Langton Capital – 2016-10-06 – YUM Brands, overseas workers, JW Lees & other:
YUM Brands, overseas workers, JW Lees & other:
A DAY IN THE LIFE:
Despite the fact that Fleurets is suggesting London rents may be going too far and the worry that 78k City jobs may be lost in order to stem the flood of suspicious potato pickers coming in from Eastern Europe, it’s hard not to view the capital as anything other than a city still in rapid growth.
That’s because, sitting in Aldgate & watching all the 15-20 story residential blocks going up complete with roof terraces and presumably Hipster-friendly beehives etc., one gets the impression of expansion, upwards at least and, provided there are enough people out there willing to pay 700, 800, 900 grand to live in 2-bed flats in the East End, all will be well. On to the news:
REVOLUTION GROUP ANALYSTS’ MEETING:
• This put out yesterday: FY Trading Figures:
• Revolution Bar Group (RBG) has this morning updated on FY trading for the 53 weeks to 30 June and further comments are set out below:
• RBG has posted a 6.9% increase in revenue across its 62 bars, with +2.3% LfL growth attributed to higher margin sales, more volumes, and broader trading hours.
• The Vodka Revolution and Revolucion de Cuba operator, which IPOd in October 2015, has now clocked up 12 consecutive quarters of LfL growth.
• The group has five site openings slated for FY17, three of which fall in the first half. Like for like sales in the first 12 weeks of the current year +1.8%.
• More on recent trading:
• Although the group’s proposed acquisition of four bars in Edinburgh was scuppered by the ‘market uncertainty’ created by the EU referendum result, RBG remains on the lookout for ‘small, high quality businesses’.
• RBG’s pipeline comprises 11 sites. Revolucion de Cuba is set to grow from 9 units to 13 in the coming months. Management wants a pipeline that provides visibility over the next 2-3 years of site openings.
• Its site in Stafford has traded well, meaning the brand could translate into secondary towns and affluent suburbs
• New units will need broadly the same amount of pre-opening costs (£200,000 per site) and refit costs (£1.1m per site) respectively as existing units.
• Balance sheet, cash flow and debt:
• Revolution remains cash generative (with an 11.5% free cash flow yield), debt-free, and profitable. The group will start paying 21% tax next year.
• CEO Mark McQuater reports ‘The financial year has begun well with recent trading robust with like for like sales of 1.8% in the first 12 weeks of the current year.’
• RBG’s second brand, Revolucion de Cuba, is growing well and the group will ‘open another 5 bars in our current year.’
• Though conditions may be uncertain going forward, Revolution remains tightly managed and cash-generative. Its big-box sites effectively create a barrier to entry, ensure that rent costs remain modest as a proportion of sales, and limit competition.
• Langton Comment: Fewer, bigger nights out may well suit RBG’s concepts, although the group’s premium pricing limits its flexibility somewhat. The declining rate of like-for-like growth might be a concern moving forwards.
• It is evaluating its potential to expand into secondary towns and affluent suburbs, based on the success of its Stafford opening, which could increase its potential market. Revolution is also looking out for small, high quality operators to acquire and integrate into its estate.
• It will open five sites next year (four Revolucion de Cubas and one Vodka Revolution) and will continue to maintain existing site investment at c6% of turnover.
• Shares in RBG are down 23% from its October ’15 IPO price of 200p, at 154p, modestly valuing the group on a PE of 13.4 times falling to 9.4 and giving its shares a well-covered 3.1% dividend yield.
• Revolution’s CEO has put his money where his mouth is, having bought £176,157 worth of shares at 155p on the day of the results. Old Mutual has also been busy building up a near-20% stake, and on 10.6 times forecast earnings, offer good value for money. Jack Brumby. 0207 702 0043.
PUB, RESTAURANT & DRINKS PRODUCERS:
• The Markit/CIPS services PMI fell slightly in September from August’s 52.9 to 52.6.
• YUM Brands reports Q3 numbers, raises full year core profit forecast to at least growth of 15%.
• YUM Brands Q3 same store sales at KFC +4% with US LfL growth of 6% & system sales +7%. Taco Bell LfL sales +3%
• YUM Brands Q3 says’ worldwide core operating profit grew 11%, with the brand divisions excluding China delivering 11% core operating profit growth in aggregate, ahead of expectations.’
• YUM Brands opened 475 restaurants worldwide in Q3, 78% in emerging markets. Group on track to separate China business 1 Nov. CEO Greg Creed reports ‘YUM Brands delivered third-quarter core operating profit growth of 11% and EPS growth, excluding Special Items, of 9%. For the full year, we are raising our core operating profit growth guidance from at least 14% to at least 15%.’
