Additionally, he arguably did allow markets to get a little ahead of themselves & now attention moves to the Fed and its Dec 16 meeting.

• Rates are likely to rise Stateside.

• Nothing mandates that it has to be a quarter point rise, however. It could be an eighth or even just 10bps.

• The point is, rates are going up rather than down – at least in the US.

• However, yesterday’s moves in the currency markets would seem to suggest that rising rates in the US and (modestly) falling rates across the Eurozone are already more than baked into markets.

Random information, hopefully not all of it useless:

• Draghi under-delivers, markets fall, Euro rises. That wasn’t the plan. Euro has its best day vs US$ in 6yrs. FT All Share apparently broken below its 50dy moving average.

• Sterling weaker vs both US$ and particularly the Euro. Perhaps Wednesday would have been the better day to load up on that holiday currency?

• Oil bounces from $42 per barrel, a level last seen late August this year. OPEC meeting today, level could be tested again despite definitive earlier bounce. OPEC may be putting the squeeze on the frackers, goes the theory, and this may not let up for some time.

• Non-farm payroll numbers in the US this afternoon.

• Yesterday was a horrible day on the wider market but a good day for good leisure companies. Dart Group, Whitbread, Greene King, Merlin all beating the trend. Today, not so much.

• WTB giving a chunk back, seems to be high volatility around the £44-£46 level. Chartists would say the bulls & the bears are engaged in mortal combat. Others would say that’s rubbish but there’s probably a bit of truth in it. We tend to believe one should 1) identify good companies and then 2) buy them when they become attractive (as they may never become cheap).

• JD Sports gave retailers a bit of a boost yesterday by raising guidance & saying ‘relatively strong trading has continued and…the Board expects that headline PBT for the year is likely to exceed current consensus market expectations of £125m by £10m’.

• Giraffe; grows sales increases losses. Just remind me, why does Tesco own this company?

• Evolution continues apace. See comments on the serviced apartment market in this morning’s email. You snooze, you lose.