Langton Capital – 2017-07-13 – June Tracker, more on JDW, FUL, SSP, Dart & other:
June Tracker, more on JDW, FUL, SSP, Dart & other:
A DAY IN THE LIFE:
Am I the only one or is there a new problem sweeping the country in that we’re now likely to swipe at books to change the page thinking it’s a Kindle?
And maybe I should sue, who’s to blame?
Is it society or some deep-pocketed Goliath – step forward Amazon – or is it, heaven forbid, me in that I’m demonstrating that, on some levels, I’m little different to Pavlov’s dogs in that I can be quickly conditioned to react in certain ways to certain stimuli?
Well we can discount the latter as there’s no money in it. Anyone got Amazon’s address? On to the news:
COFFER PEACH TRACKER FOR JUNE:
• Tracker for June shows LfL sales +0.6% vs June last year in welcome rise after May’s 0.4% decline. Inflation is 2.9%. Total sales, including the impact of new openings, were +3.7%. New openings may be most prolific for operators outside the Tracker’s cohort of 36 companies.
• Tracker says ‘the British public is continuing to go out to eat and drink, despite growing concerns about a weakening of consumer confidence’
• June Tracker’s Peter Martin says ‘fears of consumers cutting back on spending so far appear premature, at least when it comes to going to the pub or restaurant.’ Pub and restaurant spending is, however, lagging inflation and is falling on a LfL basis. JD Wetherspoon has said that it will need LfL sales increases of ‘between 3% and 4% in order to stand still at the profit line.
• June Tracker has pubs (plus 1.1%) outperforming restaurants (down 0.2%). Hot weather traditionally favours pubs over restaurants. Peach’s Peter Martin comments ‘the good weather in June will have helped pubs rather than restaurants, but a positive return across the market, even if modest, is good news.’ He adds ‘we essentially have a flat market, which considering the uncertainty in the wider economy and the increasing cost pressures that the out-of-home market is experiencing, will be welcomed by operators.’ This ignores inflation – both of general prices and of the F&B sector’s input costs.
• Tracker has London +1.2% outperforming the UK outside the M25 (plus 0.4%). London pubs were +2.4%. Both Young & Co and JDW have recently reported strong June numbers.
• Tracker suggests price rises will have helped to buoy LfL sales numbers. Peter Martin says ‘we know from our CGA business confidence survey that in the light of spiralling raw material costs, especially food, over 80% of pub and restaurant operators have already pushed through at least some price increases on food and drink this year.’ Operators such as Restaurant Group, which are cutting prices in order to attract back customers, will be finding that this is working in reverse. The Restaurant Group last year reported H1 numbers on 26 August.
• Coffer Corporate Leisure’s Trevor Watson says ‘undoubtedly the favourable weather will have improved wet led trade in particular. The impact of terrorist attacks on London wet led venues appears to have been relatively modest compared with previous incidents.’
• Sponsor RSM adds ‘the pub sector has benefitted from June’s spectacular hot spell, particularly those operators with river based pubs and large gardens. Despite the additional cost pressures and general economic uncertainty, the resilience of this month’s results with a return to positive like-for-like sales is encouraging. Operators who offer the consumer an affordable experience will continue to thrive and prosper in the current environment.’
JD WETHERSPOON – TRADING UPDATE CONFERENCE CALL:
Following its full year update earlier today, JD Wetherspoon hosted a conference call for analysts and our comments thereon are set out below:
• Q4 margins look as though they were down a bit, despite strong LfL sales. Yes, there were some Q4 costs increases coming through.
• Can you strip out the weather impact? Maybe 1% to 2%, but the group ‘has not been too scientific about it.’
• The group is a shade more ‘weather sensitive’. It operates in more tourist areas, has spent on beer gardens etc.
• Is trade consistent? What’s made the last few weeks so much better? What about wet sales (if this was the weather)? Group doesn’t want to micro-analyse. No comment on whether wet sales drove revenues.
• The 53rd week? Will be about £2m or so. It is a ‘pay week’.
• Why did you also update on 23 June? Because the market ‘was a bit low in its estimates’.
• Input cost inflation? Mostly food (as drink is on longer-term deals). Butter is spiking. Fish is an issue. Most inflation has been mitigated towards the 1% to 3% range.
• Mobile ordering app? It’s in its infancy. Don’t want to give numbers. Pleased with how it has started off.
• Regional differences? None.
• Trading down? Yes, perhaps. But the group will lose customers to the supermarkets as well. The group accepts that ‘it is doing a little better than the pack’.
• Balance sheet & debt:
• Year-end debt? Will be c£65m higher. There have been buybacks, freehold reversions etc.
