A Day in the Life:

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

So I can see why hard gambling is often defined as that which involves relatively little skill and which provides a quick fix.

It’s the lottery rather than the horse race. Far less the 90 minute football match where the form book needs to be studied etc. and, with that in mind, it’s instructive to note that even hardened stockbrokers such as Langton Capital can actually function more effectively when it considers the long game and when Bloomberg TV and, heaven help us, the IG Index market report have been turned off.

Because, whilst hearing no evil and seeing no evil may not solve a problem in itself, it certainly makes you worry about it less. Indeed a horse wearing blinkers may be coaxed into negotiating the busiest of roads whilst the breathless prose that are attached to every little statistical and corporate release by various financial commentators are probably taking years off my life. On to the news:

JD Wetherspoon Q1 Update:

Q1 Update – 13w to 25 October 2015:

JD Wetherspoon has this morning updated on trading for the 13w to 25 October 2015 and our comments thereon are set out below:

Trading:

LfL sales are +2.4% in the full quarter having been up by only 1.4% in the first 6wks of the quarter

That implies better trading, mathematically around 3.3% for the second half of the quarter

Indeed the group says ‘sales have been slightly higher in the last 6 weeks, which has coincided with the Rugby World Cup.

Re margins, the group says the ‘operating margin in the 13 weeks to 25 October 2015 was 6.2%, compared with 7.7% in the same 13 weeks last year.’

It adds ‘the lower margin was due to increases in the starting rates for hourly paid staff in October 2014 and August 2015, which totalled approximately 13%.’

Balance Sheet, Debt & Outlook:

The group has opened 3 new pubs since the start of the financial year and has sold 1.

JDW says ‘we intend to open approximately 15 pubs in the current financial year.’ This is at the lower end of prior expectations

The group confirms that ‘following a review of our pubs, as previously reported, the Company offered 20 leasehold pubs for sale’ but is adding it ‘is now considering a small number of freehold disposals in the course of the financial year.’

Re debt, JDW says ‘the Company remains in a sound financial position. Net debt at the end of this financial year is currently expected to be slightly above the 26 July 2015 total of £601.1million.’

Re the outlook, chairman Tim Martin says ‘as we indicated in September, it is difficult to quantify exactly the factors which will influence our trading performance in the early stages of a financial year.’

Mr Martin says ‘increased labour costs are clearly an important factor for all pub and restaurant companies and may result in our annual profits being slightly lower than the last financial year.’

Conclusion:

As mentioned previously, JDW is ahead of the curve on wages – but this is clearl at the expense of margin.

The group increased the minimum hourly rate for staff by 5% in October 2014 and by a further 8% at the end of July 2015.

It says ‘both decisions were taken without the knowledge that the government was about to announce a new minimum wage, now called the “living wage”.’

Re current trading, there will be some downgrades. Today’s statement highlights good LfLs (relative to the industry) but lower margins and a reduced outlook.

In the above, today’s RNS remains one in a series. The group’s shares may fall today and, as in the past, it would not be surprising to see the company buy into weakness

Langton View: JD Wetherspoon has remained true to form.

LfL sales have picked up but margin has taken another lurch downwards. Hence, even though we are only just finishing Q1, numbers will be adjusted accordingly.

Chairman Tim Martin has previously acknowledged that the economy is slightly better and sales are better. But non-director shareholders may wish to see this coming through to the bottom line and, at the moment, this is not happening.

As recently as 11 Sept, the group said ‘we continue to anticipate a trading performance similar to, or slightly above, that achieved in the last financial year.’ It knew at the time that it was putting wages up and LfL sales have improved yet guidance has now moved towards a small reduction in profits.

To be fair to the company, consensus forecasts were already for a small decrease in earnings this year. The group may earn around 48p in the year to July 2016 and perhaps 51p in the following year. This implies that the group’s shares are trading on a current year multiple of around 16.5x with a 1.6% yield.

This is not cheap, per se, but bulls (who could be getting a little exasperated) may focus on the fundamental strengths of the group and what looks should be higher margins next year whilst bears will suggest that the group may fail to deliver.

We would suggest that any material weakness should present a buying opportunity. Indeed the company itself is likely to see it that way. The group is a superlative operator, it has focused on accommodation, drink, food, further day-parts, coffee and a host of other growth areas and, though we acknowledge that this has to come through at the bottom line in order to justify our recommendation, we remain supportive of its shares.

