Langton Capital – 2018-03-09 – Fulham Shore, Conviviality, Caffe Nero & other:
Fulham Shore, Conviviality, Caffe Nero & other:
A DAY IN THE LIFE:
We were physically moving furniture yesterday. And then drinking beer. It’s best we move straight on to the news:
FULHAM SHORE PROFIT WARNING:
• Fulham Shore warns on profits, scales back rate of openings. Headline EBITDA will be below expectations.
• FUL has said ‘we expect to report an increase in turnover and Headline EBITDA for the year ending 25 March 2018 over the last financial year ended 26 March 2017. Whilst turnover for the year ending 25 March 2018 will be broadly in line with market expectations, our Headline EBITDA will, however, be below market expectations.’
• FUL says shortfall is ‘primarily due to trade in our suburban London restaurants which, whilst they are still busy, are serving fewer customers than last year with higher operating costs.’
• FUL says ‘we have opened 13 new restaurants in the financial year to 25 March 2018, taking the number of restaurants operating at the year end to 41 Franco Manca pizzerias in the UK, 1 Franco Manca pizzeria franchised in Italy and 16 The Real Greek restaurants.’
• Openings continue. FUL says ‘we are currently building a new Franco Manca pizzeria in Bath and we have exchanged contracts on a site for later in the year on South St Andrew Street, Edinburgh.’
• FUL says ‘we are operating in an uncertain economic outlook for both the UK and the restaurant sector in particular.’
• This means that openings will slow. FUL says ‘we will bring forward our plans only to fund new restaurant openings from our internally generated free cash flow by reducing the number of new restaurant openings for the coming year. We will also choose those locations that we believe will give us above average returns and sensible property deals.’
• FUL to open 4-5 new restaurants a year for next year and probably the following financial period.
• FUL says its ‘affordable menu position is where we believe we should be placed within the restaurant sector. We believe that this, along with a prudent opening plan, puts us in a good position when the UK economic environment improves.’
• Langton comment: FUL is one of the better placed UK restaurant chains. It is clearly selling what the customers want to buy at a price they are prepared to pay. But the group is not immune to what is going on in the market and, whilst its Central London units are holding up well, we believe that its suburban units are performing less strongly than they did last year.
• FUL is making good profits & is generating cash. However, profits per unit will be below last year’s level and, as better retail opportunities will likely come along in due course, we believe it is correct to slow openings.
• On a brighter note, restaurants have been around since biblical times and the better operators will survive (and ultimately prosper) for as long as financial observers are likely to have observations.
• With that in mind, FUL is a premier operator and its shares should be supported by that fact.
PUB, RESTAURANT & DRINK PRODUCERS:
• Bargain Booze & Matthew Clark owner Conviviality PLC yesterday warned on profits. Its shares fell by 59%. The group said ‘following a review of current year projections, the Company now expects that adjusted EBITDA for the current year will be approximately 20% below current market expectations.’
• Conviviality says ‘the previous guidance for net debt of approximately £150 million for the period ending 29 April 2018 remains unchanged.
• Conviviality points to ‘a material error in the financial forecasts of the Conviviality Direct business, which means the EBITDA for the current period will be impacted by approximately £5.2 million alongside lower margins’
• Conviviality reports ‘whilst our sales and orders have held up at levels ahead of last year, demonstrating that our one stop shop model is working, margins in Conviviality Direct have softened across January and February. In the revised guidance the Company has assumed a continuation of the margin weakness for the remainder of the current financial year.’
• Conviviality reassures ‘the Company has not seen any material weakness in overall demand and the previously announced cost saving actions remain fully on track.’ This did little to cheer investors and the group’s shares yesterday fell by 59%.
• Wagamama and Marriott Hotels have been named and shamed by the Government for underpaying minimum wage workers, reports the telegraph. The Government called out 179 employers, ordering them to repay thousands of workers a total of £1.1m and fined them £1.3m.
• KFC has teamed up with its old supplier following the chicken shortages it faced last month. The fast-food chain has hired Bidvest to oversee supply for 350 of its 900 UK & Ireland sites, Bidvest has promised ‘a seamless return’.
• Caffe Nero has reported full year numbers to end-May 2017 to Companies’ House saying that revenues rose from £258m to £288m and PBT increased from £25.5m to £25.8m. The company says that there is the potential for it to grow to over 900 sites in the UK.
• Famous Dave’s in the US closed 13 restaurants (around 8% of its estate) in its last financial year.
• NRN in the US has reported that LfL sales across the US industry slipped into the red again in February. It reports LfLs down 0.8% in February. NRN reports ‘traffic fell 3.1 percent in February, the industry’s worst month since September 2017.’
