Langton Capital – 2016-11-23 – More on M&B, Thomas Cook, GNK Tracker & other:
More on M&B, Thomas Cook, GNK Tracker & other:
A DAY IN THE LIFE:
Bit busy today so straight on to the news:
TOUGHER TIMES, OVEREXPANSION & MONEY-BONFIRES…
• Cheap cash & crowd-funding have ‘supply-pushed’ capacity: Arguably we’ve seen some growth for growth’s sake. Saturation is an issue.
• Several operators have built substantial estates in as little as 3yrs years.
• You can’t go from 0 to 50 units in a short time without picking up a few clunkers…Ed’s led the way and we know how that ended (hint: financial car crash)
• BrewDog has gone to 50 sites in 5yrs (29 in the UK), Bill’s to c60 in three.
• Check out Abokado, Giggling Squid, Cau. Ask RTN how Joe’s and Coast-to-Coast are going
• Five Guys has gone from 0 to 58 UK units in 3yrs.
• Smash Burger, Shake Shack & MOD Pizza are also rolling out.
• Capacity growth is stalling. Business confidence is slipping & consumer confidence is fragile.
• Costs are rising – NLW, NMW, apprenticeship levy, business rates, currency movements etc.
• Hurdle rates will rise & marginal sites will struggle. Thankfully new ones will not open
• CGA & Horizons separately say supply growth is stalling. M&B said the same thing today.
• Established operators have been trimming estates: Restaurant Group is shutting sites, Ed’s has been dismembered, JD Wetherspoon is selling sites, ditto M&B, Fuller’s.
• Early movers (re exits, disposals) and cautious openers will be the winners
• We saw this on High St c1999-2000 & the effects tend to linger as sites are rarely bulldozed
MITCHELLS & BUTLERS – FULL YEAR RESULTS:
• Following the announcement of its FY numbers earlier today, Mitchells & Butlers hosted a meeting for analysts and our further comments are set out below:
• Trading: Margin was up in H1 but down H2. LfL sales, however, performed better with a steadily improving trend over H2. See p5 (of the group’s slides)
• The group says H2 saw a ‘strong recovery’. CEO Phil Urban says that he was ‘pleased’ with this performance.
• This has continued into the first 8wks of FY17. Although the +0.5% reported for that period appears modest, the Rugby, given the location of some of M&B’s units, was a positive in FY16, making for tougher comps
• The weather (warm Sept) did help a little
• The above positive numbers are helped by refurb spends. An un-invested number has not been given but the group says that these units ‘are improving’
• Outlook for trading, costs etc.: Costs could rise by c£55m in FY17 (see p8). They rose by around £25m in FY16.
• Perhaps 1/3 of this can be mitigated. The rest will need to be addressed either through price or volume increases.
• The group will move some of its c£100m of US$ and Euro purchases to Sterling suppliers
• Price rises fall straight through to margin and, as the company says, a little bit of inflation would be helpful
• Depreciation charges will rise by perhaps £3m to £4m p.a. for a number of years to reflect increased levels of capex
• LfL sales had been c4% below the Peach Tracker. They are now around 1% above – see p18
• New openings (mostly rivals) had been a problem. This is now abating (p19) but the capacity that has already gone on will take a slice of the cake
• Brexit. Confidence hasn’t fallen materially. Around 13% of M&B’s workforce comes from the EU and it would struggle to replace this in the short term.
• Some new concepts will be trialled. The group is opening a Chicken Society outlet in Finchley next month. More will follow & other concepts will be tested.
• The dividend policy going forward ‘will reflect trading’
• Balance sheet, cash flow and debt: M&B’s conversions to Miller & Carter have cost around £600k but they return c40%
• Stonehouse Pizza & Carvery upgrades cost c£350k & return >25%. Harvester upgrades are generating a similar return.
• The aim is to get back to a 6yr refurbishment cycle. Capex will run around £200m over the near term
• The group is still c83% freehold.
• Some 75 units are up for sale. Book value is ‘above £50m’
• The group does not expect news on its March 2016 triennial review soon. It should know by the time of its H1 numbers next May.
• Langton: M&B’s units are performing somewhat better.
• Bears may argue that this growth has been purchased via capex but, though there is some truth in that suggestion, it appears some fundamental improvement is taking place beneath the surface.
• Certainly, there are extraneous events (Brexit, Sterling, business rates, apprenticeship levy etc.) that may prevent this from showing through in the short term, but these are industry-wide rather than stock specific problems.
• Issues regarding the share register remain a little off-putting for some investors but trading is perhaps a shade better. The group now maintains that it is running c1% ahead of the Peach Tracker rather than as much as 4% behind.
