A Day in the Life:

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

So providing further evidence that my life, and indeed those of most of us in the modern world, is flying away and out of control, I saw my first Easter egg adverts over the weekend.

And the summer fashions will be displayed by the clothing retailers from February and that’s only three weeks away suggesting that, before we’ve even had our first real frosts, due later this week up north by the way, we’ll be being offered sandals, short pants and snorkels and being told that we should prepare for the kids’ summer holidays, renew our passports and check that our sun-cream isn’t out of date.

All of which could be marketed as either good planning on the part of the retailers or a somewhat weird desire to wish our lives away on the part of the rest of us. Whatever happened to living for today? On to the news:

The News:

Pub, Restaurant & Drinks Producer News:

• FT suggests there could be some over-expansion on the High Street by the casual diners. Says similar to excess supermarket growth

• The Daily Mirror has suggested that an(other) upsurge in staycations could provide a boost to British pubs in 2016

• Surely the big boys buying craft brewers should realise customers are buying craft beers to get away from the big boys?

• London underground train drivers are reported to be considering 3dys of strike action in row over all-night services per BBC

• Following reaction to the government’s new alcohol guidelines, the ALMR is pushing for greater clarity and more ‘practical, evidence-based’ information. Kate Nichols, chief executive of the trade body, commented: ‘The guidelines draw a link between alcohol intake and associated health risks, but go on to say that regular drinking levels increase the chance of dying from an alcohol-related condition by just 1%. By the Government’s own admission, drinking at regular levels is no more dangerous than a host of everyday activities. What is being lost here is the fact that low levels of drinking remain very low risk…

• ‘It is worth remembering that levels of alcohol consumption have been falling steadily and are at their lowest this century. Much of the work of the licensed hospitality sector in recent years has been focused on providing consumers with greater choice and our venues remain committed to promoting healthy, responsible drinking practices in a supervised environment.’

• The BBPA has also deemed the latest alcohol guidance, which recommends a limit of 14 units a week, to be ‘well out of line’ with comparable countries. The US, for example advises 24.5 units, France 26, Italy 31.5, and Spain a liberal 35 units a week. The guidelines also mean that more male drinkers might inappropriately be classed as ‘at risk’.

• BBPA CEO Brigid Simmonds had this to say: ‘In other countries, most guidelines recognise the difference in terms of physiology and metabolism between men and women. We want to study the evidence fully, but it is important that consumers have confidence in any guidelines and the reasons for any changes are clearly evidence-based and explained… Reducing the guidelines means that a whole new group of males are classified as ‘at risk’ drinkers and there is a real danger that consumers will just ignore the advice.’

• Miles Beale of the Wine and Spirit Association has also credited the on-trade’s efforts in contributing to a 19% drop in alcohol consumption in the UK since 2004. Beale criticised the government’s lack of industry consultation, adding that producers’ significant efforts to improve unit labelling on their products must now be continued in order to reflect the new guidelines.

• Others have questioned the applicability of the revised alcohol guidelines, including the Institute of Economic Affairs’ Christopher Snowdon. The IEA researcher predicts that guidelines will someday be reduced to zero, adding: ‘Most men will find their new 14 unit ‘limit’ laughable and rightly ignore it but guidelines are not really designed for the public. They are designed for public health campaigners. The effect of today’s change will be to drag hundreds of thousands of people into the at-risk category and revive the flagging narrative of Booze Britain.’ Henry Ashworth, CEO of the Portman Group, also drew attention to the fact that the UK has departed from its European counterparts and set an international precedent by recommending the same guidelines for men and women.

• Nichols has reported an in-line full year trading update, with group revenue of £109.3m and a good international performance making up for a weak UK performance. The group says the UK soft drinks market has ‘remained challenging’ after a 0.3% fall in sales to £84.9m, although its international business was up 1.5% and 3.9% on a constant currency basis to £24.4m. The Group’s Preliminary results will be announced on 2 March 2016.

