A Day in the Life:

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

Have you ever had too much coffee in the morning?

You make a large pot & have a cup. Then you have another and then your colleague rings to say they have an out-of-office meeting & won’t be in for a couple of hours so, rather than waste it, you have another jug or two of Columbia’s finest after which you end up bouncing around the ceiling and fighting to keep the spiders from crawling around your head and scratching the insides of your eyes.

So you try self-medicating, decide a pint down the pub wouldn’t hurt.

A downer might combat the uppers, as it were, but that’s a big mistake. Your screechy voice and jerky movements will alert the bar-staff to your condition but, even so, the 11am meeting gets re-scheduled down the pub, one pint becomes three and then, when you get back to the office, you need a couple of stiff coffees to sharpen yourself up.

And on it goes but, at this time of the morning, it’s not a problem and, as I put the coffee on I find myself echoing the words of all those who went before me; what could possibly go wrong? On to the news:

The News:

Pub, Restaurant & Drinks Producer News:

• YUM Brands reports Q4 numbers, sees EPS growth of 11% (to 68c per share) & FY EPS growth of 3% (to 318c per share)

• YUM: Says worldwide system sales grew 6%. Worldwide restaurant margin +240bps to 13.6%, operating profit +17%.

• YUM: Q4 sales +7% in china (7% new units & 2% LfL growth). Margin there was up by 430bps to 11.4%.

• YUM: New global restaurants opened: Total 1,160, including 384 in China, 374 at KFC, 270 at Pizza Hut, 109 at Taco Bell +23 in India.

• YUM says 83% of its international new openings occurred in emerging markets.

• YUM: KFC sales +7%, Pizza Hut sales +2%, Taco Bell sales +7%. India sales down 9% (LfL down 13%).

• YUM full year numbers. Worldwide system sales grew 5%. Worldwide restaurant margin increased 1.5 percentage points to 16.0%. Worldwide operating profit increased 7%.

• YUM: CEO Greg Creed comments I’m pleased with the positive sales momentum we generated across the majority of Yum! in the fourth quarter. KFC China, for example, grew same-store sales 6% in the last quarter of 2015. Outside of China, each of our brand divisions grew same-store sales on a one-year and a two-year basis. Our U.S. results were particularly strong on a two-year basis, with growth of 2% at Pizza Hut, 8% at KFC and 10% at Taco Bell.’ He adds ‘fourth-quarter EPS grew 11%, with full-year EPS growth of 3% despite a 7% decline in the first half and six percentage points of foreign currency headwinds. For the full year, our brand divisions collectively grew operating profit 8% in constant currency, led by 12% operating profit growth at Taco Bell. Operating profit grew 8% in constant currency in China with impressive cost management partially offsetting weaker
than originally anticipated sales results.’

• YUM in 2016: CEO Creed comments ‘2016 will be a transformational year for Yum! as we are on track to complete the spin-off of our China Division, ultimately creating two powerful, independent, focused growth companies. The fundamental goal of Yum!, however, is unchanged. We are 100% dedicated to building and strengthening KFC, Pizza Hut and Taco Bell all around the world, as strong brands are critical to delivering sustained growth and creating shareholder value over the long term.’

• Compass Group updates on Q1 trading, says ‘Compass had a strong first quarter’ with organic revenue +5.9% in Q to end-Dec

• Compass Group: Says has continued to ‘focus on organic growth continues to drive good levels of new business and high retention rates. Like for like revenues increased, driven by modest pricing and some volume improvement.’ It says ‘we continue to drive operating efficiencies around the business, which we are partly reinvesting in the growth opportunities we see across the Group.’

• Compass says North America grew organic revenues by 7.9%. In Europe, organic revenue grew by 3.6%. It says ‘new business wins have been strong, particularly in the UK and the Mediterranean countries, retention is good and like for like revenues have stabilised.’