• YUM CEO says KFC the star. Says ‘in the third quarter, I was pleased with both KFC’s and Taco Bell’s performance’. He goes on to say ‘excluding China, our brand divisions in aggregate delivered core operating profit growth of 11%, which was ahead of our expectations. System sales for the brand divisions excluding China grew 5% in constant currency, driven by KFC where system sales grew 7% with international emerging markets up an impressive 12%.’
• YUM says re Q4 ‘sales were off to a good start in the first six weeks of the quarter in the China Division.’
• JW Lees yesterday filed accounts for the year to 31st March 2016 showing sales of £64.1m (+0.2%), EBITDA £8.9 m (+1.6%) and operating profit £6.6m (+3.8%), a record year for the company by all three measures. The group says that it strengthened its senior management team during the year by hiring Tony Spencer as Director of Retail and Nicola Waring as the company’s first Director of People. The group comments ‘2016 has been a year of consolidation for JW Lees and, although we have not acquired any new sites, we have spent a record £5.3m on improving our pubs with the aim of building the best pub estate in the North West by raising quality, standards and service.’ MD William Lees-Jones comments ‘we are proud to be reporting a record year and our business is growing steadily. We remain hungry for acquisitions of both Managed and Tenanted pubs as well as hotels in the North West.’
• Tesco shares up on recovery. Rising pension deficit one of the rare blots.
• Vista Retail Support has found that contactless has overtaken chip and pin as the most popular payment method among students. It says that around 40% favoured the payment method & says that 13% of respondents said they would avoid a retailer altogether if they were unable to pay with one tap. Vista says ‘our survey shows a significant shift in how students are choosing to pay for their goods and how they’re willing to avoid retailers who don’t allow room for choice. For canny retailers who have put the right solutions in place, however, the potential gains could be huge as local students become loyal customers.’
• Fleurets has suggested that operators face getting their fingers burned as record rents set across London reports Propel
• The ALMR has criticised government plans to ‘name and shame’ employers of non-UK nationals, adding that such a move ‘shows a lack of understanding of the way in which many operate’. Chief executive Kate Nicholls said: ‘Pubs, bars and restaurants do not actively recruit abroad seeking foreign workers, they recruit locally and it is unfair to imply that businesses are failing to support the UK workforce or failing in their duty to provide opportunities or training. Pubs, bars and restaurants invest a significant amount of time and money in their employees whether they are UK or non-UK nationals. Any implication that UK businesses are failing the UK populace by hiring migrant workers is unfair and uninformed.’
• Constellation Brands generated $1.04bn of operating cash flow and $676m of free cash flow in Q2 and now expects reported FY basic EPS of $6.25-$6.40. ‘The strong consumer demand for our portfolio continues to propel our business. During the quarter, we gained share and improved margins across our business, while continuing to make smart investments designed to fuel growth today and in the future. I am proud of our accomplishments in the first half of the year, which are enabling an increase in our overall guidance for the year,’ said Rob Sands, president and chief executive officer, Constellation Brands.
LEISURE TRAVEL & HOTELS:
• London hotel revenues are reported by HotStats to be growing at twice the rate of those in the rest of the country over a 15yr view. In the very short term, they seem to be coming under pressure. HotStats reports ‘since 2012, provincial hoteliers have been closing the gap, achieving a TrevPAR CAGR of 4.1 per cent per annum in the three years to 2015, compared to 1.5 per cent per annum at London hotels during the same period.’
• Travel alerts have been issued across Florida and the US east coast as Hurricane Matthew, which is shaping up to be the most powerful hurricane in almost a decade, heads across the region.
• IAG Group revenue passenger kilometres rose by 4.8% year-on-year in September as capacity in available seat kilometres increased by 5.6%.
FINANCE & MARKETS:
• The International Monetary Fund has warned that global financial risks are growing, highlighting specific concerns about Europe, Japan, and China. Short term risks have abated since its previous study in April, according to the organisation.
• UK new car sales grew in September by 1.6% to 469,696, according to the Society of Motor Manufacturers and Traders.
• TheCityUK has said that 75k jobs and £38bn could be lost to the UK if it fails to secure access to the single market
• Scaremongering or not, job losses in the City would not help London house prices and commercial property values could be impacted
• Elsewhere, world done by Cushman & Wakefield suggests that 95% of banks still lending in the UK post-Brexit vote. Anecdotally, there has been some move to tighten covenants & some lending is being limited to 2s EBITDA
• B of England MPC member Ben Broadbent tells Wall St Journal no-one on the current MPC was there when rates last rose. Re cutting rates, Mr Broadbent said ‘the key judgement for the MPC was that this uncertainty [the Brexit referendum] would itself weigh on demand and investment spending in particular.’
• Sterling fell below 127c yesterday for the first time since 1985.
