Langton Capital – 2016-07-01 – Brexit, recession, inbound visitors & other:
A Day in the Life:
So am I missing something here, is there a plan?
Because if there is, it’s by no means obvious to me.
The guys that were running the show last week have either gone or may be going and, whilst Boris might have been scheming and manoeuvring, he’s now imploded in a shower of vengeful sparks leaving us with, well, what?
And I get it, I really do.
Having been brought up in Hull I know what alienation means perhaps better than most but I can recognise a protest vote when it smacks me in the face and I can also draw a parallel between last Thursday’s ballot and the fact that rioters, who see themselves as having relatively little to lose, tend to burn their own neighbourhoods to the ground.
But the fact that things like this happen doesn’t mean it’s necessarily a good idea.
So using ‘democracy’ or ‘the people have spoken’ as some sort of argument-ending mantra seems to me to be somewhat self-serving when a large number of the 52% who voted to Brexit are probably even now wondering what on earth they have done.
Just to say I’ve never been in a box so please don’t feel the need to email telling me to get back in one. On to the news:
RECENT WEBSITE ARTICLES:
• Small vs large ticket items – here
• Recent notes – here
• Ongoing tweets, older emails found – here
LEISURE & ECOMOMIC NEWS – BREXIT SHOCK:
• Pubs & restaurants:
o PMA says majority in pub trade wanted Brexit but also reports many operators contacted now think it will negatively impact trade
o PMA quotes commentators as saying Brexit vote could push UK into another recession
o PMA quotes Oakman Inns’ CEO as saying ‘I am obviously disappointed with the result and I believe that the wrong choice has been made’
o JDW’s Tim Martin says we’ll be more democratic & suggests that will spur growth.
o Property Week says a number of deals ‘well under way’ pre-referendum ‘are now under a cloud of uncertainty’. Says buyers will ‘at least seek a renegotiation on price.’ It quotes a number of specific deals.
o Conflicting views. Some talk of overseas buyers snapping up cheap-Sterling buys, others suggest 40% drop in London values.
o Green Street Advisors has forecast an initial drop of 10% in London commercial property values with the City down 12% & W End 8% down. It says ‘the City is expected to be hit harder and is likely to see a bigger fall-off in demand because it has a large banking and financial tenant base.’ It adds ‘the development pipeline is also skewed to the City.’ Green Street believes that office properties will be more impacted than will retail.
• Far East property buyers:
o Singaporean bank UOB has said that it will not lend to its nationals or others against London property in the face of uncertainty re values. It says ‘we will temporarily stop receiving foreign property loan applications for London properties’ adding ‘as the aftermath of the UK referendum is still unfolding and given the uncertainties, we need to ensure our customers are cautious with their London property investments.’
o Singaporean bank UOB tells potential UK property buyers ‘to assess the situation carefully before committing to their purchases’. It says ‘there could be potential foreign exchange and sovereign risks.’
• Domestic players:
o UKinbound CEO Deirdre Wells described the result as “disappointing” but added that members were ‘resilient’. This time in the face of self-imposed adversity.
o Merlin boss Nick Varney has pointed out that a cheaper pound means people can’t afford foreign holidays & may visit UK resorts.
o Much talk of ‘no change in the short term’.
o Monarch says that sourcing external financing post the Brexit vote was ‘probably less likely to happen’.
o Moody’s reports the vote ‘is credit negative for banks across the continent, with banks in the UK most negatively affected.’
• Economic outlook:
o Moody’s says ‘the high degree of uncertainty over the UK’s future trade relationship with the EU will lead to lower GDP growth for the UK over the next two years, in response to diminished confidence and lower spending and investment.’
o Bank Governor Carney says Bank may need stimulate economy over the summer. This doesn’t come without cost.
o Governor Carney says ‘the economic outlook has deteriorated and some monetary policy easing will likely be required’. Bank will update further post 14 July.
o Economist Intelligence Unit now forecasting end-16 & 2017 recession and slower growth thereafter
o EIU sees GDP 6% below where it would have been by 2020. Expects borrowings to rise, tax revenues to fall
o EIU says Brexit vote ‘brings UK’s post-crisis recovery to a halt’. Expects unemployment to rise next year. Sees ‘2mths of chaos’
o EIU says UK’s ‘political stability premium may have been lost’. Says we won’t get a deal on migration.
o Siemens, which employs 14k people in the UK, has said that it will review its UK investments in the light of the Brexit vote
o EU officials says no to negotiations ahead of Article 50. Says trade negotiations could then only start after exit. A recent trade deal with Canada took 7yrs to settle.