• Compass sees organic revenue in the Rest of World region at +3.6% ‘with robust growth in Spanish speaking Latin America partly offset by the expected weakness in our commodity related business and a challenging environment in some emerging markets.’ The group is being impacted by the strong pound (until recently) which it says ‘had a negative translation impact on revenues and profit in the quarter of £116 million and £7 million respectively.’

• Compass re outlook. Says this ‘remains positive’. It says ‘growth in North America is strong, Europe is improving, and we are managing the challenges in the Rest of World region.’ The group concludes ‘in the longer term, we remain excited about the significant structural growth opportunities globally and the potential for further revenue and margin growth.’

• A new report concludes the pub industry still needs help in its ‘fragile recovery’ leading Camra to call for a cut to beer tax. The number of pubs closing a week has fallen from 29 a week in the last six months of 2015 to 27 a week, but Camra says that if the beer tax had not been cut in 2014, more than 1,000 pubs would have closed and some 26,000 jobs would have been lost.

• All-day dining restaurant The Alchemist is set to open its first North East site in Newcastle’s Intu Eldon Square’s Grey’s Quarter. The group launched in and has since opened units in London, Manchester, and Leeds. Simon Potts, managing director of The Alchemist, said: ‘We are really looking forward to bringing The Alchemist to Newcastle and to being part of the fantastic Greys Quarter space. Our designers are working on eye catching plans for the venue that will reflect the rich history of this fantastic city and we look forward to wowing guests with our molecular mixology and creative food offering later this year.’

• Oreos and Ritz-maker Mondelez has warned investors that it is preparing for a further deterioration in economic conditions in emerging markets. The US snack group’s shares tumbled 8.3% to $38.47 following the lacklustre sales outlook and a bigger-than-expected hit on operating profit from deconsolidating its Venezuelan operations. ‘In 2016, we expect macro conditions, especially in emerging markets, to remain difficult and potentially worsen . . . which will weigh on category and revenue growth,’ said Brian Gladden, CFO. ‘As you might expect . . . and I think you’re hearing from others . . . we’re seeing even more volatility in markets like Brazil, China and Russia, even as we start our first quarter.’ Monelez is often seen as a bellweather for consumer demand in developing markets, and joins a list of multinationals who are warning about
sharply slowing growth and currency devaluation against the USD in the year ahead.

• New BBPA chairman David Forde has told the M&C that not reducing beer duty in next month’s Budget will undo the impact of three successive 1p cuts. The managing director of Heineken UK added that upcoming cost pressures such as the National Living Wage means that another cut is required just for the industry to be able to stand still.

• Conservative business secretary Sajid Javid has said the pubs code will be amended to ensure that a Market Rent Only (MRO) will not be dependent on a rent increase. He said ‘many responses to the consultation raised an issue concerning the market rent-only option—the MRO. Specifically, they said that the eligibility of a tenant to choose the MRO at the point of rent assessment should not be contingent on the rent being increased. Clearly, that proposal would have had an effect we did not intend, so I am happy to announce that we will be accepting the argument regarding the MRO’.

• Numbers from the ONS show alcohol-related deaths have fallen once again having peaked in 2008. Observers have noted, however, that deaths remain at a higher level than they were in 1994. The PMA quotes the BBPA as saying ‘these latest figures mirror the fact harmful drinking has been falling. From 2005–2013, men drinking over the guidelines dropped from 41% to 34% and women from 33% to 26%.’

• Stonegate Pub Company is aiming to convert 80% of its TCG estate to its own formats over the next three years and is on track to achieve £2.3m of synergies. Speaking to M&C, chief executive Simon Longbottom said the total c£100m deal for TCG, including the sale and leaseback of five sites raising £34m at low yields, was the equivalent of a 6x multiple.

• England’s chief medical officer has urged women to consider the risk of breast cancer whenever they have a glass of wine. Dame Sally Davies’ revised alcohol guidelines have drawn criticism for representing a ‘nanny state’ attitude to alcohol consumption.

