Langton Capital – 2015-12-16 – Domino’s, Starbucks, Pizza Hut, interest rates & other:
A Day in the Life:
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Find previous emails at http://www.langtoncapital.co.uk/daily-notes/
I think you know that it’s the run up to Christmas week when the motion sensors in the office loos haven’t even turned the lights on by 8.50am.
I mean it’s possible that my fellow office-workers have been either holding it in or have crept to the loo so surreptitiously that they haven’t registered their presence, but that’s not really very likely, is it?
It’s more reasonable to assume that they are still home abed. Either that or they’re still blundering around somewhere after last night’s excesses because, as Langton returned (to the office, honestly) after another meeting yesterday evening, the pavements, despite the filthy weather down here in London, seemed crowded with drunk, nearly-drunk and wannabe-drunk people – and that was only 6pm. On to the news:
Pub, Restaurant & Drinks Producer News:
• Domino’s UK forms enlarged JV with Australian franchise operator to run the former’s troubled German business. Domino’s German had lost £37.4m in the year to end-Dec 2014, quite an achievement for a chain of only 20 units. Australian franchisor currently owns the name in Australia, New Zealand, France, Belgium, the Netherlands, Monaco and Japan.
• New Domino’s JV will be 2/3 Australian-owned, will buy Joey’s Pizza for up to €79m. Will then have 227 German outlets.
• Domino’s. Says JV ‘is a transformational deal for our German operations, creating the new market-leading pizza delivery operator.’ CEO David Wild says ‘our strategic stake in the joint venture positions [us] to capitalise on the significant future growth potential of this profitable and scalable business. We look forward to partnering with DPE [the Australian franchisee].’
• Domino’s UK says deal will ‘bring together both DPG’s German operations and Joey’s Pizza, becoming the single largest pizza delivery operator in Germany with around 227 stores.’ It says ‘the transaction is expected to be earnings enhancing on an underlying basis for DPG in 2016 and realise significant value over time.’ Deal will see DPG ‘receive a fee of up to €25 million (£18.2 million) from DPE which will be payable in six annual instalments, dependent upon the German JV achieving various levels of profitability.’ It says ‘DPG will have representation on the board of the German JV and also other minority protections.’
• Starbucks managed to pay £8.1m in corporation tax over the 12mths to end September. This is more than it had paid in the entire 1998-2012 period. The group says ‘before and after tax profits are both up by more than £30m as we have invested in the store experience while managing our costs.’
• Starbucks UK reports 3.8% increase in LfL sales for year to end-Sept. Profits up from £1.9m to £34.2m.
• Starbucks’ sales in the UK fell in the year to end-Sept as the group closed some 17 loss-making stores.
• Ex-Diageo CEO Paul Walsh and TPG Capital are in talks to buy the Grolsch and Peroni beer brands put up for sale as part of AB InBev’s purchase of SABMiller. Analysts have valued the two brands at £2bn.
• Pizza Hut UK has posted LfL sales growth of 6.2% for the year to 29 November and is now halfway through refurbishing its estate. The group said that each revamped site has benefitted from a 10-40% sales uplift, with a further 71 sites having been refurbished this year. CEO Jens Hofma commented: ‘Already our refurbished estate has played an instrumental role in our business success. The next year will be hugely important and I believe there has never been a more exciting time in the business.’
• Coffer Group is anticipating a slowdown in leisure investment sector transactions going forwards due to a shortage of prime properties coming to the market. Managing director Mark Sheehan said: ‘Yield compression will come to an end, and investors will need to rely on rental growth to generate returns and profit. Some softening in the leisure commercial property market is quite possible. We will also see more sale and leasebacks in the pub sector as operators capitalise on buoyant property prices and enabling them to reinvest back into growing their business.’
• Brakspear has purchased the Frogmill Inn near Cheltenham as it builds its presence in the Cotswolds. Chief exec, Tom Davies, said: ‘We’re delighted to have acquired the Frogmill Inn. It is a great pub in a great location and bolsters our presence in the Cotswolds, where we have bought two other pubs this year. We’re looking forward to working with the Frogmill’s lessees, Wheelers of St James, to maximise the site’s potential.’
• Laithwaite had its busiest online wine-buying day of the year on Monday and expects to make around half of its Champagne and Prosecco sales over the Christmas period.
• US chain Earl of Sandwich is returning to the UK with a site at the Bluewater shopping centre.
• YO! Sushi is preparing to run its first dedicated bar in its new restaurant in Chelmsford, a further instance of evolution involving an encroachment on the traditional territory of other operators
• DP Poland non-exec and ex-Domino’s UK CEO Chris Moore has bought 440,000 DPP shares, taking his stake in the company to 1.27%.
Travel & Hotels:
• Elegant Hotels FY revenue rose 4.3% to $60.1m, with growth in average daily rates (+5.7% to $373) and RevPAR (+4.9% to $255) helping to drive a 12.7% rise in adjusted EBITDA to $22.2m. Adjusted EPS increased by 15.7% to 14.7 cents and net debt has been brought down 61.2% to $40.8m following its AIM listing on 26 May earlier this year. Its shares are up over 10% since that time at 112p. The group, which has five premium freehold hotels housing 483 rooms and a restaurant in Barbados, has a market cap of £98.14m.
• CEO Sunil Chatrani commented: ‘This has been a landmark year for Elegant Hotels. We achieved strong revenue and underlying profit growth, and demand for Barbados as a tourist destination remains buoyant, with arrivals and flight capacity both continuing to improve. The Group’s admission to AIM in May has provided us with a great foundation from which to grow and expand, both organically and through acquisitions in Barbados and the wider Caribbean. 2016 promises to be a year of further significant development, and we are excited about the future prospects for the business.’
