Langton Capital – 2017-09-11 – Profit warnings, discounting, directors’ buying & other:
Profit warnings, discounting, directors’ buying & other:
A DAY IN THE LIFE:
Bit busy this morning. On to the news:
60 SECONDS: TOUGH SUMMER DENTS PUB PROFITS:
Greene King warns summer has been tough – September could be worse:
• Greene King says LfL managed sales in the 18wks to 3 Sep fell by 1.2%
• Sales in the first 10wks were flat (0% LfL)
• This implies they fell by more than 2.5% LfL in July & August
• September comps are very tough; there will be a relative September shortfall
Greene King’s news in context:
• Given the weather, the slowing economy & Brexit fears, tough trading is not a surprise
• All five listed restaurant companies have warned on profits in recent weeks
• Though GNK is only 1/3 of the way through its financial year, forecasts are being reduced
• We cut PBT estimates for 2018 & 2019 by c6% to £254m and £260m respectively
• This represents EPS of 66p and 68p. Dividends may edge forward to 33.5p and 34.0p
Implications for the sector:
• Whilst digesting Spirit has its issues, much of the Greene King comment is market-related
• MARS and MAB (and EIG) have September year ends, FY17 will not be finishing strongly
• We therefore reduce our MARS and MAB profit estimates by around 4%
• GNK and MAB are aided by their London estates but MARS has better margin progression
• Marston’s PBT is estimated at £100m for Sep 16 and £111m in FY18 (EPS 13.6p & 14.0p)
• The economy is slowing & confidence is slipping
• Big ticket spending is under pressure; affordable treats are not immune
• But operators are (for the most part) well financed and asset backed
• They are better positioned to deal with (the currently building) headwinds
• Good operators will succeed but the going is tougher than it has been for a number of years
PROFIT WARNINGS. WHAT’S NEXT; INCREASED DISCOUNTING?
• After the profit warnings, should we expect more discounting? Well, yes. Pizza Express’s 40% off meal prices deal expired yesterday. It looks like it’s been replaced with another 40% off voucher. This one expires in 3dys. I think we can guess what might happen on Thursday.
• Hungry Horse (GNK) is offering 33% off main meals this week. Frankie & Bennies’ (RTN) is offering 25% off meals with a Rewards Card signup and Harvester (MAB) is offering £10 off bills over £30. That’s 33% if you get it right. Pizza Hut is offering 33% off food, Strada is offering 33% off mains etc. etc. Some operators appear to be absent (or at least less present). These include MARS, Wagamama, Nando’s and others.
• Macro vs micro. On the industry level, discounting is a bad idea. The same customers (pretty much) eat the same meals but they pay less money. Industry profitability suffers. The industry as a whole does the same work but margins and profits fall. The problem, of course, is that at the company level, the micro level, discounting can make sense.
• Beggar thy neighbour; has the policy got legs? At the micro level, it maybe has. And for companies in trouble (maybe not existential trouble, maybe just trouble in hitting revenue numbers), there’s arguably little point in telling them that they’re disadvantaging the whole industry by cutting prices.
• Where’s the road back? This is one of the other issues. You can give vouchers away easily enough. Giving a tenner away for nine quid has never been a problem but how do you wean the public off vouchers when you’ve been supplying them for months? Well, it’s tough. Particularly if a large number (or any number) of operators are still offering discounts. Watch this space.
PUB, RESTAURANT & DRINK PRODUCERS:
• Headline writers out saying pub profits go flats, sales lose their fizz, results fail to sparkle etc.
• Greene King’s share price fell almost 15% to 560p on the back of last Friday’s profit warning, which showed that like-for-like sales declined by 1.2% in its managed arm n the 18 weeks to 3 September.
• Greene King’s shares are now at their lowest level since mid-2012.
• The Telegraph reports GNK boss Rooney Anand as saying that the rising cost of overseas holidays will constrain consumer spending in pubs going forward. Mr Anand tells the ‘paper ‘the types of things customers are saying is that it has cost them more to go on holiday and they had taken out more euros than they thought they would have to.’ Staycations must have mitigated this but GNK’s opinion is that the overall balance has been negative for trade.
• Marston’s CEO Ralph Findlay on Friday bought 47,121 shares in Marston’s at a price of 105.52p. Fulham Shore directors also bought shares in the company that they manage last week as share prices fell across the sector.
• JDW Friday bought back 200k of its own shares for cancellation at 1024.6p per share.
• Visa has reported that 2017 is set to be the weakest year for UK consumer spending in four years. It says the falling pound has dampened spending. Visa says ‘consumer spending in August has bucked the trend of the previous three months, registering a marginal increase against the same period last year.’
• Visa reports consumer spending has increased by an average of 0.2 per cent each month so far this year.
• BRC Springboard data shows high street footfall declined by 2.6 per cent in August versus a 2.1 per cent drop in July. The BRC says ‘encouraging shoppers back to more of our town centres is crucial to reducing the high number of vacant premises and the increasing gap between the vibrant and in-demand areas and those at the much more economically fragile end of the spectrum.’
• Research commissioned by The Daily Telegraph shows that nearly a quarter of shoppers have abandoned the British high street. Following a string of big high street chains such as Woolworths, Phones 4U and BHS closing, the British Retail Consortium (BRC) warns that up to 80,000 more stores could close as retailers struggle against increasing costs. Footfall in August fell 1.2% yoy.
• Wetherspoons’ second price rise in six months has been blamed on Brexit by experts. Meal deals have increased 10p and a pint has increased by 6p. Wetherspoons said Brexit had nothing to do with it saying ‘There’s been no increase in real ale. Food and drink are up by an average of 1%.’