• World markets: UK and Europe down yesterday but US up. Far East higher in Thursday trade
• Oil slightly off the top but still trading around $51.55 per barrel
• Eurozone seasonally adjusted retail sales fell by 0.1% in August
YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:
• DP Poland has announced that it has conditionally placed 6.67m shares at 48p per share (a 1.3% discount). Will accelerate openings
• DPP ups store target from 80 to 100 by 2020. Will use proceeds to open stores or fund ‘high-calibre store managers’ to franchise own sites
• Premium Bottled Ale September report suggests pricing down 0.7% with bigger moves at ASDA (-3%) & Morrison’s (-1%)
• PBA Sept report suggests number of lines on promotion down by 3.5% with uptick in promo activity at ASDA & Waitrose
• AlixPartners says UK out-of-home food and drink market is now estimated to be worth in excess of £80 billion.
• TSCO says prices 6% lower than they were 2yrs ago. Consumers (and the hospitality industry) should have benefited.
• Tesco H1 numbers, says made ‘strong H1 progress’ and has a ‘clear plan to create long term value’
• In an interview with the BBC’s Laura Kuenssberg, a shaky Theresa May accepted that most observers believe the UK will slow next year.
• Theresa May defends decision not to hold General Election despite PM, Gov. policies & cabinet all having changed radically
• Slack interest rates & 31yr low Sterling seen as a stimulus. Markets close near record highs. Ratings stretched if growth proves elusive
• Other tweets: Tesco numbers reassure. Places it with the ‘winners’ (incl. MRW) but leaves a bit of a question mark over recent SBRY numbers
• Sterling hits new lows, boosts FTSE100 but c50% of earnings of FTSE250 also comes from overseas.
• Pension deficits. TSCO confirms increase but says doesn’t impact payments. Might do over time. Rates, however, will rise at some point
• Pension deficits. At nano-level, laws of physics don’t apply. Can’t just divide a yearly payment by a negative number to give ‘liability’
• DPP places shares at the price. Follows on EZH placing at a premium, shows some appetite for growth stock shares
• JDW putting serious money where its mouth is. Buying back chunks at all-time-high of 955p per share.
• Amber Rudd to rescue, will keep out foreigners. Plenty of jobs for spud-pickers, chambermaids etc. Also, we’ll need a few more doctors…
RETAIL NEWS WITH NICK BUBB:
• Today’s Press and News: With mighty Tesco and little Topps Tiles in focus on the retail beat yesterday, it’s not surprise to see Tesco steal the show today, with lots of upbeat coverage of its bold new margin targets, which earn the approval of Lex column in the FT (albeit there is also a lot of focus on the enormous pension deficit and FD Alan Stewart’s comments that it is just an accounting issue, driven by bond yields). Tempus column in the Times looks at Topps Tiles and concludes that the shares have fallen too far and are looking cheap.
• Greggs Overseas Watch: We noted yesterday that the Business Editorial in the Telegraph had thundered that it is time for Greggs to try its hand Overseas (“Time for Greggs to test its pasties in Provence”), but our Barnet correspondent points out that Greggs made an unsuccessful foray into Belgium in 2003, building up a small chain of 10 shops only to close them in 2008, following losses.
• BDO High Street Sales Tracker: We highlighted yesterday that John Lewis did very well last week, despite the continued hot weather, given the boost from matching the House of Fraser Brand Event, but the BDO High Street Sales Tracker for small/medium-sized Non-Food chains for w/e Oct 2nd flags that Fashion Store LFL sales were 0.3% down, whilst, boosted a little by Homewares and Lifestyle sales, total Store LFL sales were only up 0.3%, although Online sales growth was strong at +28%.
• Trade Press: There will be no Drapers magazine published tomorrow, as this is another “digital-only” week, but Retail Week magazine will be coming out and they will forgive us for trailing that the front cover features photos of Andrew Murphy, Mark Lewis, Paula Nickolds and Tom Athron above the headline “John Lewis: who will be the new face at the top as Andy Street checks out?”. RW has a feature article on the 4 leading candidates to be the next John Lewis MD and an excellent column by yours truly on Andy Street’s legacy (“Sales good, profits bad?”). RW also has a feature on Tech Hubs and a review of the new Online offer from BHS. In terms of news stories, RW focuses on the news that Sainsbury’s has appointed former Boots boss Simon Roberts as its new Retail and Operations Director and that Jack Wills’ founder Peter Williams has joined forces with the Liberty department store owner
• News Flow Next Week: A busy week kicks off on Tuesday with the BRC-KPMG Retail Sales for September, closely followed by the Ted Baker interims and the N Brown interims. The Vertu Motors interims are then on Wednesday, with the WH Smith finals, the Game Digital interims and the Booker interims coming out on Thursday