A Day in the Life:

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

No time this morning & Whitbread conference call is at 8am. On to the news:

Whitbread Q3 Update:

Whitbread has this morning updated on Q3 trading for the 13wks to 26 November and our comments are set out below:

Q3 results in brief:

Regarding Q3, Whitbread has reported LfL sales up by 4.7% at Premier Inn, up by 1.7% in its restaurants and up by 2.5% at Costa

Total sales for the quarter are up by 10.8% at Premier Inn, up by 3.0% in the group’s restaurants and up by 13.85 at Costa

Year to date results in brief:

Regarding the year to date, LfL sales are +4.9% at Premier Inn, +0.6% at the group’s restaurants and +3.7% at Costa

Total sales year to date are up by 11.9% at Premier Inn, up by 2.0% at the group’s restaurants and +15.3% at Costa

The numbers for Q3 therefore represent a slight slowdown at Premier Inn and a somewhat more noticeable cooling at Costa (against more challenging comp sales). LfL sales at the group’s restaurants have picked up

Premier Inn:

In hotels & restaurants, Whitbread says ‘Premier Inn has continued to win UK market share’

It says ‘total occupancy remained high at 84.0%, in line with last year, whilst the number of rooms available increased by 7.8%.’

Whitbread says ‘in London we grew total sales by 14.8% in the quarter, with a 13.6% increase

Restaurants:

Restaurants ‘delivered total sales growth of 2.0% and like for like sales growth of 0.6% for the 39 weeks, ahead of our competitor set’.

Costa Coffee:

Whitbread reports ‘Costa grew its worldwide total sales by 15.3% and like for like UK sales by 3.7% for the 39 weeks.’

It says ‘UK Retail system sales, year to date, grew by 14.9% to £635 million with equity stores growing like for like sales by 3.7%.’

The group adds ‘we opened 69 net new UK stores, including the opening of our 2,000th UK store.’

Re machines, Whitbread says ‘Costa Express maintained its success with the installation of a further 687 Costa Express machines taking the total to 4,979.’

The group adds ‘international system sales grew by 11.9% to £236 million (13.0% at constant currency). 37 net new stores were opened in the period with 25 in EMEI and 12 in Asia.’

It says ‘in the year Costa plans to open around 200 net new stores worldwide and install over 800 net Costa Express machines.’

Other:

Whitbread says ‘our strong financial position remains unchanged.’

Incoming CEO Alison Brittain reports ‘I am delighted to have joined Whitbread as CEO. This is a great business with a strong leadership team and 48,500 team members who are passionate about delivering outstanding customer service.’

She says ‘in Costa and Premier Inn we have built the nation’s most loved coffee shop and hotel brands and we have laid out clear and ambitious growth milestones.’

Regarding the numbers, she adds ‘Whitbread has had another good quarter’ and says ‘our brands continue to win market share and we are on track to deliver full year results in line with market expectations.’

Langton Comment: Whitbread’s shares have slipped a little (c16% to be fair) from their recent highs and may have been beginning to factor in an inevitable slowing, in the UK at least, of its Costa sales.

These are by no means poor but the reality of the situation is that the coffee market in the UK must be more mature than it was, even if it is not mature in the absolute sense of the word.

Furthermore, as we have seen in casual dining, the market leader tends to be there to be shot at and, over time, new entrants may be something of an issue.

However, Whitbread has reassured that it will deliver numbers in line with expectations. And its shares now trade on a perhaps more reasonable 19.1x this year’s numbers with a 2.0% yield falling to 17.0x next year’s earnings.

And in Costa and Premier Inn, the group does have two potentially international brands. That is something of a rarity across much of the leisure space and would-be holders are likely to remain attracted to the stock.

The News:

Pub, Restaurant & Drinks Producer News:

• Coffer Peach Tracker points to 0.2% LfL decline in spend across UK’s major pubs & restaurants in November.

• Coffer Peach Tracker: LfL sales down 1.5% in London with Tracker saying nervousness in wake of Paris murders to blame

• Coffer Peach Tracker: Says in London was a case of ‘chain restaurants feeling the biggest impact’. Restaurant sales were down 2.6% in London but provincial sales were higher at plus 3.5% for restaurants and +0.3% for on-trade sales as a whole.

• Coffer Peach Tracker: Has London pubs down 0.8% in Nov on back of Paris attacks. Peter Martin puts a positive spin on it and says ‘when you consider that October had seen a 2.5% jump in like-for-like sales nationally, with London up 3.5%, you can see the scale of this November’s fall-back. Also November 2014 had seen a 3.4% increase on 2013.’ He continues ‘the public’s nervousness is understandable and it seems London has been affected both by a drop-off in tourist business and Londoners not staying out as long after work. Operators are reporting both reduced sales and cancellations of bookings, in restaurants and late night venues.’