• The Scotch Whisky Association has met British Treasury officials to call for a 2% cut in spirits duty as 76% of the price of an average bottle of scotch currently goes on tax. The chief executive of the SWA commented: ‘We hope the Government will build on last year’s decision by once again cutting excise by 2% and helping to reduce from the current onerous 76% the tax take on an average priced bottle of Scotch.’

Leisure Travel:

• UK inbound tourism figures for July to September 2015 show 10.5 million visits, up 5% YoY and setting a new record for any quarter.

• A general strike by unions in Greece today is expected to cause flight and ferry disruption.

• The US Travel Association’s Travel Trends Index predicts moderate travel growth in early 2016 after trailing off in December 2015.

• The US hotel industry is projected to experience continued YoY increases through 2017, according to STR and Tourism Economics. The report forecasts a 0.6% increase in occupancy to 65.9% in 2016, a 4.4% rise in average daily rate to $125.30 and a 5% increase in revenue per available room to $82.60. For 2017, the US hotel industry is projected to report a 0.2% increase in occupancy to 66.1% next year, with ADR set to rise 4.3% to $130.63 and a RevPAR to grow by 4.5% to $86.28.

• US travel buyers have suggested at the 6th annual Business Travel Show that 2016 could be a “challenging year” for buyers. Speakers believe budgets could be under pressure whilst prices continue to rise

Other Leisure:

• Yahoo has surpassed expectations with Q4 earnings of $4.9bn, up from $4.6bn in 2014, and is set to spend this year cutting costs.

Finance & Markets:

• UK services PMI was little changed in Jan (at 55.6) from its December (55.5) figure. Any number over 50.0 implies growth.

• UK services. Markit reports that ‘the three PMI surveys for January collectively point to a slight upturn in the rate of economic growth, consistent with GDP rising at a quarterly rate of 0.6% in the first quarter, up from 0.5% in the fourth quarter, if current levels are sustained.’ Markit said, however, that ‘cracks are beginning to appear in the country’s resilience to the various headwinds’. It said ‘worries about a Chinese ‘hard landing’, financial market jitters, higher interest rates in the US, more austerity at home and the possibility of ‘Brexit’ and EU tensions have collectively pushed the business mood in the dominant service sector to its darkest for three years.’

• Head of Global Equities at US house Fidelity Dominic Rossi has said that the Bank of England is being (at least verbally) “too aggressive” on interest rates. He goes on to suggest to the BBC that the Bank had been “poor” at understanding why inflation was so low.

• Global markets: UK & Europe sharply down yesterday. US, however, mostly up and Far East higher in Thurs trade

• Oil price markedly higher. Currently trading at around $35.30 per barrel

Retail Roundup from Nick Bubb:

DFS:
Ahead of today’s pre-close update (for the 26 weeks to 30 January), the DFS share price was one of the few risers in the sector yesterday, but the news is not that exciting and there is no profit forecast upgrade. The message is that “The Group has maintained good sales growth through the first half of the current financial year, reflecting a healthy furniture market environment and the success of our strategic initiatives”, but gross sales growth is only 7%, which is better than the lame 4% growth seen in the previous half-year, but is not as good as the 8.8% LFL order growth seen by rival ScS in the same period. ScS has seen its House of Fraser concession business chip in, but then DFS has extra growth from Sofa Workshop, Dwell and the DFS Netherlands start-up and although they are said to have “all contributed encouragingly” there is no split of
performance. With operating costs also on the rise, the upshot is that DFS say that “our expectations for the group’s financial performance in the full year remain unchanged”. The other news is that Bill Barnes, the DFS Finance Director, has decided to retire in the summer at the ripe old age of 58, after almost 13 years with the Group and will be succeeded by his No 2, Nicola Bancroft.