The News:

Pub, Restaurant & Drinks Producer News:

• SAB + AB InBev have had their request to extend their Put Up or Shut Up deadline by a further week to 11 Nov granted

• So how long is it before someone tries to deliver takeaways via drone? We could have burgers falling from the sky by Xmas

• The heat’s getting turned up further re the sugar debate. It was 2nd or 3rd lead on the news with 90% of respondents saying the other 10% should pay more for sugar.

• A 12-year study has found that men who consumed at least two servings of sweetened beverages are 23% more likely to suffer from heart failure. The study, by the Karolinska Institutet in Stockholm, followed 42,400 Swedish men aged 45 to 79.

• Mexican restaurant Chilango has exceeded its £1m Crowdcube fundraising target.

• Rebecca Burr, editor of the Michelin Eating Out in Pubs Guide 2016, says pubs should be praised for evolving alongside changing consumer trends. Burr commented: ‘What has been very impressive this year is the number of pubs we’re seeing expanding their repertoire and offering more than just a lunch or dinner service. For instance, afternoon tea is now on the menu at quite a few pubs around the UK, something that was relatively unheard of in a pub setting a few years ago.’

• FT reports Molson Coors is nearing a deal to buy SABMiller’s US JV stake as a part of AB InBev’s moves to avoid competition problems. It quotes analysts as saying the 58% share should fetch between $10bn and $13.5bn. It says ‘a planned disposal to Molson Coors is further indication that AB InBev and SAB are closer to cementing the terms of their combination, ahead of a Wednesday deadline for AB InBev to make a formal offer for SAB.’

• Beds and Bars reports LfL sales +14% in Oct reports Propel

• Poppleston Allen writes that Plymouth City Council has begun consultation on introducing a late night levy and will end on 4 December. The proposed Late Night Levy will apply to premises that are authorised to sell alcohol at any time between 01:00 and 06:00 and the Council will make a decision on 1 April 2016.

• Virgin Wines posted a full year net profit of £4.3m for the year to 3 July 2015, with sales rising to almost £40m. Crediting its WineBank customer account scheme, in which customers receive £1 for every £5 put into their account, for the good results. Virgin Wines CEO Jay Wright said: ‘WineBank gives customers the freedom to buy what they want, when they want, with the ability to receive 20% extra value on their orders all the time. No other retailer offers this type of service; growing our WineBank is a big focus for us moving forward.’

• Technomic reports US consumers pushing for varied + unique tastes, says 40% are more willing to visit a restaurant innovates re flavours. It says its research ‘shows that heightened interest in new tastes has accelerated the time in which many spices, ingredients or preparation methods go from “emerging” to “mainstream.”’ A constant circa two thirds of consumers across limited service burger, pizza + Mexican restaurants are willing to try something new.

• Australian brewer Black Hops Brewing has introduced a beer to coincide with FPS game Call of Duty: Black Ops III called Black Hops. The pale ale, described as ‘crisp, light and refreshing with tantalising hop aromas of pine and citrus fruit,’ was launched on 2 November ahead of the game’s release on 6 November.

• Amazon has launched its first physical bookstore in Seattle and plans to use its extensive library of customer data to better stock its shelves.

• Marks & Spencer grew sales 1.4% to £5bn in the H1 to 26 September, with like-for-likes up 0.2%, as underlying PBT increased 6.1% to £284m. General Merchandise gross margin was up 285bps, ahead of expectations, leading the group to raise its full year guidance to +200 to 250bps following ‘significant sourcing gains’.

• Marc Bolland, Chief Executive, said: ‘We delivered good underlying profit growth in the first half and made strong progress against our key priorities. Our Food business again outperformed the market by over 3% points as our focus on quality and innovation continues to set us apart. In General Merchandise we decided to improve profitability by focusing on gross margin, delivering another significant increase, which in part resulted in slightly lower sales.  As a consequence of good performance and strong cash generation we have decided to increase our dividend.’

Travel & Hotels:

• PPHE updates on Q3, says total 9mth revenues +9.7% to Euro 79.8m. Constant currency increase was 3.8%.