• Coffer Peach Tracker: Says ‘London will be hoping that public confidence returns for the Christmas and New Year festive season, in what should be the industry’s busiest trading period.’ Trevor Watson, director at Davis Coffer Lyons, said ‘the international dimension seems to be having a significant impact on London in particular. Sterling has strengthened considerably over the last year, which is likely to be having an adverse effect on the spending of overseas visitors who make up a large proportion of London diners. This longer term effect, combined with the short term effect of the Paris bombings, is resulting in weak statistics for London in November.’

• National Living Wage could be ‘Sword of Damocles’ warns Christie & C0. It says wages will push cost of labour up materially.

• Christie’s Simon Chaplin says ‘the full impact of the NLW has yet to be seen on the bottom line but most are preparing for it or have started to introduce it in readiness. Over the coming year, we may well see a levelling off in values in the independent market as the minimum wage and other costs, such as rent, rise.’ He goes on to say ‘the forthcoming business rate revaluation will also hit the bottom line and there is little doubt that some businesses will fail as a consequence. With Central London seeing around 180 new restaurants open every year, yet 35% closing down, it [the NLW] remains a Sword of Damocles for many.’

• Christie’s Simon Chaplin goes on to say ‘an evident way to counter the increased wage bills is to raise prices, especially in a market where the dining out culture is thriving.’ A number of operators have said that they do not believe this will be easy – and it may be impossible. Christie goes on ‘however, recent surveys suggest that whilst frequency is growing, the average spend per head remains static, with the main driving factor being the under 25 age-group eating out at fast casual dining venues. Furthermore the discounted “voucher culture” has clearly diminished as operators have been struggling to maintain margins.’

• AB inBev has launched its Global Smart Drinking Goals and will invest $1bn in marketing to help reduce harmful drinking by 2025. The brewer also wants to put guidance labels on all products to increase alcohol health literacy.

• The European branded coffee shop market grew by 1,615 stores to an estimated total of 19,472 in 2015 as brands such as Costa, McCafé and Starbucks continue to expand. Of these chains, Costa Coffee remains the leader, adding 209 stores in the last twelve months to take its total in Europe to 2,315 stores. The Allegra World Coffee Portal report also finds that the UK remains the most developed market with around 33% of the European market.

• Nando’s is aiming to double its current estate of 348 sites and plans to open 25 next year while refurbishing an additional 30+.

• Indoor Bowling Equity has acquired six bowling venues from The Original Bowling Company, taking it to 36 sites.

• The Welsh government has amended plans for a ban on e-cigarettes in public places but is still likely to enforce the measure in eating places among other areas. ALMR chief executive Kate Nicholls noted: ‘Pubs, bars and nightclubs have their own policies regarding the use of electronic cigarettes within their venues and we see no reason why any such policy should not be at the discretion of the licensee. Unless we are presented with evidence that the use of such devices in a pub, bar or restaurant, comes with significant risk, heavy-handed legislation such as this should be avoided.’

• Yahoo Inc is putting its plan to sell off its $30bn+ stake in Alibaba on hold and will instead create a new company to house the rest of its assets. The separate publicly traded company will hold Yahoo’s internet business and its 35% stake in Yahoo Japan. The internet group owes the majority of its $35bn market cap to its stakes in Alibaba and Yahoo Japan.

• Marston’s has signed a three-year contract to become the sole distributor of German lager Warsteiner in the UK.

• Ed’s Easy Diner annual turnover has risen 39.3% to £36.5m.

• One in every 12 bottles of Champagne bought in UK shops comes from the discounter, up 50% on last year.

• David Forde, Managing Director of Heineken UK, has replaced Jonathon Neame as BBPA Chairman.

• Tesco-owned garden centre Dobbies saw sales grow 8% to £153m for the year to 1 March but property writedowns brought an FY pre-tax loss of £48.4m.

Travel & Hotels:

• TUI FY numbers: A ‘particularly strong’ performance from its Northern Region, Hotels & Resorts and Cruises division helped drive a 15.4% rise in underlying FY EBITDA for TUI. The group says it has outperformed post-merger and reiterates its guidance of at least 10% underlying EBITA CAGR over the three years to 2017/18. The group’s business in Tunisia, North Africa trading in France and costs in Belgium and the Netherlands hit trading, while the ‘continued competitive market conditions’ in Germany were only partially offset by ongoing operational efficiencies.

• TUI FY numbers: Current trading is in line with management expectations, with flights to Sharm el-Sheikh remaining cancelled. TUI is seeing flat bookings and a 4% increase in average selling price for its Winter season, while Summer trading in the UK looks encouraging with bookings up 11%.