• Leverage rise to 3.7x EBITDA? Co says it will be a bit higher but 3.5x remains the goal ‘over five to ten years’.
• Disposals? Has sold c80 in the last two years. There will be some this year with additions of c12-15 or so. Net, net, there may be no change.
• Langton View: JD Wetherspoon has confirmed that trading is good, that it has become a little more weather-sensitive and that debt will be a shade higher.
• It updated last month ‘because estimates were a bit low’ and the year should trade out well.
• Margins are perhaps a little lower than hoped and there may not be upgrades on the back of today’s announcement.
• Nonetheless, the group’s shares, trading as they are at around 16.5x this year’s (and next year’s) earnings, are not as optically expensive as they sometimes are and, as the freehold element within the group’s estate continues to rise, this should be reflected in the share price going forward.
• As it is buying shares back and will continue to do so during its closed period, JDW appears to think that its shares offer fair value and, despite them having breached £10 once again this morning, we would be inclined to agree.
FULHAM SHORE FY ANALYSTS’ MEETING:
Following the posting of its FY numbers this morning, The Fulham Shore hosted its analysts’ meeting. Our comments are set out below:
• The group has seen a c1% reduction in gross margin because of the cost pressures it faces alongside the rest of the industry (chiefly labour and input costs).
• Of these, The Fulham Shore anticipates labour to be the bigger issue going forwards. The group is already seeing an effect this summer with regards to worker availability.
• Group staff turnover is low by industry standards, and workers are compensated well with share-based payments (up 110.8% year-on-year) and rising wages. Costs will, however, increase to attract and retain quality staff.
• Franco Manca and The Real Greek have sought to cover the impact of the weaker pound by changing their menus to mitigate cost increases.
• More on Trading:
• There has been an increasing amount of sourdough pizza competitors entering the market, but these are typically ex-chefs that run single-site operations.
• Franco Manca’s biggest competition is cannibalization, according to the group’s management. Established incumbents such as Pizza Express have as much as double the average customer spend of Franco Manca. FM upsells less.
• This offers it a clear advantage, particularly at a time when the consumer is becoming more discerning in his/her discretionary spend.
• The Real Greek, meanwhile, has very few rivals in its space and has been performing well in the regions. Its rate of site openings will increase in future.
• Management is also optimistic about its ‘Greek on the Street’ concept, which could increase the concept’s addressable market and offer a way into the lucrative food-to-go market.
• It says both brands have the potential to expand considerably, but its Bukowski franchise in Soho is now ‘under review’. Its higher protein menus result in lower margins and the site has become something of a distraction.
• The group’s tight focus on quality sites and good value leases provide the opportunity for shorter paybacks and higher returns on capital. Canny property deals have so far been a hallmark of The Fulham Shore’s success at a time when many rivals have come unstuck.
• Its Westfield site inside Debenhams shows a creative approach to addressing spare retail capacity in a way that benefits both parties.
• Current Trading:
• The Fulham Shore has opened eight new sites so far this year. A couple opened towards the end of last financial year were also intended for FY2018.
• It says there is a ‘very strong’ pipeline for FY2018, with room still in London and university towns across the country to aim for.
• Management says more money will be invested into brand building (having billed the past two years a ‘brand grab’) with one eye on the long-term future of the brands as national, and even global, brands.
• As The Real Greek expansion steps up, more will have to be invested into the business to beef up its central team with the additions of HR and property people. This has already happened at Franco Manca.
• An increasing amount of regional openings might change the maturity profile of its sites. The first Franco Manca in Brixton took three years to take off. The regions might be similar, as the brand is less well known outside of London.
• Langton View: The Fulham Shore has delivered an assured meeting and is ready to get on with the job at hand of rolling out Franco Manca and The Real Greek. Though Bukowski might be taken off the menu, the group’s two central concepts offer enough momentum and potential to be optimistic about The Fulham Shore’s prospects.
• Labour costs will clearly become an issue but the group believes it is better positioned than most in the industry to absorb any rising costs. The group’s net operating cash flow has nearly trebled and its credit facility, which has been bumped up to £14.25m, is manageable. The group’s managing director takes pride in his ability to negotiate favourable lease deals and can keep a tight rein on costs.
• With a target of 15 new store openings this year (and a history of surpassing such targets) and a strong pipeline, The Fulham Shore is making steady progress and its management have enough experience to ride out the much-flagged headwinds facing the industry.
PUB, RESTAURANT & DRINK PRODUCERS:
• F& B companies in the press. Brexit campaigner Tim Martin is in the Press having told anti-Brexiteers to ‘put a sock in it’. The day after having reported Full Year numbers, pizza operator Fulham Shore gets a few column inches having said that its (largely EU) staff ‘feel very bruised over Brexit’. The latter says that it is already having some issues in recruiting and retaining staff from the Continent.
