A Day in the Life:

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

I think that the world splits into people who are optimistic and people who, well, aren’t and, though it pains me to say it, the latter group often manage to run their lives somewhat more efficiently than do the former.

Because fundamentally pessimistic people build a bit of slack into their meetings’ schedules such that traffic jams, tube delays, forgotten smartphones and the rest cause them fewer problems whereas optimistic people, such as myself, build in ‘minus ten minutes’ of slack into their days as ‘something will turn up’ and ‘it will be all right’.

Hence my diary ends up looking like a car crash and, if the normal ‘one third of meetings get cancelled’ rule doesn’t hold true, then I can end up rushing around like a fly with a blue bottom and get less done as a result. Ah, to be more downbeat. On to the news:

JD Wetherspoon Q1 IMS – Conference Call:

Q1 Update – 13w to 25 October 2015:

Following its Q1 update earlier this morning, JD Wetherspoon hosted a conference call for analysts and our comments thereon are set out below:

Trading:

Questions, not surprisingly, focused on margins. The group reiterated that the recent increase in wages was the main factor leading to reduced margins. Other costs have not really risen. Group reiterated that margin is an output rather than an input.

Is the margin trend downwards, will the FY margin be below the Q1 margin? Analysts were told that they can see when wages rose & can do their own calculations thereon.

Did staff receive two pay-rises in the year to end-Q1? Rose in October last year (5%) and then Aug (8%) this year. To some extent, therefore, margins should level off.

What wage inflation are you expecting in FY16? Don’t focus on this but think it will be between 5% and 8%

How will you mitigate rising costs? It’s a ‘fine balance’. Group doesn’t want to reduce service levels. There is ‘very little room for manoeuvre on prices.

Group is pleased on current LfLs but can’t say whether this will continue into Q2 and beyond.

Xmas bookings, any trends? Not really.

Balance Sheet, Debt & Outlook:

The group ‘is considering further disposals’. These could/should happen both this financial year and next.

What ‘type’ of pubs are you looking to sell? Tend to be ‘pubs that the group has outgrown’. There may be a small number of pubs where there is some cannibalisation

Net debt ‘will be slightly higher’ but this is not factoring in freehold disposals which, if achieved, would push debt lower.

Why are you cutting back on new openings? Group is ‘pragmatic’ and has other uses for its cash. The pubs that the group actually has opened have been performing well. JDW has been buying in freeholds where it is the lessee, etc.

Langton View: JD Wetherspoon has remained true to form – and take that how you may. The group has ‘done a Wetherspoon’ in that sales are good but margins, once more, are lower.

The group expects wages to rise by between 5% and 8% next year (to July 2016) suggesting that margins are unlikely to rise markedly in the near term. Indeed the group reiterated its view (and the view of other operators) that this was not a market in which it could raise prices.

Numbers are likely to edge back and, as expected, the group’s shares have opened lower.

With that in mind, we would not be surprised to see the group buying back its own shares. It mentioned that it had ‘other uses’ for its cash and, alongside buying in freeholds, reducing the number of shares in circulation may also be a corporate goal.

The News:

Pub, Restaurant & Drinks Producer News:

• JD Wetherspoon finishes day at lows. Downgrades likely. Co yet to reassure that it can turn margins around

• Coca-Cola Hellenic saw volumes grow 5.4% in its Q3 thanks in part to favourable weather and comparatives. Developing markets posted a positive performance, with the 10.4% increase in volumes led by Poland and Hungary, although revenue grew at a slower pace ‘reflecting adverse mix’. Established markets such as Italy and Austria also bounced back (+7.4%), while volume growth in emerging markets including Romania, Nigeria and Ukraine was ‘exceptional’ despite lagging the other groups with 2.4% growth.

• CEO Dimitris Lois commented on current trading and the group’s outlook: ‘As the year has progressed we have been encouraged by gradually improving market conditions in our European countries, where economic activity has been depressed for many years. We have also benefitted from buoyant trading in many of our emerging markets. In the remainder of the year, we will continue to manage the conditions in each of our market segments with the right mix of pricing initiatives, affordability focus and consumer offering, although the four fewer selling days will impact our volumes. Overall, we are confident that in 2015 we will grow volumes across our reporting segments as well as expand Group operating margin.’

• Latest Harden’s London Restaurant guide points to fastest ever rate of new site openings per M+C. Openings > closures by c3 to 2. Harden’s says average price per dinner at restaurants in 2016 guide is £50.51 vs £49.46 last year.