BREXIT & RECESSION. LANGTON VIEW:
• Uncertainty and a reluctance to spend are positively correlated.
• We have the former & we will soon have the latter.
• There is a non-financial angle in that, as even Boris Johnson conceded, around half the electorate did not want this to happen.
• Hence it is likely that some of the 48% will work, spend and consume a little less than they otherwise would have done.
• There will be no compensating move to work harder/longer across the 52%.
• The maths is therefore compelling. Our slide rule isn’t up to the task but the Economic Intelligence Unit is estimating a stalled H2/2016, a 1% drop in GDP next year and a 6% undershoot by 2020.
• We believe (and certainly hope) that large ticket items will bear the brunt of this (as they did in 2008-09) and that spending on ‘affordable treats’ will hold up relatively well.
PUB, RESTAURANT & DRINKS PRODUCERS:
• JDW Wednesday bought back 80k shares at 689.5p. This year it has now retired 5.5m shares for £37.8m, an average of 685p per share.
• MCA reports former Geronimo Inns managing director Ed Turner is launching a new pub company & has secured first site. The PMA says the first site will re-open in early August as the Old Ale and Coffee House.
• Hershey has rejected a $23bn approach by Mondelez International Inc.
• Darden Restaurants reports Q4 numbers. Says ‘due to the impact of the extra week of operations included in the fourth quarter of fiscal 2015, total sales from continuing operations decreased 4.7% to $1.79 billion; excluding the impact of the extra week, total sales from continuing operations increased 2.1%’
• Darden says EPS from continuing operations increased 19.6% to $1.10 in Q4. CEO Gene Lee says ‘I’m pleased with the results we achieved during the fourth quarter, which wrapped up a year of significant progress improving our operations and financial performance.’ He continues ‘these results reinforce our firm belief that our strategy is working as we continue to build guest loyalty by relentlessly focusing on our back-to-basics operating philosophy. This focus, together with our competitive advantages, drove our strong performance for the year and increased shareholder value.’
• Constellation Brands has reported a 15% jump in quarterly net sales, helped by higher demand for its Corona & Modelo beers. Net income attributable to the company rose to $318.3 million, or $1.55 per share, in Q1 to end-May. Net sales rose to $1.87 billion from $1.63 billion.
• South Africa’s Competition Tribunal has conditionally approved AB InBev’s merger with SABMiller, meaning the process is on track for completion in the second half of 2016. AB InBev has now obtained approval in 16 jurisdictions. Commenting on the decision, Carlos Brito, CEO of AB InBev, said: ‘We are delighted by the Competition Tribunal’s decision to approve our proposed combination with SABMiller in South Africa, a market that would play a critical role in the combined company.’
• Jamie Oliver Restaurant Group is looking to add more than 100 restaurants to its existing estate of 86 sites over the next four years. The group is targeting 12 to 14 openings in the next year.
• Carlsberg UK will outsource its distribution as part of a strategic review which includes the proposed transfer of its remaining logistics operations to DHL Tradeteam.
• Recent encouraging growth in sales across the US beer, wine, spirits, and cider categories has been attributed to savvy brand innovation and premium pricing. The IWSR’s 2016 US Beverage Alcohol Review shows that the premium-and-above segment of wine held a 20.7% share in 2015, compared to a 13.3% share in 2005. Meanwhile the power of good branding is evidenced in the fact that Four of the top five fastest-growing wine brands are owned by E&J Gallo (Barefoot, Dark Horse, Liberty Creek and Apothic).
• There was significant success for the spirits category, which enjoyed its 19th consecutive year of volume gains, up 28.7% from 10 years ago, and where: ‘Trading up to higher-quality products, or premiumisation, continues to be another contributing factor to the growth of the spirits industry.’