Weather Watch:
As we head into early February, the weather is quite chilly and you may think that Fashion retailers can’t blame the weather for not selling outerwear last month…But memories about “the weather” are notoriously short-term, so we turned to the Retail weather consultants Planalytics for their regular monthly overview of how last month’s weather “should” have affected the High Street. And the headline for January this year was “Still mild despite a short taste of winter”. The record-breaking warmth of December continued into the first week of the New Year, but winter finally made a brief appearance between the 10th and 21st of the month. The overall average temperature of 5.1 degrees C was slightly above “normal” and nearly 1 degree C higher than last year. Wet weather continued to plague the country for much of the
month, which as a whole was the 5th wettest January of the past half century and much wetter than last year. The milder start and end to the month hampered clearance of autumn/winter products and while Planalytics said that “weather driven demand” for seasonal items such as knitwear and outerwear was broadly neutral year-on-year for the whole month, this was only driven up to neutral by the cold snap mid-month.

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:

Interest rate expectations:

• Why do we pay these people so much?

• Expectations for the number of rate rises in the US in calendar 2016 now range from 0 to 4.

• Given that rates tend to move in the quarter-end months, it would not really be possible for there to be a wider spread.

• That said, what does it mean?

• Well the currency markets etc. will be lacking guidance because it means that some credible commentators are now expecting the Fed to leave rates where they currently stand for at least a 12mth period

• Reading backwards from that, there is the implication that global growth could slow – and that will impact oil prices, equity prices and the rest

Evolution in the leisure industry:

• As we have said on a number of occasions, change is the only constant.

• Today (in earlier email) we carry stories that 1) popcorn may be replacing crisps as consumers search for a healthy (or less unhealthy) option, 2) Dry January impacted trading this year more, perhaps, than it has in the past, 3) Amazon is set to open 400 physical book stores and 4) Choice Hotels may enter the ‘sharing market’ and presumably take on Airbnb head-to-head.

• Hence we can see that some operators are putting their shareholders’ money where Langton’s mouth is.

• Evolution may arguably be split between a) disruptors and b) market share stealers.

• Airbnb, Uber, Deliveroo etc. may fall into the former category

• Whilst Amazon (with bookshops), McDonald’s (with table service), Burger King (with alcohol), Choice Hotels (with a ‘sharing model’) fall into the latter

• We don’t have numbers to evidence the volume of would-be disrupters who go bust – but we would hazard to guess that there are more operators willing to try to steal a larger share of an existing cake than there are innovators who truly add something completely new

Holiday market – volcanoes, terrorism, SARS & now the Zika virus:

• We (and the stock market) are torn two ways on leisure travel stocks.

• We believe that the market for leisure travel is a premium-to-GDP growth industry

• This is particularly the case in developing or nearly developed economies.

• Spending a week on the beach will rank behind buying a fridge, but probably ahead of buying a second fridge for the den

• But there are many other factors that suggest, to us at least, that leisure travel companies should maybe not trade on a market rating. Let alone a premium

• Weather, terrorism, accidents, currency movements, oil price shifts, health scares (avian flu, SARS and now the Zika virus to name but a few) and random acts of God such as volcanic eruptions can make a mockery of the best-laid plans and earnings can be ruined via action from left-of-field

• With the above in mind, we would point out that, whilst TCG trades on a 2016 multiple of c9x, TUI’s shares are trading at around 13x this year’s earnings

Random information, hopefully not all of it useless:

• Market scheduled earlier to open down 40pts. Narrowed the loss & got to a dozen or so points down before falling for real. Down c57pts at time of writing.

• Oil has apparently just had its worst two days (in % terms at least) for about 7yrs.

• Sterling markedly stronger against both US$ and Euro. To put this in context, however, Sterling has still weakened (against both) by around 10% since the beginning of December last year.

• Gold bugs will be crawling out of their holes as the rally in the metal is now distinctly noticeable. Gold is still down c8% over the last 12mths, however.

• Coffee, cocoa weak. Sugar strong and Hog prices continuing to rally. Latter serves as a proxy for white meat.