• Five Guys is to debut in Spain this year in a joint venture and has secured a three-floor, 735sqm site in Madrid in the city’s upscale shopping street Gran Via.

• Downing LLP has put in over £3m for the roll out of bar and grill concept Potting Shed Bar and Gardens with the Burning Night Group.

• ASDA is reported to be set to cut another £500m in prices this year. This is in addition to previous commitment to cut £1bn over 5yrs. CEO Andy Clarke reports ‘we must take radical action to win back our customers.’ He adds ‘we expect that 2016 will be another year of intense pressure at a macroeconomic level in addition to sales remaining under strain from price deflation, a continued competitive background throughout the sector and radically changing customer shopping habits.’ This comes hard on the heels of comments from Sainsbury CFO John Rogers that 2016 could be a year of recovery for the UK’s grocery majors.

• Sainsbury said to be courting Home Retail for its Argos delivery hub. Some suggestions that it would sell Homebase (again) should it be successful in buying the UK general retailer.

Leisure Travel:

• Sales of Irish hotel assets exceeded €1bn in 2015.

Other Leisure:

• Two ticket purchasers shared UK record lottery jackpot over the weekend. Getting one number out of 12 correct, Langton was not among them

• Music legend David Bowie dies from cancer, aged 69.

Finance & Markets:

• US nonfarm payroll numbers surged in December in a move that reinforced the opinion of some observers that Fed will raise rates in March

• US nonfarm payroll numbers up by 292k in Dec per US Labor Department. Unemployment rate steady at 5%, a 7.5yr low

• UK trade deficit down in Nov on back of cheaper oil. ONS says deficit was £3.17bn in Nov down from £3.51bn in Oct.

• Bank of England reports that interest rates for savers are hitting new lows. Average rate on ISAs now 0.85% in Dec from 0.99% in Nov

• Household debt at 5yr highs per TUC analysis. Says UK households are in debt to the tune of c25.5% of annual income. The numbers include student loans but do not include mortgage debt

• World markets. UK down Friday after early bounce. European markets lower, US also & Far East down in Monday trade

• Oil price back down below $33. Trading at around $32.90 per barrel

Langton Food Retail Index – The Grocer’s Dozen

It has been a busy week for the companies covered in our Food Retail Index, with the underperforming Poundland racking up another profit warning, Majestic impressing, Marks and Spencers getting rid of CEO Mark Bolland, Card Factory poaching B&M’s chief operating officer, and the news that Sainsbury’s has been gauging appetite for a potential takeover bid for Home Retail.

Grocers

The big news in the grocers remains Sainsbury’s covert approach to buy Home Retail back in November (for c£1bn) and its subsequent approach to shareholders. Such a move suggests that the grocer is committed to pursuing a deal and sees real value to be made.

Home Retail’s Argos business may be up against a ruthless e-tailing giant in Amazon, but the group has nevertheless invested heavily in its logistics, store formats, and marketing (having stepped foot inside an Argos store at the weekend, there has been a marked improvement, although the overall shopping experience remains as harrowing as ever).

On top of all this Home Retail has net cash of £193m and another c£550m in net store card debtors, so a deal could prove immediately balance sheet-enhancing for Sainsbury. Home Retail’s largest shareholders – Old Mutual, Toscafund, and Schroders, are all said to be keen for talks to be revived.

Specialty/Wholesale

Majestic Wine had a very strong week, rising 19% to 357p on the back of strong results for the ten weeks to 4 January (an important period that accounts for as much as 30% of the group’s total annual sales). Group total sales were up some 12.2% and retail sales (the group’s biggest division) increased 7.3% LfL, ‘supported by the previously indicated strategic investments to reinvigorate sales growth.’

The new three-year strategy has resulted in higher costs and a lower gross margin percentage, although this was management had warned previously that this would be the case.

Naked Wines has continued to grow strongly, with sales up 28.9% year on year, while Majestic Commercial also saw sales up 10.2%. The figures should go some way to reassuring investors who put their faith in CEO Rowan Gormley’s ability to graduate from helming an up-and-coming internet company to helming a stumbling retail operation with an up-and-coming internet business attached to it.