• Pizza Hut is targeting millennials through a new smartphone app, an increased alcohol and cocktails menu and offering the lunchtime buffet in evenings in selected stores. The pizza chain is on track to redesign 90% of its restaurants by the end of this year. For the year ending 6 December, 2016, sales grew from £225m to £233 but pre-tax profit fell from £7.9m to £5.2m.
• Half of Britons now expect their kids to be worse off than they are themselves.
• NRN reports that Chili’s Grill & Bar is cutting choice on its menu by 40%. It says ‘by eliminating 40% of our menu, we’ve reinvested in meatier burgers, ribs and fajitas – the items that we’ve always been known for.’
• London’s housing crisis will force workers to either live in so-called “micro flats” or leave the capital according to data from London-based firm U+I. The developer intends to build thousands of flats in London of around half the size now recommended for dwellings. Satirical journal The Daily Mash recently reported that software companies were developing apps to allow Londoners to see what it was to like to have a garden. Or a life, some might say.
• Fentimans is moving into the craft beer market via the new Fearless Brewing Company, named after founder Thomas Fentiman’s dog. The group has repurposed its old facility into a brewery for Fearless Brewing, which plans to bring its first beers to market within the next two years.
• AB InBev has laid off almost 400 employees from its High End division. The division is in charge of craft beer acquisitions and ‘super-premium’ imports and has bought 10 US craft breweries since 2011.
• MCA writes that JD Wetherspoon has put three pubs on the market — The Crown & Sceptre in Streatham Hill, The Widow Frost in Mansfield, and The Grapes in Sutton.
• The Scotch whisky tourism industry has been boosted by the weak pound, with a record 1.7 million tourists paying a visit to a Scotch distillery in 2016. This is an 8% rise on the previous year. Almost £53m worth of revenue was generated by visitors and the average spend per person rising by 13% from £27 to £31 compared with the previous year. ‘Brexit and the weakness of sterling have given a short term boost to distilleries, and, despite some uncertainty about the long-term, they are continuing to invest to improve visitor facilities,’ said Karen Betts, SWA chief executive, while Diageo credited the rise in tourism to increasing interest from Russian and Chinese consumers specifically.
• Peter Furness-Smith, former managing director of McMullens, has become a non-exec at pub operator and brewer Brakspear. Furness-Smith said, ‘I’ve been impressed with what Brakspear has achieved over the last few years, particularly the clear market positioning they have developed for each of their pubs.’
• In partnership with Ford Motor Co., Domino’s Pizza Inc is testing pizza delivery using driverless vehicles in the US.
• US casual diner TGI Fridays has seen take-out sales grow by 30% in the year since introducing online ordering. As a result the Dallas-based operator is investing heavily into new digital technology.
HOLIDAYS, LEISURE TRAVEL & HOTEL:
• President Trump said hurricane Irma is ‘of absolutely historic destructive potential. I ask everyone in the storm’s path to be vigilant and to heed all recommendations from government officials and law enforcement’.
• Pilots at Thomas Cook have gone on a 12-hour strike for the first time in 40 years over pay. Balpa, the union, said it was committed to finding a solution to the dispute and urged Thomas Cook to put forward an offer the pilots could accept.
• STR has released strong results f0r the US hotel industry with occupancy climbing 2.2% to 65.9%, ADR rising 2.1% to $121.76 and RevPAR increasing 4.3% to $80.22.
• The EMEA has found that London is the top destination for meetings and events, with the city benefitting from a weak pound.
• The UN World Tourism Organisation has recorded a global increase in international tourists (up 6%) for the six months to June. UNWTO secretary-general Taleb Rifai stated that the strong results could in part be attributed to ‘a significant rebound in destinations such as Turkey, Egypt and Tunisia that suffered decreases in previous years.’
• Luton airport progresses plans for improved transport links on the back of a record summer, which saw passenger numbers increase 6.8% y-o-y to 4.7m.
• Caravan park owner Park Leisure has reported a drop in profits of 43% to £3.29m. Turnover was flat at £57.8m but costs rose.
FINANCE & MARKETS:
• The NIESR has suggested that output grew by 0.4 per cent in the three months ending in August 2017 after 0.2 per cent in the three months to July. It says ‘we estimate that economic growth accelerated to 0.4 per cent in the three months to August. Our estimate is in line with our latest forecast for third quarter GDP which also stands at 0.4 per cent. Service sector output as well as industrial production appears to have contributed to the uptick in GDP growth.’
• The latest quarterly review of inflation expectations undertaken by the Bank of England suggests that consumers expect the rate of inflation to be around 2.8% for the next year. The survey suggests that expectations for inflation over the entirety of the next five years is 3.4% per annum.
• The ONS reports that manufacturing output grew at the fastest pace this year in July.
• The ECB has indicated that it will begin tapering QE over the next few months.
• BCC says there is ‘no sign on the horizon of a return to healthier levels of growth’. It expects to see 1.6% growth this year with 1.2% in 2018 and 1.4% in 2019. The BCC says ‘the rising upfront cost of doing business in the UK, the uncertainty around Brexit and the constraints created by skills gaps and shoddy infrastructure collectively outweigh any benefit arising from the recent depreciation in sterling.’ It says ‘a cheaper currency does not automatically mean an export boom, no matter how politicians or commentators will it to happen.’
• UK trade deficit £2.9bn in July. Same as June.
• Oil down to $54.05
• Sterling up vs dollar at $1.3172
• Pound up vs Euro at €1.097
• UK 10yr gilt yields up 1bp at 99bps
• World markets: UK down on Friday but Europe up. Wall Street down but Asia mostly up in Monday trade
o TUC lectures Tories on economics. Says Mrs May’s demands of the EU are like a ‘letter to Santa’.
o Tory donor Lord Harris of Peckham has said that Mrs May is ‘hopeless & weak’.