• TUI FY numbers: Friedrich Joussen and Peter Long, joint CEOs, commented: ‘We outlined our strategy and growth roadmap at the Capital Markets Update in May 2015 and we are on track to deliver our plans for Tourism growth, maximise the growth and value of our other businesses and deliver merger synergies, with a focus on balance sheet strength, flexibility and strong free cash flow generation. The strategic review of Hotelbeds is also under way, including a potential disposal of the business, with the carve-out from Inbound Services expected to complete end of 2015 / beginning of 2016.

• TUI FY numbers: ‘Taking into account the continued cessation of flights in and out of Sharm el Sheikh by several countries, current trading for Winter 2015/16 and Summer 2016 is in line with our expectations. We therefore expect to deliver growth in underlying EBITA of at least 10% in 2015/16 and reiterate our previous guidance of at least 10% underlying EBITA CAGR over the three years from 2014/15 to 2017/18.’

• Nearly 1.5 million people flew out of Manchester airport in November, taking its rolling annual passenger total to 23 million (up 5% y-o-y). With new destinations announced by EasyJet, Thomas Cook and Thomson Airways, international flights grew 14.5% in November and the airport’s managing director, Ken O’Toole, added: ‘We are preparing for our busiest ever December. We continue to recruit additional staff to ensure we can cope with the increased demand and capacity.’

• More Uber drivers in California can participate in a class action to enforce pay + expenses a California judge has ruled

• Accor is buying a portfolio of luxury hotels including London’s Savoy + New York’s Plaza, in a cash + share deal worth $2.9bn

• A new report on travel trends has found that the UK (16%), China (12%), Mexico (10%), Italy (6%) and France (5%) accounted for 49% of all luxury hotel sales in 2014. The report, by International Luxury Travel Market, also observes that while the luxury and budget hotel segments continue to do well, mid-price offers are suffering from the boom in private rentals.

• Lifestyle, one of the largest retail chains in the Middle East, has withdrawn Donald Trump products from its shops following the outspoken Republican campaigner’s latest remarks. The group, which has 190 stores in the region, has removed Trump Home products from its shelves in the UAE, Kuwait, Saudi Arabia and Qatar.

Finance & Markets:

• BCC cuts estimate of UK economic growth saying a weaker-than-expected trade and manufacturing performance was to blame.

• BCC now looking for 2.4% growth in 2015 (was 2.6%). Now estimates 2.5% in both 2016 and 2017 (vs 2.7% in both).

• Help to Buy may be propping up housing market say some observers.

• World markets: UK markets down yesterday for 5th day on trot. Europe down + US also lower. F East lower in Thurs trade

• Oil price bumping around the bottom at c$40.50 per barrel

• The Reserve Bank of New Zealand has reduced its benchmark interest rate for the fourth time since June, from 2.75% to 2.5%. The move was expected following lower levels of inflation due to a strong NZ dollar, while the world’s largest dairy exporter has been affected by weaker international prices.

Retail Roundup from Nick Bubb:

Sports Direct:
The City was expecting c9% profit growth in today’s interims from Sports Direct, so the 3.6% growth in underlying PBT to £166m looks a slight miss, on flat sales of £1.43bn, but underlying EBITDA was up by c8% and the culprit was a hefty rise in Depreciation (see House of Fraser comment below). The Chairman says, loyally, that “In spite of a challenging market and disappointing weather conditions, we have yet again succeeded in achieving growth across all key areas”, although the Guardian will be more interested in his comment that “A number of issues were raised by shareholders at our AGM which we have addressed, for example the inconvenience experienced by some warehouse workers from the logistics of the security process when exiting the warehouse”.  The MD Dave Forsey says that “Trading since the period end has been in line with
management’s expectations and… we remain confident of achieving the 2015 Share Scheme’s revised underlying EBITDA target of £420m…We look forward to 2016 with confidence ahead of the Olympic Games in Rio and the 2016 European Football Championships”, but at the 9am analysts meeting the City will want to hear how the group will hit the 2016/17 EBITDA target without more acquisitions…

Darty: You might think that Darty has been taken over by its French rival FNAC, but the deal won’t complete until mid-2016 at the earliest, so life goes on and today’s Darty interims (for the 6 months to end October) show that the core business is performing quite well, with LFL sales up 4.7% in Q2 in France, although the Netherlands has been hit by systems issues…CEO Régis Schultz says: “We have made a strong start to the year with market share gains, significantly improved profit performance and a substantial reduction in our net debt…Sales have held up well in the past few weeks despite events in France and Belgium and we are well prepared for the peak trading period”.

Ocado: Time is running out for Ocado to deliver its much-promised International licensing deal and find a new Online Grocery partner by year-end and, needless to say, the Q4 trading update today contains no mention of the situation…although core trading in the 16 weeks to Nov 29th has been solid enough, with Retail sales up by 13.0%, despite a drop in order value of over 2%. Tim Steiner, Ocado’s feisty CEO, says: “We are pleased to report the thirteenth consecutive quarter of double-digit sales growth in what is a challenging and competitive grocery retail environment”.