Shares remain expensive on the surface and hard to value in the long term, while competition with the supermarkets, discounters, and other online operators may intensify further. However, the group is acting to change its future and we await further updates with interest.

Discounters

Poundland continues to have a rough old time, down another 19% to 166.9p after adding to its growing collection of profit warnings.

LFL sales were down in the key Q3 period (the 13 weeks to Dec 27th) and total sales were just 6% for the core Poundland business (ex the 99p Stores acquisition). Management described the performance of new stores as ‘broadly’ on budget – a vague and not altogether reassuring description. Furthermore, declining high street footfall means that LfL sales could be down as much as 4%, despite softer comps.

The news that the group is trialling a multi-price discount format, rather than reassuring, makes us wonder: why not invest in B&M instead? It is already hundreds of stores into such a strategy, has a heavyweight board, a proven sourcing model and a higher operating margin. Jack Brumby – jack.brumby@langtoncapital.co.uk

Retail Roundup from Nick Bubb:

Saturday Press (1):
The big story in the Saturday papers was the shock Sports Direct profit warning on Friday morning, which the Guardian deemed important enough to put on its page 2, noting our view that the main problem for Sports Direct at Christmas was not the weather but JD Sports’ better range of brands and better-looking stores. The Telegraph highlighted that one long-term supporter, the Odey hedge fund, has been significantly reducing its stake in recent weeks. Apart from the headlines about much the 15% share price collapse cost Mike Ashley and the likelihood that Sports Direct will now drop out of the FTSE 100 index, the editorial comment was pretty scathing too, with the Independent thundering that “things have just got more a lot more serious”, the Daily Mail noting the “increasing distrust in an empire with values that are out of touch with current business
culture” and the Times trumpeting that “Mike’s lost his touch in front of goal”. And, to rub the salt in the wound, the Times flagged, coincidentally, that Mike Ashley is being sued by Jeff Blue, the former banker turned Sports Direct’s M&A adviser, over a £15m bet allegedly made in a pub!   

Saturday Press (2):
In other news, there were several mentions of the good-looking 15% Christmas sales growth reported by the outerwear specialist Mountain Warehouse, whilst the main story in the Daily Mail was that Sainsbury is ramping up its jv with discount store Netto (having lodged applications for 10 more sites) and the FT carried an interview with Waitrose MD Mark Price in which he made gloomy noises about future industry margins. The FT also had a big feature about the threat to High Street retailers posed by the surge in Online shopping, in which it noted our view that only 15% of M&S’s Non-Food sales are made Online. The editorial by veteran commentator Chris Blackhurst in the Independent noted the problems that new M&S CEO Steve Rowe will have in improving M&S’s struggling Clothing operation and also flagged that Sainsbury see Argos as the best hope of stopping
the Amazon juggernaut. The Times also highlighted that several members of Sainsbury’s top team, including Chairman David Tyler, know a lot about the Argos business, from previous jobs. The Independent market report led with the news that Boohoo has been downgraded by Panmure Gordon, whilst the FT and the Times’ market reports led with the news that Barcap upgraded Tesco on Friday. Finally, the Yorkshire Post noted, loyally, that Asda has bought 2 food manufacturing companies and the Daily Express had its traditionally gloomy front page story about “the weather”, headlined “Big Freeze to Last a Week”. 