• The group’s shares are lowly rated at around 7.3x this year’s earnings.
• In addition, M&B’s units are to die for and, over time, it should be able to find a solution for most its sites. Execution will remain an issue and costs will rise in FY17 but, overall, risks are perhaps weighted towards the upside.
PUB, RESTAURANT & DRINKS PRODUCERS:
• Greene King Tracker has UK households spending £212 on out of home leisure last month, up 3% on last year
• GNK Tracker: Says spend on eating out in Oct was +8% on same month last year. Other Leisure spend was down 2%.
• GNK Tracker: Reports 14m people planning to visit the pub over Xmas with 37% of 18 to 24 & 36% of 25 to 34-year-olds planning to go
• GNK Tracker: Says ‘Christmas is always a great time for the pub – it offers a festive, comforting and fun environment for all.’ He continues ‘it’s great to see that the British public is looking forward to the festive season, despite 2016 having been a busy and eventful year, and that many of them will be celebrating in the pub.’
• GNK Tracker: Says households gloomier, some 2/3 thought they would be worse off by this time next year vs only 8% who were optimistic
• The US fast-casual pizza segment is saturated following eight years of stellar growth and a shakeout has begun, according to operators.
• Dr Pepper Snapple Group and PepsiCo are respectively buying antioxidant beverages maker Bai Brands for $1.7bn and probiotic drinks maker KeVita Inc for an undisclosed amount. The moves mark a continuation of the trend seeing beverage companies branch into health and wellness products as soda sales fall.
• Campari chairman Luca Garavoglia will take direct control of the family firm that owns a majority of the world’s sixth-largest premium spirits maker.
• Innis & Gunn now raised £1.84m via Crowdcube, some 182% of the amount the company initially intended to raise. Crowdcube reports that the company, which had turnover in 2015 of £12.5m, has a pre-new money valuation of £49.17m.
• Morrison’s is to open C-Stores at 10 Rontec petrol stations. Also the Safeway brand is to be revived as a wholesaler. CEO Dave Potts reports ‘these are two capital light ways of growing in the convenience food market. By working with well-established partners and reviving the Safeway brand, we are making our products more accessible to more customers.’
• Cracker Barrel reported Q3 numbers yesterday. It raised LfL sales for the 10th consecutive quarter. CEO Sandra Cochran reports ‘the differentiation of our brand experience and our excellent operational execution, along with broad marketing efforts, helped us outpace the industry.’
• Cracker Barrel reports Q3 LfL sales +1.3%. Says driven entirely by an increase in menu prices. Average check price +3%. Co admits ‘we had fewer guest visits and we had fewer guests purchasing a retail product.’ Ms Cochran reports ‘today’s consumers are focused on value, affordability and variety. The environment includes a lot of uncertainty. With the election, hopefully some of that has been resolved. But a number of issues will continue to be on consumers’ minds, and potentially impact the degree to which they eat out at restaurants.’
• MCA reports Harden’s as saying East London remains the destination of choice for new openings – although West London narrowed the gap this year
• The ALMR has urged the government to take ‘decisive action’ to combat rising costs for businesses such as business rates ahead of today’s Autumn Statement. The trade body is also campaigning for a resumption of high street retail relief, transitional rates relief, the abolition of National Insurance Contributions for under-25s, a delay to the Apprenticeship Levy, and for future National Living Wage rates to be set independently by the Low Pay Commission.
• Fabric’s owners have struck a deal with Islington Borough Council to reopen the nightclub just months after it was shut down and had its licence revoked. A joint statement from Islington Borough Council and Fabric Life said: ‘Fabric is committed to doing all it reasonably can to ensure that no more of its clubbers come to drug-related harm. It also recognises that there needs to be, and will be, changes to its management structure and accountability.’
• The All-Party Save the Pub Group has called on the Chancellor to maintain the freeze on beer duty that was first announced by George Osborne in March 2016.
• Honest Burgers has opened its 17th following the acquisition of the former White Rabbit on Bradbury Street in Dalston, East London. The 2,000 sq ft A3 unit is held on the remainder of a 12-year lease, expiring July 2024, at a passing rent of £39,000. It was purchased at a ‘substantial premium’ by Honest Burgers, who is backed by the Active Private Equity group and has a pipeline that also includes London sites on Baker Street and Southward Street and another in Reading.
• A Cancer Research UK study looking at data from the 2015 national diet survey suggests that UK teenagers drink enough sugar every year to fill a bathtub with fizzy cola.
• The Rioja DOCa has reported an ‘exceptional’ harvest after the region’s control board certified 442.4m kg grapes which were turned into 318.5m litres of wine.
