Langton Capital – 2016-03-04 – Whitbread, Dart Group, new openings & other:
A Day in the Life:
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If it’s spring now, then how come we’ve got a snowman sitting in the middle of our lawn?
I mean he’s a bit diminished. Looks like a large, white, wizened prune and the snow around him has gone and he’s the first (and probably the last) of the year but he’s still existent and a look at the calendar would suggest that he shouldn’t be.
But then again, it shouldn’t have been the same temperature on both the winter and summer solstices, around 15 degrees, but it was and now the weather is materially impacting leisure stocks, retailers, food producers, you name it.
Which is a nuisance. The operators in question have to then get the news across and, in doing so, they may like to start a comment with the words ‘we don’t like to talk about the weather’ but that’s as old as the hills because you know darned well that they’re then going to talk about it at length, explain how it put people off their gravy and custard (Premier Foods), disinclined them to visit the High Street for a new coat (various) and now let us know that customers are both fewer in number (see above) and less likely to buy a hot drink when the daffs are out in December.
Anyway, it is what it is. We’ll be lapping all this weather this time next year at which point it will be interesting to see whether the various companies now reporting put their then-recovery down to anything other than their own genius. On to the news:
Whitbread – Q4 Update – Conference Call:
Q4 Update: 50w to 11 Feb – Conf. Call:
Following its 50wk update earlier this morning, Whitbread hosted a conference call for analysts and our comments are set out below:
Says ‘the UK hotel market has been weaker since November’
Group ‘anticipates a pickup’ in London in the next few months – but REVPAR is likely to be flat over the coming year
Can you cut costs if market worsens? Says operational gearing is lower because of the freehold nature of the estate.
Slowing market? Yes in London, less so in regions. STR estimates London flat in year to next Feb. Says market ‘is down 3% at present’. STR is looking for 3.5% growth in the regions. PI has extensions in addition to organic REVPAR. These show in LfL sales but they do dilute REVPAR. WTB is expecting around 1% reduction in REVPAR as a result of extensions.
Extensions, 1500 this year, c1700 next. Extended hotels see REVPAR down around 3%. Across the estate, this equates to a 1% drag. Returns on extensions (no extra infrastructure etc.) are good. They tend to cost around £60-65k per room.
Group will open c5k rooms per year.
LfLs have been improving, what’s going on? Business is ‘doing relatively well’. It is the F&B offer for the PI estate.
Is 2-3% LfL reasonable going forward? Say around 2%.
Footfall on the high street and in shopping centres has been flat. This impacted hot-drink sales
Are you losing share? It is a competitive market. Being #1 is good – but it requires effort to maintain this position.
What was the exit rate? Has recently been ‘phenomenal’. Last 8wks ‘has been closer to 3%’. But it is variable.
High Street has some issues. Internet, business rates issues etc. but ‘we remain social creatures and coffee shops have a future…’
Group points to the 3% number ‘but this may be 2% to 3% for next year and thereafter. Group says it ‘is not just about LfLs, it’s about growth as well’. E.g. Express.
How does this 2-3% split between pricing & volume? Say half and half. Group has just put through its first price rise in years. Prices still lower than competitors.
Should be around 250 units next year, 50:50 UK & overseas with around 50 in China. Should install around 1,000 machines next year. Just signed with Shell to open c150 in Canada.
Costa Fresco? The store has done well. It’s just a test. Learnings ‘will be extended to a handful of stores’. There could be some back-filling to existing stores.
Group will continue to open c200-250 units per annum.
Group reiterated that it ‘will need to invest’. P&L cost will be around £15m. This is an incremental step up – it will be ongoing per annum.
Sale & leaseback? Couple of years since they last did this. They may go £100m plus. Yields are looking good (i.e. low). Won’t guide at the moment re yield.
Group will spend £700m this year and c£700m next. Debt this year should be around £900m.
Capex will clearly be influenced by the freehold-leasehold mix.
Langton Comment: Whitbread has confirmed that it is in line to hit targets.
However, the group’s comments on Costa (impacted by the weather) and Premier Inn (impacted by the slowdown in London) have arguably warranted the c4% drop in the group’s share price this morning.
Whilst FY16 numbers are secure (the year actually ends today), there will be a degree of uncertainty regarding FY17 – and indeed growth going forward.
The position will be clearer when the group reports FY numbers in April. The recovery that the group expects to have happened in the London hotel market (in order to hit flat on the year) will have either happened or not and the weather (re Costa) should have normalised.