• Kuoni Group has sold its ‘Neue Hard’ property in Zurich to Zürcher Kantonalbank for CHF 75m, completing the streamlining of its property estate in Switzerland.
• Japan Airlines is suspending its flights between Paris and Tokyo Narita in the wake of November’s terrorist attacks. A spokesperson said that the carrier will instead focus on its daily Paris-Haneda service, which has seen a 40% fall in demand.
• Thomas Cook has closed its bedbank Hotels4U, purchased for £21.8m in 2008, and will list the brand’s hotels instead on thomascook.com. The leisure operator said: ‘The marketing strategy for Thomas Cook has changed significantly over the last year, with an increased focus on the Thomas Cook master brand, particularly in the consumer facing, hotel-only space.’
• London hotel occupancy fell 3.5% year-on-year in November to just under 82% and RevPAR dropped 1.4% to £122.38, according to STR Global.
• Bwin announces court approval for GVC merger.
Finance & Markets:
• UK inflation back >0 for the first time in 4mths in the year to Nov. ONS says prices +0.1% last month from minus 0.1% in Oct. This move was despite a softening in clothes prices year on year.
• US inflation excluding food & energy moved up to 2% in November reports the US Labor Department. Inflation up to 0.5% including food & fuel in the year to November
• UK house prices rising strongly reports ONS. Says prices up 0.8% in Oct with the annual rise up to 7% from 6.1%. ONS says ‘upwards pressure on house prices may be a result of a shortage of supply and a strengthening of demand in the housing market, a view supported by a number of house market indicators.’
• B of England governor Mark Carney has he is concerned about high levels of lending to landlords re buy to let properties. He says ‘there are a number of things happening … we are watching it closely and we will take action.’
• World markets: UK market strong yesterday on bounce from 3yr lows. Europe also rallied, US higher and Asia up on Weds trading.
• World markets. Volumes reasonable given on-going Fed meeting, announcement due after Europe closes this evening
• Oil price bounced yesterday, trading at around $38.30 per barrel.
Retail Roundup from Nick Bubb:
Bonmarche: Today has brought a double-whammy of bad news…first Bonmarche announce that CEO Beth Butterwick will step down after four years with the Company to join Karen Millen as Chief Executive, then they announce a huge profit warning because of the mild weather!
Carpetright: The highlight of yesterday’s Carpetright interim results meeting was when the estimable new CEO Wilf Walsh thundered that the business would deal “aggressively” with its property portfolio and cut its UK rent bill. He also revealed that the average transaction value on interest-free credit is £1200 (four times the company average) and that the Carpetright store with the highest penetration of underlay sales is in Glossop! On a more serious note, he admitted that the biggest worry about H2 sales growth was the fact that consumer confidence is “fragile” and the economic recovery is “slow”. Nick Bubb – firstname.lastname@example.org
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:
The number of licensed units:
• See earlier email for comments re the Alix Partners / CGA Peach Growth Monitor.
• Is an increased number of units a) a sign of robust health or b) an indication that the number of new entrants is something of a problem at a time of sluggish demand and customer retrenchment?
• The monitor suggests ‘the figures are more evidence that the licensed trade is back in growth after years of steady decline, mostly driven by the closure of drink-led pubs.’
• And this is true – but the growth being measured is the number of units open rather than the sales taken per unit – let alone the profitability of the industry as a whole or of the individual players within it
• Because it is perfectly possible for an industry to be in ‘robust’ growth but for all the players within it to be making less money
• A 0.6% increase in the number of units open in a year may not be a big number taken on its own but, if the number of units opening are on average larger in terms of scale than the units closing (and they are), then ‘capacity’ has actually risen by more than the 0.6% suggested.
• This is perhaps indicative of a state of affairs in which the incumbents are there to be shot at but in which nimble new entrants are able to succeed
The coffee market:
• So the UK coffee shop market is huge and growing (see earlier email).
• This accords with the evidence of one’s own eyes though we would suggest that the fact that Costa, Starbucks and Caffe Nero have little more than 10% of the 30k strong market
• Admittedly the three majors have around 53% of the branded coffee shop market but even the market leader, Costa, with 6.6% of the market, could still have room to grow
• We have believed for some time that there may be room for a ‘not-Costa’ brand but, if this were to be artisanal in nature, it may be self-limiting in terms of scale
• An alternative could be to grow an operation without overt branding
• Very different markets, admittedly, but Dignity has managed this with funeral directors and CVS with veterinary practices etc.
The Nudge principle, National Living Wage, payroll taxes, apprenticeship levies and non-tax payers:
• Reducing corporation tax will help tax paying companies.
• Less so those that do not pay tax.
• Whilst the NLW, payroll taxes & apprenticeship levies etc. will be paid by all operators.
• There’s justice of a sort.
Black Friday, good riddance (part II):
• The BRC would have us believe that Black Friday, which featured a large number of online offers, has been responsible for actually reducing High Street footfall in November.
• True, this is part-due to the tough comps caused by a strong Black Friday last year but, with discounts impacting margins and consumers always hard to wean off discounts once they have received them, this is not altogether helpful.
• Any moves to further weaken Black Friday may be welcomed by a number of on-trade, food and general retailers.
Random information, hopefully not all of it useless:
• So food price inflation is set to ‘bounce back to 0%’? For those who can remember the price rises of the early 80s and even the 70s, that’s not saying much.
• Fed tomorrow. Announcement after European markets have closed.