• Sky News reports Patron Capital, which is buying Punch B, is in the bidding to purchase Admiral Taverns for around £200m. The MCA reports that the properties in question have recently been values at £243m.
• SSP yesterday updated on Q3 trading saying that ‘on a constant currency basis, total Group revenues for the period from 1 April 2017 to 30 June 2017 increased by 14.6%, with like-for-like sales growth of 3.6% [and] net contract gains of 7.6%.’ Looking forward, the group says ‘whilst a degree of uncertainty always exists around passenger numbers in the short term, particularly in the current environment, we are well placed to continue to benefit from the structural growth opportunities in our markets and to create further shareholder value.’
• Food led bar company Darwin & Wallace is to open its 5th site, No 29 Power Station West on 28th July next to Battersea Power Station within Circus West Village. It says that ‘created by artisans of interiors, food and drink and set to be the village’s only pub on site, No 29 Power Station West and will join a selection of all independent traders next to the iconic Battersea Power Station’.
• Asian casual dining chain P.F Chang’s is the latest US operator to announce plans to open in London, with its first site due to open in Covent Garden on 4 August. The group was founded in 1993 and has since opened over 280 sites in the USA and worldwide. It is the latest in a string of US chains to cross the pond in the past two years, with The Counter, MOD Pizza and Smashburger among those vying for a slice of the booming UK restaurant market.
• The take away pizza chain, Papa John’s, has now enabled customers to order from Facebook, as its digital ordering arms race with Domino’s Pizza continues.
• BDO has reported that ‘UK economic growth slowed in the first quarter of 2017.’ It says ‘following the 0.5% and 0.7% growth in GDP in the last two quarters of 2016, the post-European Union referendum depreciation of the pound and rise in living costs finally filtered through to household budgets.’
• BDO says slowing economy ‘suggests a challenging environment for consumer-facing sectors such as retail and the leisure industry.’
• BDO reports ‘the extent to which households choose to spend, borrow or save is likely to be significantly influenced by confidence levels.’ It adds ‘the IHS Markit Household Finance Index for May 2017 found that UK household finances remain under the greatest pressure seen since mid-2014.’
• The last test in the British & Irish Lions’ series against the All Blacks has produced a significant uplift in beer sales for pubs showing the games. Data from Vianet and MatchPint found that beer volumes in sports venues saw a 58% uplift in beer sales during match time compared to the previous weekend.
• Carlsberg and Brooklyn Brewery have extended their collaboration across Europe. The pair will open a joint venture brewery in Lithuania, after a recent successful UK joint venture which saw Carlsberg acquire craft brewery London Fields.
• TripAdvisor has agreed a new partnership deal with Deliveroo, which will enable TripAdvisor users to access the Deliveroo service and order food online.
• The UK competition authorities have said they will launch an in-depth probe into the proposed merger of Tesco and Booker. The Competition and Markets Authority has said there would be 350 areas of reduced competition as a result of the merger.
HOLIDAYS, LEISURE TRAVEL & HOTEL:
• Dart Group reports FY numbers to end-March, says revenues rose 23% to £1.7bn with operating profit down 2% at £103m
• Dart reports PBT of £90.1m (2016: £104.2m) with operating margin down to 6.0% from 7.5% last year
• Dart reports EPS of 51.8p (2016: 60.2p) with a full year dividend of 5.272p (2016: 4p). Group says lower profit ‘includes considerable investment to launch our two new Jet2.com operating bases at Birmingham and London Stansted Airports and also includes a £10.9m charge for foreign exchange revaluation losses (2016: £1.3m).’
• Dart reports ‘both our Leisure Travel and Distribution & Logistics businesses have made satisfactory starts to the new financial year. Given visibility on current forward bookings and the recent successful launch of our new operating bases at Birmingham and London Stansted Airports, the Board expects to meet current market expectations of underlying profit before taxation for the year ending 31 March 2018.
• Dart concludes ‘despite the considerable uncertainty around “Brexit” negotiations, we believe that the UK Government recognises the importance of aviation services and similarly, European countries appreciate the value that British tourists bring to their respective economies. Therefore, for the long-term, we remain confident in the resilience of our Leisure Travel business.’
• STR data for London Jun 2017 shows strong rate growth in hotels. Average daily rate was up 5.5% to £162.51 with RevPAR increasing 5.1% to £136.72 yoy. Occupancy dropped 0.4% to 84.1%. This data shows that the London Bridge terrorist attack only resulted in moderate declines, with ADR and RevPAR battling back to growth by the end of the month.