• IGD has predicted the overall food-to-go market will grow by 35% in the next five years up to 2021, with operators such as Greggs set to be the strongest climbers. The grocery research charity expects that the burgeoning market will be worth £2.71bn by 2021, up from £16.1bn in 2016. Food-to-go specialists such as Pret and Subway have been touted as possible winners, alongside fastfood chains such as McDonalds, quick service restaurants, coffee shops, c-stores, and forecourts.
THOMAS COOK – FULL YEAR NUMBERS:
• TCG FY: Numbers better than feared but flattered by currency translation post Sterling’s collapse. Dividend resumed at 0.5p
• TCG reports FY numbers, says it has ‘proactively managed through tough market’. It has resumed dividend payments at 0.5p
• TCG FY: Revenue £7.8bn (down £22m) with margin at 23.4% vs 22.6% last year. Underlying profit £308m vs £310m
• TCG FY: Says UK business has ‘continued to strengthen’. N Europe sees ‘record profits’ but Germany & Belgium down
• TCG FY: Basic EPS 0.8p vs 1.6p. Says underlying EPS is 8.5p vs 8.9p last year. Dividend is 0.5p per share
• TCG FY: Says performance ‘in line with Q3 expectations’ with ‘Turkey impact offset by shift to alternative destinations’
• TCG maintains it is ‘transforming the business for sustainable growth through our New Operating Model’. CEO Peter Fankhauser ‘in what’s been a difficult year for tourism, I’m pleased with the progress that we’ve made at Thomas Cook. The early actions we took to shift our holiday programme into the Western Mediterranean and long haul, together with the benefits of a stronger Euro, helped us to maintain revenue at Group level. Additionally, a focus on holidays to our own-brand and partner hotels delivered record profit margins in our UK and Northern European businesses. Underlying operating profit for the group was £308 million. This reflects the decline in customer demand for Turkey, which impacted Condor in particular, and the effect on our Belgian business of the Brussels attacks.’
• TCG boss Fankhauser reports ‘we’ve made big strides towards our target to put the customer back at the heart of the business. Our strategy is clear: to deliver sustainable growth by giving our customers great holidays which inspire them to come back to Thomas Cook and recommend us to their family and friends. This renewed focus on quality and service delivered a six-point increase in customer satisfaction in Summer 2016 telling us that the changes we’re making are having an impact where it matters most.’
• TCG says ‘given the environment, the Board’s recommendation to pay a dividend, our first in five years, reflects confidence in the strategy and the opportunity for sustainable, profitable growth.’
• TCG on the future, Fankhauser says ‘we’re taking a cautious approach to the year ahead’ but 2017 so far is ‘encouraging’.
• TCG says ‘we are addressing the decline in Condor’s profitability with actions that we expect to have a positive impact in the second half of the year. Overall, we are confident that our strategy for profitable growth, focusing on improving our holidays for customers, will help us to achieve a full year operating result in line with current market expectations.’
• TCG current trading. Winter 2016/17 is ‘in line with our expectations’ & is currently 61% sold.
LEISURE TRAVEL & HOTELS:
• Ryanair CEO Michael O’Leary has told MPs they have ‘no idea’ how to navigate the UK’s exit from the EU and added that his airline has ‘already begun’ moving capacity away from Britain. Speaking at the Airport Operators Association conference, O’Leary confirmed Ryanair had cut its planned UK growth for 2017 by more than half – from 12% to between 5-6% – and would be looking to focus its efforts on growing business in Germany, Spain and central Europe. He branded Brexit a ‘deeply retrograde step’ for the country and likened Conservative ministers to characters from Dad’s Army for their ‘it’ll be alright Sergeant Jones’ attitude.
• The US hotel industry posted a 0.3% fall in occupancy to 68.6% during October 2016, although average daily rate increased 1.9% to $126.73. Revenue per available room grew 1.6% to $86.94, meaning October was the industry’s 80th consecutive month of year-on-year RevPAR growth, albeit the occasion was market by ‘the lowest RevPAR growth figure of any month since February of 2010’. Supply growth continues to be a risk and STR expect this to pull ahead of demand in 2017.
• UK airports are calling for improved transport links from major cities to boost the economy and create jobs. ‘Today’s report by the Airport Operators Association shows that making it easier for more people to travel to and from airports will enable aviation to deliver more for the UK economy, creating tens of thousands of jobs in the process,’ said AOA chief executive Darren Caplan.
• Lufthansa will cancel 900 fights on Wednesday as pilots strike again over pay.
FINANCE & MARKETS:
• UK government borrowing fell to £4.8bn in October due to higher tax income per ONS. Amount was £1.6bn lower than Oct last year. Borrowing for the first 7mths of the year stands at £48.6bn, the lowest since 2008.