We continue to believe that Whitbread has potentially world-beating brands in the shape of Costa and Premier Inn. However, until the outlook for the London hotel market becomes a little clearer (and we do believe that the down-cycle will become established), would-be shareholders may decide to sit on their hands with regard to Whitbread’s shares. With that (worth of the brands vs short term concerns) in mind, value is likely to emerge but we would not be in a rush to establish an overweight position.
Pub, Restaurant & Drinks Producer News:
• Whitbread shares down 6.2% as market digests numbers. Shares lurched & then lurched again as forecasts & rating tweaked
• BHS has said that it may close 40 of its 164 stores unless landlords “reduce the rents substantially” on half its stores.
• Burger chain Five Guys is on track for 30 openings in the UK this year and is close to its first opening in France.
• Christopher Snowden of the Institute of Economic Affairs has said discussions on how to tackle obesity are taking place ‘against a backdrop of collective madness’. The government has delayed the release of its childhood obesity strategy for the third time and it is now expected to appear after the summer’s EU referendum.
• Lidl is adding a range of three English wines until the end of Spring as part of its ‘Wine Cellar’ promotion, along with three Hungarian ranges. The English wines are a sparkling brut, a white, and rosé, all from producer Broadwood’s Folly in Surrey.
• Aldi introduced nearly 40 wines exclusive to its online range at its tasting this week and intends to keep its online offering at around 110-120 wines.
• The UK services sector weakened in February with a Markit/CIPS PMI reading of 52.7 marking the slowest rate of growth in nearly three years. Markit chief economist Chris Williamson said of the subdued reading: ‘Survey responses reveal that firms are worried about signs of faltering demand, but boardrooms have also become unsettled by concerns regarding the increased risk of ‘Brexit’, financial market volatility and weak economic growth at home and abroad.’
• Dart (Jet2) updates on trading for year to 31 March, says operating profit will be ‘slightly ahead of current market expectations’. It says this is ‘as a result of lower than anticipated winter losses.’
• Dart says ‘forward bookings in the Leisure Travel business for summer 2016 are promising’. This is being ‘supported by an increasing number of package holiday customers as a proportion of overall customers booked. Over 50% of the season has already been sold, which is ahead of the same stage last year.’
• Dart concludes ‘although it is still early in the leisure travel booking cycle and notwithstanding challenges in the Eastern Mediterranean, given current booking momentum the Board expects operating performance for the year ending 31 March 2017 to be broadly in line with the current year.’
• STR reports on US hotel industry for week to 27 Feb. Says occupancy down 0.2pps with rate up by 3.3% and REVPAR +3.1%.
• IAG traffic stats for Feb. Says RPK +15.8% vs same month last year (+9.5% pro-forma). Capacity +14.0% (7.2%). Premium traffic +7.0%.
• European hotel transaction volume totalled €23.7 billion in 2015, a record level and an increase of 66% on the previous year. The annual European Hotel Transactions report by HVS shows that the active portfolio transactions market is in rude health, with investors from Europe accounting for €10.9 billion-worth of transactions with activity from the Middle East up 140% to €4.4bn, and that from North America up 46% to €5.5bn. The UK was the strongest driver of transaction activity during 2015, accounting for 48% of total volume, with London seeing 63% of all single asset transactions.
• AccorHotels will spend more than £160m on five new hotels in the UK, including a flagship Novotel at Canary Wharf which will be tallest in the chain.
Finance & Markets:
• House prices in the UK continue to rise at a ‘robust pace’ according to lenders Halifax and Nationwide, with values up 9.7% YoY in February. The price rises are being driven by the continued imbalance between supply and demand.
• Brazil’s GDP contracted by 3.8% in 2015 as low commodity prices and slowing global growth held back the world’s seventh-largest economy. Investigations are also continuing into a high-level bribery and corruption scandal involving major construction projects, while President Dilma Rousseff’s opponents are attempting to impeach her over alleged accounting irregularities.
• Statistics from the US Department of Energy showed a larger than expected 10.4mln barrel rise in America’s crude inventory. The nation’s stockpile now amounts to nearly 520mln barrels.