• Chilango co-founder Eric Partaker has said the Mexican restaurant group will continue overfunding indefinitely after passing its £1m target. Speaking to the M&C, Partaker said: ‘Any further funds we raise will help accelerate the roll out – it puts more ammo in the guns so if options come up faster than expected we can act… The popularity of Mexican food and the Mexican fast casual segment is fantastic but to me the number of players in the space is irrelevant because there’s always room in the market for the best.’

• Spanish restaurant group Grupo Sagardi is in talks to open in Shoreditch next year. The group currently has 30 sites across Spain, Portugal, Chile, Argentina and Buenos Aires.

• Stonegate’s The Grapes pub in Beverley will have a greater range of cask beer and a new breakfast menu once it opens following a £200,000 refurbishment.

• McDonald’s is to trial a premium range of burgers called the Signature Collection across 28 sites around London and Manchester. The range of burgers, served in brioche-style buns and priced at £4.69, will be introduced in 400 sites around the country next summer.

• UK service sector growth accelerated last month, with the Markit/CIPS service sector purchasing managers’ index up from 53.3 to 54.9.

• Store owners have bought into Halloween more this year, with increases in-store events, activities and promotions over the past few weeks.

• A poll conducted by the Grocer has found that 43% of 2,000 UK adults would support legislation banning promotions on high sugar food and drink. However, the study found less appetite for the proposed sugar tax with 60% of respondents saying such a measure would not be effective in reducing obesity.

• Morrison’s updates on Q3 trading. Total sales ex-fuel down 2.0%. Down 2.6% LfL (down 5.1% including fuel).

• MRW Q3: Says ‘we are improving the shopping trip and serving our customers better.’ Has seen ‘good progress during the quarter against many aspects of our plan.’ It adds ‘our customer satisfaction scores were again materially ahead of last year. We continue to invest in lower prices.’

• MRW Q3: Says deflation ex-fuel was 2.2% for Q3 vs last year and ‘is now 5.3% on a two year basis.’

• MRW Q3: CEO David Potts says ‘the business is moving at pace on the long journey towards improving the shopping trip for customers.’ He adds ‘our priorities for the rest of the year are unchanged – to stabilise trading, reduce costs and further improve the capability of the leadership team. We are making good progress in many areas and customers are noticing improvements.’

• MRW Q3: Re outlook, says ‘as previously guided, we expect that underlying profit before tax will be higher in H2 than H1’.

Travel & Hotels:

• There are now some 1.6bn travellers aged 50 and over around the world, according to Tourism Intelligence International MD Dr Auliana Poon.

• The British government has suspended flights to Sharm el-Sheikh amid fears that Flight 9268 was downed by a bomb. A government spokesperson said ‘we have been following the investigation closely to make sure that we take any steps necessary to ensure the safety of British citizens on flights from Sharm. That will always be our priority.’ It added ‘the [UK] Prime Minister called President Sisi yesterday evening to discuss what measures the Egyptians are taking to ensure the tightest possible security arrangements at Sharm el-Sheikh airport. While the investigation is still ongoing we cannot say categorically why the Russian jet crashed. But as more information has come to light we have become concerned that the plane may well have been brought down by an explosive device. In light of this and as a precautionary measure we have decided that flights due to leave Sharm
for the UK this evening will be delayed. That will allow time for a team of UK aviation experts, currently travelling to Sharm, to make an assessment of the security arrangements in place at the airport and to identify whether any further action is required.’

• Kuoni reports Q3 numbers says has ‘posted strong organic turnover growth of +8.0% in the important third quarter.’ It adds ‘all divisions contributed to the growth, particularly Global Travel Distribution (GTD) and VFS Global Divisions. Gross profit margin increased in the summer quarter from 16.6% to 17.1% compared to prior-year.’ Nine month revenues from continuing operations are up by 7.6%.

• Kuoni outlook. Says EBITA ‘of CHF 50 million or higher are expected, being above the expectations communicated.’ It says ‘the sale of Asian tour operating activities (India/Hong Kong) is expected to be completed (Closing) in the fourth quarter of 2015, subject to approval by responsible authorities.’ Chairman Heinz Karrer says ‘all divisions recorded positive organic turnover growth in the important summer quarter. In particular, the GTD Division recorded a significant increase of operating earnings (EBIT) in the third quarter by more than a quarter compared with the previous year. Visa services provider VFS Global posted impressively strong turnover growth. GTS Division is being extensively restructured, due to a lack of profitability, triggered by the changed market situation, particularly in the Japanese group travel market. The objective is to return
the division to profit and increase flexibility so that it can respond quickly to changing market conditions in the future.’

• Kuoni has announced that Zubin Karkaria, currently head of VFS Global Division, is to be its new CEO. Group board to be reduced in size. Chairman Heinz Karrer reports ‘the Kuoni Group has been transformed from a broadly based travel company pursuing a wide range of very different activities into a focussed global service provider for the professional travel industry and governments. Such an in-depth new strategic direction presents a number of challenges and places heavy demands on management especially in fast-changing markets. After a critical review of the strategic direction, the Board of Directors has decided to accelerate its implementation.’

