Langton Capital – 2016-01-18 – Daily Wrap: Tracker, restaurant capacity, CAKE, oil prices & other:
Leisure Wrap & Other:
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. As always, contact us if you’d like further details:
• It being the middle Monday in January, we are statistically living through the most depressing day of the year.
• Having said that, Langton is buoyed by the warm afterglow of a 6-0 Hull City victory on Saturday.
Coffer Peach Tracker for Xmas period:
• See earlier email for detail.
• Main take-away points:
o Wet did better than food. Warm weather & Xmas.
o London performed in line with the provinces. A recent first & perhaps a sign of exhaustion in the Capital?
o London restaurants performed less well than those in the provinces. This is a capacity issue. We have opined at length. New entrants may perform well themselves, but the cake (which until now has admittedly been growing) must be sliced more thinly.
o Total sales were +5.2% with LfL sales +1.8% and the balance made up by new capacity. Capacity growth is running in excess of GDP growth. That can’t go on forever.
• The note of caution introduced by Coffer is interesting. Director Mark Sheehan says ‘looking ahead we do predict a tougher 2016 with a marked downturn in consumer confidence and strong completion in the sector from the many expanding restaurant, bar and pub groups.’
• Coffer has previously noted that ‘even tall trees do not grow to the sky’ and has suggested that property costs are perhaps a shade high.
• So what to do? First, we, Coffer & history may be wrong; perhaps London will grow to the sky. Second the regions are OK. Third, some new entrants will perform extremely well. Fourth the ‘industry’ may prosper whilst many if not most of the players in it struggle. Stock selection is key.
Restraint (lack thereof) and Restaurant Capacity:
• The Tragedy of the Commons – see – here
• What is good at the micro level may be damaging at the macro.
• In the restaurant market, there is little if any evidence of a self-correction.
• The fact that there is too much capacity, therefore, may be drilled home only when profits fall, rents can’t be paid, the VAT man comes calling etc.
• This is an issue caused by the few (some of whom may do really well) but affecting the many.
• The impact may come through higher rents which, once elevated, are extremely sticky on the downside.
• Labour may be bid up, customers may become demanding, entitled etc. Discounting may follow, bring with it lower margins, worse cash flow etc.
Highly rated companies, Patisserie Valerie:
• Gregg’s and Restaurant Group’s shares fell sharply last week as did shares in Cineworld.
• But the shares of Patisserie Valerie also fell sharply. They are now down by around 25% in a week.
• Yes, in a week.
• And, whilst we do not doubt that the shares were a ‘sell’, nothing is really going wrong.
• But, when ratings are examined forensically, growth prospects are analysed and fund managers are looking for profits to book, this is the kind of thing that happens.
• One manager dashes for the exit, so does another, the shares fall and, before too long, the cart is being put before the horse and people may be suggesting that the share price move is ‘trying to tell us something’.
• When in fact it isn’t.
• That’s not to say that the shares couldn’t concede more ground. They trade, even after their fall, on around 25x this year’s earnings and yield about 0.8%.
• Today we refer to the growth of the serviced apartment market.
• Also the growth in Chinese tourist numbers.
Interest rates and the stock market sell-off:
• It’s a silver lining, but it comes at a price.
• Lower oil, no inflation & weaker stock markets do make it somewhat less likely that the US will put up interest rates the expected 4x 0.25% this calendar year.
• Betting has already shifted to perhaps two rises with the first the other side of the summer, likely September.
• The UK remains some two to four moves behind the US. Betting here is now for end-2016 or sometime in Q1 of 2017.
Iran and the oil market (very briefly):
• Iranian rehabilitation has been well-flagged.
• The oil market should have discounted Iran’s re-emergence long since
• Sometimes this pricing in happens, sometimes it doesn’t
• Efficient Markets Hypothesis be damned, emotion matters
• Iran is c1m barrels a day (bpd) at full pops, it is c100k now
• World oil supply is c97m bpd (and it may rise). Demand is 96m bpd (and may fall).
• The above is negative re pricing – but it should not be a shock.
Random information, hopefully not all of it useless:
• Retail had an extremely busy week last week. We would suggest that it may be worth sparing the time to read through Nick Bubb’s earlier contribution alongside our own Food Retail Index and Leisure Retail Index comments this morning.
• Oil price trying to bounce. Traded below $28 at one point. Goldman target of $20 looking not unreasonable.
• Markets try to open higher then fall
• Sterling a little higher vs both US$ and Euro
• Commodities bar gold all pants. Gold bugs dusting off their buy stories. But to put the bounce in gold in perspective, price is still off c16% over the last year.
• Having said that commodities are priced cheaply, the sugar price is pretty high. Basic sugar is 14.92 cents per pound whilst white sugar is selling for $427.20 per ton, up around 6.9% over the last year. For anyone looking to store a few quid’s worth, you should be aware that it is sold in contract lots of 50 tons.
• CPI tomorrow. There is no inflation.
• US closed today. Don’t look for guidance to New York.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Coffer Peach Tracker shows Xmas & New Year LfL revenues +1.8% across major UK restaurants + food led pubs
a. Tracker: Says ‘drink-led pubs and bars see best of the seasonal uplift’. Says Xmas came late but was strong.
b. Tracker 6wk data to 3 Jan shows ‘little difference…in the performance of London against the rest of the country.’ That’s a recent first
c. Tracker: Says ‘drink-led managed pub + bar businesses, which collectively saw a 3.1% LfL increase over the same period last year.’
d. Tracker: Has LfL sales +4.5% in each of the last two weeks of December.
e. Tracker: Says restaurants less strong than bars with best trading outside of London. Supports our view re potential London capacity issues
f. Tracker has total sales +5.2% (LfL +1.8%) showing the material impact of new openings. Capacity issues upcoming?
g. Tracker: Notes of caution. Coffer says ‘we do predict a tougher 2016 with a marked downturn in consumer confidence + strong completion’.
2. Trade bodies Camra, BBPA, SIBA have urged MPs to back another Beer Duty cut in the upcoming Budget
3. Castle Rock has created a hybrid 7.7% ABV ‘bwine’ drink made from the fermentation of both malted grains + Pinot Grigot grapes
4. Japanese brewer Suntory has ruled itself out of bidding for Peroni and Grolsch, according to reports
5. Caffe Nero is teaming up with Middle East hospitality group Al Tayer as it looks to expand its portfolio in the region
6. Serviced apartments are now a ‘mainstream’ accommodation choice for business travellers, according to Booking.com
7. A total of 109 million outbound Chinese tourists spent a record $229bn in 2015, according to stats from GfK.
8. Terrorism continues to overshadow the leisure travel industry after further killings in Central Africa over the weekend
9. Reuters has reported that PE group Arle Capital, owner of Spain’s theme park operator Parques Reunidos, is considering an IPO
10. Oil prices plumbing new depths. Trading at around $28.70 per barrel after sharp falls on Friday. World markets down in sympathy