• World markets: UK mixed and Europe down yesterday. US higher but Far East down in Friday trading
• Oil price maintaining higher levels. Trading at around $37.15 per barrel. Price is now almost 35% up from its mid-Feb lows
Retail Roundup from Nick Bubb:
Trade Press (1):
Trade Press (2): The Editor of Drapers magazine flags in her column today that International Women’s Day takes place on March 8th and thunders that “Diversity makes businesses stronger and better”. Drapers also have a feature asking industry insiders to nominate inspirational women. The main News story is that Fashion multiples and Department Stores endured a tough retail environment in February, “citing cold weather, uncertainty over a Brexit and fragile stock markets as factors that stifled trade”. Drapers also flags that the Australian flash Sales website MySale improved margins and boosted sales in its first half, as poor autumn trading/warm weather in the UK led to fashion retailers holding surplus stock.
News Flow Next Week: This has been a surprisingly eventful week, but next week gets busier, with Tuesday bringing the BRC-KPMG Retail Sales for February, plus the latest Kantar and Nielsen Grocery market share data. On Wednesday we get the Lookers finals and the Retail Business Technology Expo (RBTE) at Olympia. And then Thursday brings the Morrisons finals, the John Lewis Partnership finals and the much-awaited Home Retail Q4 update. 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:
Whitbread – sluggish trading?
• The group has great brands in Premier Inn & Costa
• But both are facing headwinds in the near term (Costa) and the medium term (Premier Inn)
• Costa’s growth slowed materially in Q4. The group put this, with good reason, down to the warm winter weather and reduced retail foot-fall.
• It says there has recently been some improvement. It will give further detail at its April FY numbers – but there may remain a little concern until the situation is clarified
• Premier Inn has a slightly bigger issue in that the UK hotel cycle, particularly in London, is past its peak.
• Not to put too fine a point upon it, London is in a downswing and the regions, though there will be a lag, may follow
• This isn’t to say that hotels per se are a ‘bad business’ as they are not. And Branded Budget Hotels arguably remains the place to be.
• The sub-sector can fish in the mom & pop B&B pool in addition to which it may aspire to take share from 3-star operators in a downturn
• Hence we could, with equal conviction, wax lyrical about short term problems or about the group’s medium-and-longer-term strengths
• Both of which would be valid but, as far as the market is concerned, both the EPS for FY17 and beyond and, perhaps more importantly, the rating attached to earnings, will be under review.
Coffee market – great but was greater?
• Still in growth, even over a mild winter, but there are some issues.
• We tend to agree with WTB CEO Alison Brittain that we are ‘social animals’ and that coffee shops appeal as a meeting place to abstemious Britons
• But online shopping is causing a problem for the High Street and, if the BRC is correct in saying that a third of retail jobs could disappear over the next four or five years, then retail footfall is likely to be diminished
• This will impact coffee sales.
• Added to which the success of coffee is hardly a secret.
• Pubs are pushing it, Gregg’s is pushing it, Pret and EAT are doing likewise and Starbucks is arguably on the up (or at least no longer sliding).
• In addition, a number of independents are threatening to out-Costa Costa leading the market leader to suggest that, just maybe, it will roll out more of a food offer
How to measure growth, LfL or total sales?
• If like for likes edge down but an operator adds units, isn’t it still growing?
• Well yes. Dividends aren’t paid out of LfL sales but rather out of total cash flow.
• A company that sells the least well-performing 50% of its units may see LfLs step up – but it will still be a smaller company.
• Whitbread made this point twice today.
• It said that REVPAR will fall when new rooms are opened at existing hotels – but total income will rise (and even LfL sales – for the hotel in question – will move better.
• It also said that LfLs were not the only string to their Costa bow. The company is still opening units and to say that it is ‘not growing’ would be misleading.
• Whilst the above new metric beds in, however, markets may be tempted to shoot the messenger.
• Oil price looks to be holding relatively comfortably above the $36 mark.
• Oil’s medium term up-trend looks to be established. Higher highs and higher lows indicative of a change in direction.
• Oh volatility, where art thou? A number of soft commodity 1yr price charts are beginning to resemble flat lines. Cattle prices, down 11% over a year, haven’t done much for six months. Similarly Robusta Coffee prices, though down 18% on a 12mth, are looking flat and Soybean prices, though down a massive 22% over the last year, have done relatively little over the last 6mths.
Random information, hopefully not all of it useless:
• Travis Perkins suggests that big-ticket sales remain strong. Says in today’s release ‘after a period of market weakness in the third quarter of the year, the Consumer division returned to good growth in the fourth quarter. This was predominantly driven by strong kitchen and bathroom sales in Wickes’. Perhaps it’s the last of the PPI money getting spent?