• HMRC reports sales of homes in UK remained sluggish over autumn period vs last year. Sales in Oct were down 16% on 2015
• World markets: UK & Europe up yesterday & US also higher. Far East up in Wednesday trading
• Oil firm with Brent Crude trading around $49.10 per barrel
• Sterling little changed at $1.242
• Longer term interest rates in US unchanged with 30yr bonds at 3.00%
• Credit Suisse reports UK has lost $1.5tn in US$ wealth since the Brexit vote. Purely currency related
YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:
• M&B reports FY LfL sales down 0.8% but ‘with improving trend through the year’. Says first 8wks of FY17 were +0.5%
• M&B CEO Phil Urban reports ‘during the year we have made good progress in our three priority areas’
• M&B FY: Says in FY17 we ‘face external cost headwinds’ & it sees margins under pressure.
• Compass Group has reported FY numbers saying ‘organic revenue growth of 5%’
• Vianet’s iDraught system shows beer volumes were down y-on-y last weekend, with both sports & non-sports venues seeing a drop.
• Imbiba-backed Wright & Bell has launched its ‘department store of dining’ concept The Kitty Hawk in Moorgate
• Morrisons is reducing the price of petrol to less than £1 a litre for shoppers who spend more than £50 in store.
• Later Tweets: M&B sees ‘strong recovery’ in H2. CEO Phil Urban says that he was ‘pleased’ with this performance.
• M&B reports at-first-glance modest +0.5% LfL in first 8wks of FY17 but says Rugby (given location of some units) was strong in comp period
• M&B. Costs could rise by c£55m in FY17. They rose by around £25m in FY16. Some inflation ‘would be a good thing’
• M&B looking to move some of its c£100m of US$ and Euro purchases to Sterling suppliers
• M&B says new capacity has been a problem but says it’s abating. Weaker operators or those too-hasty to open marginal sites could suffer
• M&B getting returns of up to 40% on Miller & Carter refurbs, 25% at Harvester & Stonehouse Pizza & Grill
RETAIL NEWS WITH NICK BUBB:
• ScS Group: Ahead of today’s AGM, ScS has reported that the group has had a good start to the new financial year, with LFL order intake up 5.0% for the 16 weeks ended 19 November, which they call “a pleasing performance against particularly strong comparatives” (a year ago they were running up 7.9%). SCS also flag that their new store in Aberdeen has seen strong trading since opening on 22 September and that a further three stores are scheduled to open on Boxing Day, located in Plymouth, Straiton (Edinburgh) and Thanet. So the big weeks lie ahead, but ScS say “The group continues to trade in line with expectations and to make progress with its strategy for growth”.
• Signet: The US jewellery retail giant Signet reported yesterday that overall Q3 sales were down by 2.0% LFL, but the CEO Mark Light said that “We expected challenging market conditions to result in a sales decline. However, our continuing ability to execute in a difficult environment led to results that were somewhat better than our expectations”. The US was weak, nevertheless, with the core Kay chain down 2.9% LFL, but back in the good old UK (H Samuel/Ernest Jones) LFL sales were up by 3.6% in Q3, driven by “strong sales of diamond jewellery and prestige watches”.
• GameStop: It was striking that Game Digital’s share price hit a new low of 46p yesterday afternoon, ahead of the Q3 results from its US peer GameStop at the close on Wall Street. And GameStop’s LFL store sales were down by as much as 6.5%: “As previously reported, the video game category was impacted by weaker than expected demand during the last few weeks of October”. For the key Q4 period, GameStop expects LFL store sales to range from -12.0% to -7.0%…However, the embattled CEO Paul Raines said “Our third quarter results were in line with the revised guidance we issued on November 2nd. While the video game business has underperformed recently, we are focused on maintaining our leading market position, especially during the holiday season, as well as driving diversification through the growth of Technology Brands, Digital and Collectibles”.
• John Lewis Partnership Sales Watch: “The plane flew into the side of the mountain” on the John Lewis sales graph last week, but they will make it up this week…Sales were down in w/e Nov 19th by 2.6% on the year (-4% LFL) and John Lewis, that great bellwether, says “With five weeks to go to Christmas people are beginning to decorate their homes but seem to be waiting for the Black Friday deals to do much of their gift buying”. Home sales were up by 0.6% gross, but Fashion sales were down by 0.4% gross and Electricals sales (“where customers expect to see the biggest Black Friday deals”) were down by 8.2% gross. Over the last 16 weeks, gross sales at John Lewis are running 3.7% (c2% up LFL), with Electricals sales running up by 7.1% gross. Over at Waitrose, sales were not much better last week, with gross sales flat (c3% down LFL) in w/e Nov 19th.