• Wizz Air grew its amount of passengers carried by 20.4% in the six months to 30 September, pushing revenue up 15% to €836.4m and PBT up 16.4% to €190.9m. Management’s expectation of an underlying net profit for the year ending 31 March 2016 in the range of €190 million to €200 million remains unchanged, implying an underlying H2 loss of between €6 million and €16 million, broadly in line with the H2 F15 loss of €7m. Wizz Air’s cash grew from €617m to €710m and its net debt to EBITDAR was brought down from 2 times a year earlier to 1.2 times.

• More on Wizz Air: The group continued to reduce its cost base, with unit costs falling 1% to 2.19 euro cents ex-fuel and 11.3% to 1.27 euro cents including fuel. The low-cost Central and Eastern European-based carrier reiterated its view that lower oil prices are feeding into lower air fares and that unit revenues will continue to decrease as a result. A total of eight new aircraft were added during the first half, increasing the fleet to 63 Airbus A320s and bringin the average age of its aircraft down to 3.8 years. Load factor rose 1.6% to a busy 90.7%. Although the company ‘has very limited visibility of demand in the final quarter of its financial year’, it confirmed ‘robust bookings for the third quarter.’

• Conclusion on Wizz Air: CEO József Váradi said: ‘We continue to deliver against our ambition to make safe, reliable, affordable air travel available to everyone in Central and Eastern Europe. Our ultra-low cost model gives us a clear cost advantage versus most of our rivals, including many other low cost airlines, and as a result we are able to offer our passengers low fares and sustain a relatively high growth rate compared to other carriers. We have a strong balance sheet, proven management team, best-in-class fleet and leading market position in CEE. This winning formula leaves Wizz Air well placed to continue to deliver significant growth and returns for our shareholders.’

• Hotstats reports hoteliers in the UK’s E Midlands successfully recorded growth across all key market segments in Oct.

• Hotstats reports strong hotel performance in Berlin during Sept. Berlin marathon + athletics meet pushed occupancy

• The US announced yesterday at the World Travel Market that Global Entry has been extended to UK citizens. Global Entry allows faster clearance of pre-approved, low-risk travellers and is available through the UK Home Office website for a £42 processing fee.

• Brazil is preparing to introduce a 90-day visa exemption in an attempt to encourage visitors during next year’s Olympic and Paralympic Games.

Other Leisure:

• Activation Blizzard has acquired London-based owner of app game Candy Crush Saga, King Digital Entertainment for $5.9bn. The deal is expected to complete by early 2016, assuming at least 75% of King Digital Entertainment shareholders approve.

• Groupon shares fell 26% after-hours as the firm missed forecasts + announced co-founder Eric Lefkofsky is to move to chairman.

Finance & Markets:

• World markets: UK up yesterday, Europe also. US higher later in the day + Far East up in Weds trading

• Oil price settling above $50. Down a shade in latest trading but still offered at around $50.40 per barrel

Retail Roundup from Nick Bubb:

Marks & Spencer:
We flagged on Monday that the City had been softened up for another weak sales performance from M&S General Merchandise (GM) in Q2, ahead of today’s interims and Q2 update, and the outcome was indeed as bad as feared at -1.9% LFL (despite the big Online sales recovery) …But M&S are quick to attribute that to reduced discounting and “a decision to focus on full price sales” and have been able to come in with a GM gross margin increase of +285bps in H1 (the 26 weeks to Sept 26th), which is better than expected, thanks to strong sourcing gains, and have increased their full-year margin growth guidance. Thanks to that strong GM gross margin, M&S have therefore been able to beat H1 underlying PBT expectations and deliver “good” growth of 6% to £284m, despite a big hit to International profits (albeit there is a chunky £68m exceptional
charge, mainly for store impairments). And given improved cash generation, M&S have raised the interim dividend by 6.3% to 6.8p per share. Despite the comment in the Outlook statement that “market conditions continue to be challenging”, that cocktail of good news should be enough to push the shares up a bit first thing, ahead of the 9am analysts meeting in the City.