• As for beer, it is craft beer that has predictably outperformed the rest of its sector, growing its share of the market from 6.1% to 11% in the past five years. By volume, the craft beer segment posted an increase of 6.9% in 2015, ending the year at 37,300 hectolitres. The top five leading brands (Corona Extra, Modelo Especial, Heineken, Stella Artois and Dos Equis) make up nearly 70% of the category and each increased volumes last year on an average growth rate of 10.6%.
• The US has become the world’s number one Champagne market by value, which rose 28% last year to €515m (ahead of the UK on €512m off the back of a 7% rise in sales). The drink has also benefitted from a trend of premiumisation.
LEISURE TRAVEL & HOTELS:
• Outbound Chinese international travellers could outspend travellers from Germany, UK & France combined by 2025. Thomas Cook is here well positioned.
• US hotel industry reported REVPAR up 4.4% in the week to 25 June per STR. Occupancy was some 0.1% lower
• Travel bosses have cautioned that fallout from Brexit alongside a new visitor tax could see tourism to the Balearics suffer. Barcelo Hotels & Resorts.
• Chief executive Raul Gonzalez said: “The combination of the depreciation of sterling and the eco-tax is a bad combination. It’s very difficult to have a clear opinion [on Brexit] but some people will not be able to pay as much money for holidays and we will see a reduction in the length of holidays.’
• The tax, approved by the Balearic parliament, costs up to €2.20 per person, per night, and is effective from today (1 July).
• Family adventure holiday operator Intrepid Group has cancelled all departures to Turkey for the next week following the terrorist attack on Istanbul’s Ataturk airport. Three attackers arrived in a taxi and began firing at the terminal entrance on Tuesday evening before blowing themselves up, taking the lives of 41 travellers with them and injuring 239 people. British Airways is to resume service to the airport after cancelling all flights on Wednesday.
• A series of five strikes by air traffic controllers in Portugal has been cancelled as airlines negotiate a period of labour disruption in various Eurozone countries.
• Iata’s chief executive Tony Tyler has said governments face a ‘growing challenge’ to keep travellers safe following the recent Istanbul bombing. Tyler commented: ‘This tragedy in Istanbul and the one in Brussels earlier this year show that there is a growing challenge for governments to keep people safe in the “landside” parts of the airport. Moving people “airside” more quickly can help to mitigate risk. The industry has a number of initiatives in place to achieve that aim and we are working with governments and airports to implement them.’
• The decision to expand either Heathrow or Gatwick has been delayed once again and a decision will not be made until after the election of a new Conservative leader.
FINANCE & MARKETS:
• Bank of Governor Mark Carney has said he will not quit if his critics rise to power
• UK current account deficit in Q1 was £32.6bn per ONS, still close to record highs.
• Sterling fell 1% yesterday on fears/hopes of a summer interest rate cut
• The UK’s FTSE100 index has hit a 10mth high on hopes of interest rate cuts in the summer.
• World markets: UK, Europe and US all higher yesterday. Far East up in Friday trading.
• Oil price holding around the $50.05 level. Had dipped below $50 but climbed above that level again this morning.
YESTERDAY IN A NUTSHELL – SEE LIVE TWEETS ON WEBSITE:
• Some of our morning tweets: Langton discusses the impact of Brexit uncertainty on consumer spending. Small vs large ticket items – here
• French Finance Minister Michel Sapin has said that freedom of movement will be ‘on the table’ in talks with UK.
• Airline bosses meeting in Brussels have said that the Brexit should cause only ‘short term turbulence’.
• GNK analysts’ meeting. Says it (in retail) will focus on 1) brands, 2) value, service & quality, 3) staff, 4) property 5) balance sheet
• GNK analysts’ meeting. Says since January, EU Referendum uncertainty seems to have hung over consumer spending
• Since January, JDW has bought back around 5.5m of its own shares for £37.3m or 685p per share. Equivalent to c15 large freehold pubs
• Vianet has commented on trading ahead of its AGM later this morning saying it is in line with expectations.
• My Local, the convenience store chain once owned by Morrisons, has entered administration
• Fosun has taken advantage of post-Brexit volatility by increasing its stake in Thomas Cook to 8.2%
• Sportech has reported that HMRC has paid it £93m in relation to its Spot the Ball VAT claim. Around £4m may follow.