Sunday Press (1):
The two big themes in the Sunday press were the Sainsbury bid for Home Retail and the resignation of Marc Bolland as Marks & Spencer CEO (see below), but there were plenty of other stories and the main story on the front page of the Sunday Telegraph Business section was headlined “Asda warns of more Retail turmoil”, with Asda CEO Andy Clarke announcing £500m of more price cuts. The Sunday Telegraph also had a big two-page spread on the aftermath of Christmas trading, headlined “Christmas mourning as tills fall silent”, including previews of the trading updates next week. On individual companies, the Sunday Times flagged that House of Fraser would announce decent 5% sales growth at Christmas and the Sunday Express highlighted that Greggs is still “on a roll”, but the Observer noted that the City is braced for more bad news from Burberry
about trading in China. And the Observer stuck the boot in on Sports Direct again, flagging that investors only put up with Mike Ashley’s antics when business was booming…

Sunday Press (2): There was plenty of coverage of the Sainsbury bid for Home Retail and the top story in the Sunday Times Business section was that some excitable Home Retail investors are demanding a bid of over 200p (ie £1.6m, £500m more than Sainsbury’s first approach), whilst the Mail on Sunday flagged that Sainsbury is trying to drum up shareholder support for a more modest £1.2bn bid. The Sunday Times also had a separate feature on why Sainsbury CEO Mike Coupe sees potential in a tie-up with Argos, but the Sunday Telegraph flagged that a giant hedge fund WorldQuant has opened up a big short position in Sainsbury on the back of its move for Home Retail.

Sunday Press (3):
There was also plenty of coverage of the resignation of Marc Bolland as Marks & Spencer CEO and the Sunday Times had a detailed feature on his time at the business, headlined “Nice food, shame about the frocks”, and the Business Editor also inveighed about the millstone of M&S Clothing, concluding that shareholders will “judge his tenure an extremely limited success”. The Business Editorial in the Sunday Telegraph also mocked the claim of M&S Chairman, Robert Swannell, that Bolland’s departure was nothing to do with the Board, thundering that “Mr Bolland should in truth have gone have gone a long time ago”. Finally, it was interesting to see that the Sunday Times issued a modest apology to M&S for insinuating last week that it “sneaked” out a hefty cut to sales forecasts before Christmas through Nomura (it
said that Nomura acted “independently and without any input from M&S”).

Today’s Press and News: There are plenty of previews in today’s papers of the weak Christmas sales expected to be announced this week by the big supermarkets and the headlines are pretty similar, eg “Supermarkets suffer tough festive period” in the Guardian and “Tidal wave batters UK supermarkets” in the Daily Mail. The Telegraph flags that AO World should have picked up pace at Christmas (although its preview gets the date wrong: the AO update is tomorrow, not today). The “Small Cap” column in the FT has a detailed look at Poundland, arguing that the weak Christmas sales figures are a portent of the challenges ahead for the business.  The only Retail news out today is that SCS has appointed a new FD and that the struggling Indian Online fashion retailer Koovs has issued a bullish trading update.

News Flow This Week:
The big focus this week will be on the Food Retailers, with the Morrison’s Xmas update tomorrow (just before the latest monthly Kantar and Nielsen Grocery market share data), the Sainsbury Q3 on Wednesday and the Tesco Q3/Xmas update on Thursday, whilst tomorrow also brings the Greggs pre-close and the Booker Q3 is on Thursday. Tomorrow also brings the BRC-KPMG Retail Sales for December (see above), the long-awaited Debenhams IMS, the AO.com update and the Boohoo update. Wednesday brings the Ted Baker update, the Shoe Zone interims, the Dunelm Q2 update and the Game Digital AGM update. Then, on “Super Thursday”, we also get the Home Retail update, the ASOS update for Q1 (4 months), the Burberry Q3, the Mothercare Q3, the Moss Bros Xmas update, the ABF (Primark) Q1, the JD Sports Xmas update and the SuperGroup Xmas update, whilst the Debenhams AGM is being held
that day. Then Friday brings the Bonmarche Xmas update. Phew! Nick Bubb – nicholas_bubb@hotmail.com

Friday 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:

Alcohol guidelines:

• Nanny state etc.; those points are all well-made elsewhere.

• The easy stuff (too much alcohol is bad, being drunk is sub-optimal etc.) is agreed by all parties.