Weather Watch:
We have been flagging that trading for Fashion retailers wasn’t easy last month, as per the Next trading update, despite the soft comps caused by last year’s prolonged “Indian Summer”, but, although some people are complaining about the current warm spell, 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 “should” have affected the High Street. And given that October last year was so warm, their headline for October this year was “Cooler and drier than last year”, flagging that the weather stimulated demand for autumn winter products. The first week of October trended a bit warmer than last year, but year-on-year demand for seasonal products quickly became more positive. Temperatures for the UK
averaged 10.4 degrees C which, while not as cold as retailers would have liked, was 1.6 degrees cooler than last year on average and 0.4 degrees cooler than normal. The South-East saw the biggest year-on-year downswing in temperatures. All in all, Planalytics said that “weather driven demand” for outerwear should therefore have been 11% higher than in 2014 in October, other things being equal, although it doesn’t feel like many Fashion retailers enjoyed that sort of consumer demand…Nick Bubb – nicholas_bubb@hotmail.com

Tuesday 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:

More restaurants failing than in depths of recession:

• See earlier email – accountancy firm Moore Stephens claims that the number of restaurants going out of business last year was 50% higher than during the recession.

• It quotes numbers but, taking there veracity as read, this is an interesting situation.

• It fits in with our suggestion that it is possible for an industry to grow whilst a number, maybe even a large number of its incumbents have a hard time.

• New entrants will be causing a part of the problem.

• In addition to which, UK pubs are muscling their way into the VFM end of the market.

• They increase the number sites that need to generate income & may depress LfL sales (whilst headline sales rise).

• This would appear to be the case as the difference between the Coffer Peach Tracker’s measure of LfL vs total sales has recently been around five percentage points.

• And labour costs and particularly rents (in London and also elsewhere) are rising meaning that, even if sales hold up, profits may not.

• We would favour, where it’s possible to invest in them, dynamic new entrants.

Big ticket spending:

• Pendragon (following Lookers on Friday) suggests that the car market is buoyant.

• It comments “the performance of the Group is in line with expectations for the full year, which were upgraded in August”.

• Interestingly, however, it says ‘we believe the UK new car market has reached its natural level’ of around 2.6m cars.

• This would suggest that Sainsbury and others may have a point when they suggest that the small-ticket companies (pubs, restaurants, food retailers, general retailers etc.) could be set to see a pickup in spending towards or just after the end of this year.

Sterling:

• The Pound has had a strong few days as the international currency markets have weighed the chances of the Bank of England putting up rates against the likelihood of similar moves by the Fed and/or the ECB

• Sterling is up against both the US$ and the € over recent trading sessions and, re the €, it is almost back to the recent highs seen in the late summer.

• Movements against the US$ clearly impact the Sterling cost of commodities (not least oil) and affect the Sterling equivalent profits for US$-denominated earnings being translated by UK companies into GBP.

• The former is broadly positive for margins whilst the latter is negative on translation.

• Sterling strength against the € impacts the bed-buying costs of tour operators (positively but after a lag as the next season – and often the season after that – have been mostly committed) and impacts immediately (positively) the on-the-ground costs faced by holidaymakers when they are in resort.

• To the extent that holidaymakers bring some cash home, this may also positively impact UK pubs & restaurants

AB Foods, loading too much onto Primark’s shoulders?

• ABF down on its numbers but shares incredibly strong over the last 3yrs.

• Is too much being loaded on the back of Primark?

• Can the latter crack the US and, whilst it’s trying to do so, how will Walmart respond?

• Shares are on a mid-30s PER. That’s not a typo.

• There are no bid rumours out there that we’re aware of but, though a market cap of £27bn doesn’t make it bid-proof (witness SAB Miller), when Tesco has a market cap of £15bn, there aren’t that many potential acquirers out there.

• This suggests that the market cap needs to be supported by earnings rather than speculation of this sort.

Random information, hopefully not all of it useless (re most leisure operators etc.):

• Oil price down a bit, precious metals ditto.

• Sugar price staging a major rally. Sentiment may be against the product but it remains an input in many processed foods. The sugar price is now down only around 3% over the last 12mths.

• Just Eat shares down 6% on what look like stellar Q3 numbers. The shares may become overvalued from time to time but go figure.

• Thomas Cook getting a bad press for selling holidays cheap. Corfu tragedy still a very unpleasant episode but can’t help thinking that the company, nearly a decade and at least two management changes and a financial restructuring later, isn’t being a little unfairly judged.

• Perfect markets? Well hardly. The market is what it is but how can commodity stocks perform in the way they do when the market should have been anticipating the commodity cycle? And now we have STAN issuing paper after its shares have fallen by two thirds over the last 5yrs. Its shares, apparently, have tracked (in a much exaggerated fashion) the slowdown in East Asia when they should have taken it into account years ago.