• Other Tweets: Michael Gove stands for leadership, splits the Boris vote. Theresa May now favourite to win the job.
• Betting now that Fed may not raise interest rates in US this year. Maybe not even next.
• Markets beginning to think we won’t leave the EU. But they were wrong last Thursday.
• Message re Brexit, what’s the plan? Oh, there isn’t one?! Just a protest vote (gone wrong)?
• GFK saying consumer confidence slipped in H1 June. That was pre-Brexit. Where are we at now?
• Boris will not stand for PM. What an utter disgrace. At least fellow Brexiters Hull are still in with a chance of the Premiership
RETAIL NEWS WITH NICK BUBB:
• Today’s Press and News: The latest turmoil and treachery in the ranks of the Tory Party dominate the front pages today, but the Bank of England’s gloomy pronouncements on the UK economy post-Brexit get plenty of headlines as well, eg “Pound slides as Carney signals fresh stimulus” in the Times and “Rate cut ‘on the cards’ to aid economy” in the Telegraph. The Telegraph and the FT also flag that Amazon’s grocery delivery service has already been extended to cover a further 59 London postcodes in North, East and Central London (bringing the number of areas eligible for the service to 128) and the FT also flags that a Qatari retail group, Al Mana, has bought the online and international operations of BHS.
• News Flow Next Week: As the sector tries to reassess the outlook for the second half of the year after the EU Referendum vote, Topps Tiles’ Q3 update and Booker’s AG tgh M update on Wednesday will get more attention than usual, but the big day is Thursday, in the form of the Marks & Spencer Q1 trading update, the Sports Direct finals and the Dunelm Q4 update…
• John Lewis Partnership Sales Watch: Given the reports of a slump in consumer confidence over the weekend, it is interesting to see that last week’s trading looked quite good at John Lewis, as w/e June 25th saw overall gross sales up by 7.3% on last year, but this was distorted, as “in line with the market, Clearance was brought forward compared to last year”, so we will have to see how this week’s sales turn out to judge the trend. Over the last 21 weeks John Lewis sales are now running up by 5.4% (just under 4% up LFL). Over at Waitrose, sales over the last 21 weeks are now up by 2.6% gross (flat LFL), after a 0.7% dip in gross sales last week, “with comparisons impacted by last year’s warmer weather and a period of high profile marketing activity during the equivalent week in 2015 to coincide with the launch of Pick Your Own Offers”.
• Trade Press (1): The front cover of Drapers magazine today carries a sober message that after Brexit “…the fashion industry must hold its nerve and maintain its focus on what it does best…” and the Brexit shock is inevitably the subject of the Editor’s column (she thunders that “The British fashion industry is open for business”). Drapers also has a selection of business reactions, flagging that the bosses of several multiples and department stores called for a calm, pragmatic approach to the potentially “seismic” implications of Brexit. Drapers also flags that Arcadia is “considering various options” to replace the £100m in annual revenue generated through Dorothy Perkins, Wallis and Burton concessions within BHS stores…and that the Next-owned Lipsy business is aiming to take on Asos through its Online young fashion branded
• Footwear Awards Watch: And at the Drapers Footwear Awards 2016 last night, Jimmy Choo was the big winner, picking up three awards (“Women’s Fashion Brand”, “Best Store Design of the Year” and “Footwear Designer of the Year”). Ted Baker picked up two awards (“Men’s Fashion Brand” and “International Business of the Year”), while Dune was named “Multiple Retailer of the Year”, for the third year in a row.
• Trade Press (2): The front cover of Retail Week magazine features a picture of a shopping basket full of question-marks, set against the Euro flag, with the headline “What the shock Brexit vote means for retailers”, whilst the Editor-in-Chief thunders in his column that “Retail should grasp the positive opportunities offered by Brexit”. The main news stories in RW are that the My Local chain has gone into administration, Ocado boss Tim Steiner has scoffed at the impact of the launch of Amazon Fresh and that Carpetright boss Wilf Walsh is upbeat, despite being “personally surprised and bitterly disappointed” about the outcome of last week’s EU Referendum.