• Eurotunnel’s Le Shuttle posted a 7% decrease in tourist traffic for June yoy, up against tough comps due to the European football championships in France last year. Eurotunnel said overall shuttle traffic has fallen 2% since January with 1.16m vehicles transported.
• The short-haul late sales period has endured a slow start, meaning budget airlines could bear the brunt by lowering flight prices. Chris Photi of White Hart Associates Travel Accountants said ‘Exchange rates are a huge issue; the perception is that it is 20% dearer…There is not the feel-good factor to spend – maybe people are waiting for the late, late market.’
• Manchester Airports Group annual profits for the 12 months leading to March 31, boosted by a record number of passengers at Manchester airport and strong growth at Stansted. EBITDA increased 8.7% yoy to £348m and overall passenger numbers rose 7.7% to 55.9m, with 26.2m at Manchester airport (11.5% growth) and 24.3m at Stansted (4.7% growth).
• A report published by HVS on the growth in serviced apartments has found that there are currently 10,000 units in the pipeline across Europe, of which 37% will open by the end of 2017. According to the report the majority of pipeline openings are in the UK (41%), with Germany accounting for 32%.
• InterContinental Hotels Group (IHG) has announced the signing of Hotel Indigo London – One Leicester Square, growing the brand to 11 hotels in the UK with 4 in London. The 95-room hotel will open late 2017, and will feature a destination rooftop bar. Critereon Capital will operate the hotel under a franchise agreement.
FINANCE & MARKETS:
• Reuters reports that UK household income was actually falling before the June 8 vote that saw current PM Theresa May lose her majority.
• UK jobs numbers yesterday were deemed to be slightly better than expected. Sterling strengthened a little.
• US Fed chair Janet Yellen has said that US interest rates are likely to remain historically low over the longer term
• Oil price down 50c or so at $47.76
• Sterling stronger at $1.2899 and €1.1278
• UK 10yr gilt yield off 2bps at 1.26%
• World markets: UK sharply higher with Europe & US also up. Far East generally higher in Thursday trade
YESTERDAY’S LATER TWEETS:
• Later tweets: JDW reports +5.3% LfLs in last 11wks. Margin > last year but a little down in Q4. Good progress but shares slipped a tad
• Tim Martin tells cautious Brexit observers ‘put a sock in it’. Says uncertainty is a fact of life (though scale of it is off the charts)
• Fulham Shore reports FY March numbers, revenues 41%, pre-opening cost EBITDA +36.5%. Slight margin slip on higher costs
• FUL reports moved from 29 to 45 restaurants in the year to March & stands at 54 units now. More openings to come
• FUL targeting new openings, delivery, forward ordering & marginal revenue. Bukowski, not so much. Single unit likely to be rebranded
• Sterling at 8mth low versus Euro. Euro itself at a 14mth high versus US$.
• Unemployment falls to 1.49m, lowest since 1975. Wages 2% versus inflation of 2.9% as most of us work harder, get poorer
• ONS says squeeze to continue. Says ‘ the growth in weekly wages [is] low and inflation [is] still rising.’
RETAIL NEWS WITH NICK BUBB:
• ASOS: By Boohoo.com’s standards, today’s Q3 sales update (for the 4 months to 30 June) from ASOS is a little unexciting, but 26% constant currency growth would be considered very good for most companies (32% at actual rates) and ASOS has edged up its sales growth guidance for y/e August. UK growth was “only” 16% in the period, but International sales growth was 44% (32% in constant currency). CEO Nick Beighton says “We remain on track and confident of meeting market expectations” (the company compiled PBT consensus for FY 2017 is £79.4m). There is a conf call for analysts at 8.30am.
• Game Digital: There was some big trading in Game Digital shares yesterday, but we had no idea that it was “Mad Mike” at work, with Sports Direct announcing this morning that it has bought 44m shares in the company, to give it a 25.75% stake. The only comment on the transaction is from Game Digital which has rushed out a statement welcoming this new shareholder: “GAME is pleased that the strategic value of the group has been recognised by Sports Direct through this acquisition of a 25.75% stake. The Group looks forward to working collaboratively with Sports Direct to explore the clear opportunities that a constructive partnership and collaboration can deliver for all stakeholders in the gaming, live events and rapidly growing esports markets in which it operates”.
• N Brown: We recall some wag saying recently that the home shopping company N Brown was showing signs of turning itself from a financial services business into a retailer, but old habits die hard and investors will be shocked by today’s announcement that N Brown “has identified flaws in certain general insurance products which were provided by a third party insurance underwriter and sold by the Group to its customers between 2006 and 2014…Following an assessment of the cost of potential customer redress, the Group expects to incur an exceptional cost in this year’s income statement in the range of £35m to £40m”…