• Hence the debate, which is kept alive in part by paid lobbyists, salaried journalists, remunerated charity bosses and the like, is about how much is too much

• So just a few questions.

o Whether 14 units is the right number or the wrong number, how can one size fit all, not least across the genders?

o If the required calorie intake, oxygen intake, heat output etc. is different for men and women, how can the alcohol figure be the same?

o How can hospital admission figures etc. be rising when alcohol consumption is falling? Could there not be a third factor, different categorisation of complaints, for example?

o Accepted that ‘too much’ alcohol is bad, is enough attention being paid to causality (or the lack of it) versus a link by association/simple correlation. No stats whatsoever here but it’s likely that tattoos are positively correlated to alcohol intake – but there is no causality. Okay, so there’s the odd regrettable stag night…

• We could go on but feel that this is getting a little stale already. The news has achieved at least one of its aims in that it has kept the news presses rolling, the lobbying industry in employment etc.

When are ‘special’ offers not so special?

• Well when they’re every-day, of course.

• See earlier email (A Day in the Life) for comments on printer ink, pizza offers etc.

• See also detail on proportion of bottle premium ales now on ‘offer’.

• Typically this is three (£2) bottles for £5 and, once the consumer has paid £5, why would he/she pay £6.

When is a supportive 25% shareholder a monkey on your back?

• Ask J Sainsbury.

Sugar, back in the news:

• Perhaps it’s not possible to take the politics out of the politician. By this we mean that an easy, consensual topic (don’t be fat, be healthy) is always a more attractive topic than a thorny, perennial, potentially career-destroying subject (like education, health etc.)

• Hence sugar is back in the news.

• Sugar, a relatively soft target, is back in the news – see earlier email, BBC etc. for details.

• A tax may work. See Mexico data, plenty online.

• It’s hardly libertarian non-interference but, compared with addressing inequality, religious strife, the Middle East, the demographic time-bomb, the impoverishment of youth by the baby-boom generation etc., it must be an appealing topic.

• What next, vilify bacon?

Single ‘product’ companies.

• Is Poundland a good idea?

• I mean if you own the company, I can see that the position has to be justified to some extent but, if you can be B&M (and sell everything to everybody at every price), then why be Poundland and sell everything for a quid?

• Perhaps that’s a gross oversimplification.

• Or perhaps not as Nick Bubb writes this morning ‘the other new news was that Poundland confirmed that they would trial a multi-price format in the spring, taking 6 of the Family Bargains stores inherited from the 99p Stores deal…’

Oil price bounce; can you see it?

• The oil price is off the bottom. But a glance at the chart shows that this is a twitch in what has otherwise been a downward slope

• Brent now off around 30.6% over the last year.

• Interestingly gap over West Texas is down to circa zero.

• Against such a backdrop, it’s arguably strange to see the natural gas price has been strong recently.

Random information, hopefully not all of it useless:

• Retail stocks hogging the headlines, Christmas, mild weather & all that. Retailers in the winners & the losers yesterday, mostly news driven. Good performers included Next (bounce), M&S (CEO jettisoned), Home Retail (bounce post drop post bounce post bid approach), Supergroup, JD Sports & others. Fallers included Poundland (poor numbers) B&M (sympathy) and Sports Direct.

• Retail Week features an interview with SBRY CFO John Rogers suggesting that 2016 could be grocery’s year of recovery. Good luck with that.

• Bit of a bounce going on. Oil price, equity markets, you name it. Most things are just peachy.

• We didn’t quite hit our 24 August lows but, that said, the major US indices have already made their worst start to New Year trading on record.

• And all’s not quite so well in the currency markets. Sterling down vs both US$ and Euro. No big moves at this stage but such a drift, if maintained, would put upward pressure on prices.

• That may be seen, at this stage & in the virtual absence of inflation, as much the lesser of two evils.

• No sooner is the bounce in gold visible to the naked eye than the metal goes into reverse. Price down as risk assets become more attractive. This on a very short term view. Partially driven by the move in China to suspend its market ‘circuit breakers’. Hardly the strongest of fundamental reasons.

• Cocoa price gone sharply into reverse. Price of sugar still high but other inputs, e.g. soybean meal, still extremely weak.