Other Leisure:

• Facebook reports Q3 jump in profits on back of increased advertising. Net income +11% at $891m v $806m last year.

Finance & Markets:

• Fed Chair Janet Yellen has told congress US economy is ‘performing well’ and could cope with a December interest rate rise. She said ‘I see underutilization of labour resources as having diminished significantly.’

• World markets: UK mixed yesterday, miners strong. Europe was mostly higher but the US was down on rate fears. Far East mostly up today.

• Oil down over last 24hrs, now trading at around $48.80 per barrel.

Retail Roundup from Nick Bubb:

Morrisons The c4% share price rocket yesterday implied that today’s Q3 update (for the 13 weeks to 1 November) from Morrisons would produce some fireworks, but the -2.6% LFL is a bit of a damp squib! Morrisons blame 2.2% food price deflation and reduced vouchering, but the plan to “stabilise trading” still seems  a bit remote, even though the comps are weak and the new CEO Dave Potts says, rather lamely, “we are improving the shopping trip and serving our customers better”. The comment that “As previously guided, we expect that underlying profit before tax will be higher in the second half of 2015/16 than the first” is also rather unhelpful, so we hope management have something to say for themselves on the 9am conference call.

SuperGroup: Today’s Q2 update (for the 13 weeks to 24 October) from SuperGroup makes much better reading, with Retail LFL sales up by a heady 15.5%, helped by weak comps and the shift in the autumn weather versus last year. CEO Euan Sutherland says: “With a successful first half completed, the business is well placed for the all-important peak season and we remain confident of delivering full year profits in line with our existing guidance although comparatives throughout the second half are more challenging”.

Howden : After the recent Travis Perkins profit warning, investors may have been a bit nervous about Howden, but today’s trading update is reassuring, flagging that Howden Joinery UK depots’ total revenue in the second half of the year to 31 October (periods 7 to 11) increased by 12.8% (c10% LFL growth), despite toughening comps since June.

Marks & Spencer:
We didn’t have time yesterday to mention the M&S Food performance in H1 and it is ironic that, having moved straight on from the M&S results to talk about the weather in October, M&S blamed the poor weather in August for higher wastage of barbecue and picnic food, which resulted in a surprise 25bp dip in the M&S Food gross margin in H1. We were certainly right to say that the overall cocktail of news was good enough to push the shares up usefully first thing yesterday, given the profit and GM gross margin beat, but the weak Food gross margin was certainly one thing that analysts grumbled about, even though the embattled CEO Marc Bolland trumpeted as usual the product innovation in the Food business. Food LFL sales growth was still nothing to write home about, at just 0.2% LFL in both Q2 and H1 (with new Simply Food space adding over3% to that), and
although M&S claimed that LFL sales were consistently over 300bps better than the market they also conceded that their food price deflation was about flat. The surprisingly high UK operating cost growth guidance for H2 and the chunky “exceptional” charges for store impairments in H1 also weighed on sentiment and skewed the tone of the Q&A session at the analysts meeting in the City, with the result that the shares boiled over somewhat (after jumping by c4% first thing)…Nick Bubb – nicholas_bubb@hotmail.com

Wednesday 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:

JD Wetherspoon thoughts:

• No apologies, no nothing.

• Margin lower, estimates to be reduced.

• But yes, the group did put through 2 pay rises in the last 12mths, 5% and 8% and, yes, this could have impacted margins.

• No real guidance on whether they will finish the year above or below current levels.

• Leaves the group, which we basically support, open to the accusation that it is buying sales via low prices.

• This may have some veracity and, if true, it does limit the group’s room for manoeuvre should it go for profit at some point rather than simply sales.

• Elsewhere 1) the group is right to aim at coffee, other day parts, food in general and accommodation. But 2) this will not drive profits (and could actually have a negative impact on margins) in the short term.

• We would not be surprised to see the company buying back its own shares once more at current levels.

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

• Oil up through $50. Moves seem to be positively correlated with equity markets (which are themselves at present correlated with manufacturing output, particularly as regards China).

• Commodities; further upward moves in sugar – now down only 1% over the last year – and in cocoa:

• Other soft commodities still very weak.

• Marks’ shares rise on soft numbers. General merchandise was poor (down 1.9% LfL) with a good performance from food. The City, however, is looking on the bright side & has swallowed the M&S line that, though sales were down, discounting was reduced as a result of “a decision to focus on full price sales”. Gross margin (are you listening JD Wetherspoon) was up by some 285bps.