House of Fraser Watch:
We noted yesterday that, as August was “challenging” and October wasn’t easy for Fashion retailers, we doubted if the Q3 update from HOF (for the 13 weeks to Oct 31st) would show much LFL sales growth and, given the warm weather of late, we doubted if the last 5 weeks would show much LFL sales growth either…Well, we were too gloomy, as the +4.6% LFL in Q3 was surprisingly good, driven by impressive 28% Online sales growth, but HOF also saw 0.8% Store LFL growth, which is pretty good going, albeit that was boosted by store revamps. And on the Bondholder’s call, the new CEO Nigel Oddy said that Q4 to date, after a successful Black Friday and Cyber Monday, was seeing continuing c5% LFL sales growth. By way of contrast, John Lewis was up by only 2.5% gross in the same 13 weeks as HOF’s Q3 (with LFL sales about 1% up), albeit Fashion sales were up by
5.2%, with performance held back by sluggish Electricals and Home trade. HOF also said that Q3 gross margins were up by 50bps, but look at the 6% operating cost growth in Q3 (reflecting the burden of Online fulfilment costs) and you see why HOF still doesn’t really make any money…You can’t ignore the “D” in a fixed asset heavy business like Department Stores and just focus on the “EBITDA”, as Depreciation at HOF is c£40m a year and EBITDA is likely to be little more than £65m…

Today’s Press and News: Ahead of today’s Sports Direct interims, the big story is the Guardian front page expose of the dreadful ”gulag” working conditions inside the Sports Direct warehouse, with the Business editorial thundering that the weakness in the Sports Direct share price implies that maybe “even the City senses increasing risks”. Nick Bubb – nicholas_bubb@hotmail.com

Wednesday Wrap:

This was produced for distribution yesterday 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:

VAT and the hospitality industry:

• We have maintained for some time that, despite the fact that VAT is indeed levied at a reduced rate on some leisure services across the EU, it was always going to be politically difficult, if not impossible, to sack nurses in order to give the alcohol industry a break

• Of course that represents an egregious oversimplification of the arguments.

• But nonetheless, politicians were not likely to (and indeed did not) take the chance than any moves in this direction would have been interpreted as above

• Tim Martin at Wetherspoon has been one of the most dedicated campaigners in support of Jacques Borel’s VAT Club but JDW has now withdrawn its support

• It says ‘Jacques Borel has done an amazing job campaigning for a VAT cut over the past five years’ but says ‘I have decided that Wetherspoon can no longer support the VAT Club in its present form and believe there now needs to be an alliance of companies who believe, as I do, that a VAT cut is vital for the future of the hospitality sector.’

• He adds ‘it is a shame that some big companies have not supported the campaign to date’ the sentiment being in line with his comments expressed in the PMA in June 2014 to the effect that Greene King, Enterprise Inns and Mitchells & Butlers were ‘conspicuously absent from the VAT Club and are silent as the grave on tax equality.’

• JDW says that it will continue to campaign for a reduction in VAT and, over time, this may well be forthcoming

• However, such calls are more likely to fall on receptive ears at the top of an economic cycle and it is to be hoped, given just how challenging trading remains, that we are not quite there yet.

Tesco & diversification; just how did that work out for them?

• Well not terribly well.

• Blinkbox, Hudl, Harris & Hoole, Giraffe and now The Guardian highlights losses at the Tesco-owned Dobbies Garden Centres.

• Its business editorial suggests Tesco has “spent a year going sideways” and that may be a little generous.

• And, in terms of diversification disasters, Fresh & Easy in the US was in a league of its own.

Random information, hopefully not all of it useless:

• When do we start declaring Late Night Levies as a stealth tax?

• UK economy looking pretty good per NIESR. Leaves UK, as so often, half way between the US and Europe when it comes to rate rises. Estimate for the US to rise stuck on 16 December (next Wednesday), the UK perhaps end-Q1 2016 (but that’s a bit flaky & subject to review) and Europe possibly 2017. 

• Online general retail had a bad day of it yesterday. Ocado down 5%, AO World losing 4%. Home Retail & Poundland also in the top losers but food retailers on the up.

• Sterling stable against Euro and Dollar but a glance at the two year chart shows just how far things have moved (stronger vs Euro, weaker vs Dollar) since around mid-2014:

• Recent (18mth) currency movements would seem to suggest that markets have been anticipating an upward move in US$ rates and perhaps a downward move in Euro interest rates for some considerable time.

• Commodity prices all still extremely weak with the exception of El Nino impacted OJ, sugar and cocoa. Now, however, it looks as though the milk price in the UK may be showing some signs of life.

• Miners extremely weak yesterday. Interesting to see that the top ten risers in the FTSE had to include some seven shares whose price had actually fallen