Langton Capital – 2016-03-07 – Daily Wrap: Capacity, input prices, property costs & 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:
Capacity, new openings etc.:
• Capacity issues remain front of mind. Today we mention Five Guys, Pizza Hut and Telepizza as amongst the large number of operators looking to put on sites in the UK
• This may mean that, with the economy hardly powering ahead, the cake has to be sliced more thinly
• This will negatively impact incumbents. Particularly any that are lazy and entitled and who haven’t yet been put out of business by more nimble competitors
• Even for those professional operators that have remained relevant to their customers, new entrants could push up property (and ultimately wage) costs
• For the new entrants themselves, however, putting on capacity could – and indeed should – lead to higher sales, profits etc.
Commodities & input prices:
• Oil stronger. Going down as we write but still holding above the $39 level. Part of the US$ price rise may be put down to dollar weakness but the oil companies still won’t be complaining.
• Gold price also firmer but down a little over that weekend. Oil / gold ratio (that is the number of barrels of oil needed to buy one ounce of gold) has fallen from 34.4 on Friday morning to 32.3 this morning. Longer term average has been in the region of 16x to 18x.
• Commodity of the day. Hogs again, recent strength continues. Price now up by some 14% over the last 12mths
• Weaker soybean prices lend weight to suggestion that ‘downstream’ foodstuff prices could remain depressed. Price now down 20% over a rolling 12mth period.
• Re property costs, as mentioned above, new entrants could be forcing prices to rise. However, the proposed BHS CVS seems to have grabbed the headlines. Whilst the nature of property law means that most rents will continue to rise even if ‘spot’ prices fall, such moves could mean that new leases may be just that little bit less expensive than they would otherwise have been
UK big ticket sales:
• Feb car sales in the UK hit a 12yr high.
• Big ticket (cars, furniture etc.) spending still seems to be holding up.
• This was meant to have abated (to the benefit of small-ticket retailers) by the end of last year.
• Didn’t seem to happen & wheedling money out of the consumer remains a feature of leisure retail marketing
• Jobs’ data in the US Friday suggest that ‘recession’ is less rather than more likely. Rate rises tentatively back on the agenda. March rise possible but unlikely.
• Meanwhile data elsewhere (Europe & China) suggests that slowdown may be taking hold. Deflation an issue on the Continent, more QE likely there from Thursday. China not to have a hard landing. Says China.
Random information, hopefully not all of it useless:
• US$ weakness a bit of a recent feature. Sterling up vs dollar, sideways vs Euro.
• Equity markets set break winning run.
• Weather. Interesting to see that warm weather in December ‘hit retailers’ and now cold weather in Feb has done the same. Makes sense for the fashion retailers at least as they will have been receiving spring & summer stock for a couple of weeks now and there will have been relatively few consumers willing to battle their way through the snow in order to buy a pair of shorts
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. Alixpartners’ Growth Co Index topped by all-day licensed café concept The Breakfast Club, which was launched in Soho in 2005
2. The Casual Dining Group is expecting sales of over £300m and run-rate EBITDA of c£50m for the year to 31 March.
3. Pizza Hut is set to open its first restaurant in over five years in 2017 in the White Rose development in Leeds
4. World’s 4th largest delivery chain Telepizza (1,311 stores in 14 countries), is seeking regional master franchisees for a UK-wide rollout.
5. The UK wine industry has set itself the target of increasing export volumes from 250,000 to 2.5 million bottles by 2020.
6. Five Guys is planning to add 30 sites to its existing 41 in the UK this year and has plans to open in Spain and France.
7. Wetherspoons has raised the prices on its Breakfast Club menu by between 5 and 10
8. Caffè Nero paid no corporation tax in the last financial year despite making a £23.6m profit and growing sales by 8.5% to £241m
9. Just Eat Boss sells c£12.5m of shares in the online takeaway delivery company at around 393p a share
10. No. of physical stores selling music, films and games has surged to a record high thanks to non-specialist vendors such as supermarkets
11. Flights from Leeds Bradford airport were delayed on Friday morning due to snow across northern England.
12. UK tourism ministers have agreed to ask the Treasury to commission research into a VAT cut for the tourism industry.
13. Cineworld down Friday on broker comment. Shares lose around 6% of value. Says ‘signs of maturity’ across geographies
14. Premier Li Keqiang has admitted that China will struggle to keep its economy growing by at least 6.5% over the next five years
15. Almost 84,000 new cars were sold in February in the UK, making for the most active month since 2004, according to SMMT
16. US economy added 242k jobs in Feb, considerably more than the 190k expected by economists
17. Interest rates in UK could fall further says ex-MPC member David Blanchflower. He says rates could stay low till 2021.
18. China’s head of state planning Xu Shaoshi has said that China will “absolutely not experience a hard landing”. So that’s settled then
19. Brent moving smartly higher. Trading at around $39.50 per barrel.