• MPs have launched an investigation into energy drinks, as concerns grow about their possible negative impacts on young people’s health in the UK. The Commons science and technology committee will analyse why many convenience stores have not followed supermarkets in introducing a ban on sales to under-16s.
• The MCA’s Eating Out Panel has shown mixed results for february to follow the optimism of January’s uptick in frequency. There was a slight rise in breakfast frequency, but the largest challenge to operators was dinner. The panel also noted a fall in the average lunch spend.
• Heineken is rumoured to be about to offload its brewing interests in China to China Resources Beer, the group behind the world’s biggest beer brand, Snow. Heineken has been trading in China since 1983, but has struggled to get a foothold.
• Heineken is believed to be considering becoming a majority shareholder in United Breweries after reportedly approaching the Indian authorities about buying confiscated shares from the company’s former owner, Vijay Mallya. The Dutch brewer already has effective control through a 44% stake in the company, but is looking to acquire Mr. Mallya 15.2% holding in United Breweries.
• Late-night operator, The Deltic Group has announced that it will remove plastic straws from its venues. The alternative PLA straws that the group will use biodegrade in six months.
• Karla and Andrew Murphy have launched a bottle shop called 80 Day Bier Markt at Paragon Arcade in Hull’s city centre, which sells cans and bottles from around the world.
• The UK’s largest independent perfume retailer, The Fragrance Shop, is moving towards a £200m stock market listing.
• PwC has announced the first job losses at Maplin following its collapse last week and warned of upcoming store closures. A total of 55 workers in London and another eight in Rotherham have been made redundant. PwC said on Thursday: ‘Unfortunately, it has not been possible to secure a buyer for the business. While the administrators remain open to interest from potential buyers, it has been necessary to make a total of 63 redundancies at Maplin’s head offices in London and Rotherham.’
• EI Group yesterday bought back another 309,672 of its own shares for cancellation at 125p per share
• Mobile payments and loyalty app Zapper, which allows users to scan a QR code at the till, has been introduced in 20 more Spar stores.
• John Lewis has cut worker bonuses to just 5% of salary as pre-tax profits sank 77% to £104m for the year to January 27. The fall in profits was partly due to £111m one-off restructuring and redundancy costs, as well as property impairments. Sir Charlie Mayfield, chairman, said it had been a ‘challenging year’ of ‘subdued’ consumer demand.
HOLIDAYS & LEISURE TRAVEL:
• The travel industry expects the bounce back in bookings after last week’s weather to create a ‘mini-Christmas’. Thousands of flights were cancelled last week, with widespread travel branch closures.
• A study by Acceleration Partners shows that one in four consumers would only book a holiday if they could negotiate a discount on the price. Over half of respondents said they enjoy holidays more if they save money on the original price quoted.
• Global airlines report the slowest annual rise in demand in nearly four years at the start of 2018. Iata reports January’s 4.6% increase was due to temporary factors such as the timing of Lunar New Year and tough comparisons with a strong end to 2016 and early 2017. Capacity rose 5.3% for the month but load factor slipped 0.5% to 79.6%.
• Hotel Cafe Royal, the 150-year-old five-star hotel in Soho, is to receive a £165m loan from real estate investment giant Barings Real Estate.
• US hotel results for the week ending 3 March show occupancy up 1.7% to 65.9%, ADR climbed 2.3% to $126.06 and RevPAR increased 4.2% to $83.04.
• Reports of Amazon’s digital assistant Alexa randomly laughing have caused the firm to take action to remedy the problem.
FINANCE & MARKETS:
• The ECB has kept interest rates at their present 0.0%.
• Sterling down vs dollar at $1.3803. Flat vs Euro at€1.1207
• Oil down at $63.79
• UK 10yr gilt rate down 3bps at 1.47%
• World markets: UK up yesterday with Europe & US also higher. Far East up in Friday trade
• Bitcoin down at $8,662
• Brexit & politics:
o President Trump has signed into law his steel & aluminium tariffs. US whiskey is one of the products to be targeted in retaliation by the EU.
o Times reports Russia as saying traitors are not safe on British soil.
o Times reports Labour’s John McDonnell gets praise from business for suggesting small companies should have easier access to finance
o Labour has accused the Tories of prioritising the City in current Brexit talks
PRIOR DAY LATER TWEETS:
• Later tweets: Cutting prices (everyday) hits margin etc. but may be the right thing to do. Is painful & for RTN for example, execution risk remains
• Lower food cost inflation something of a relief to the hospitality industry. With chef wages & other staff costs rising, every little helps.
• Halifax has rate of house price growth in UK only 1.8% in the year to February. That’s below inflation and slowest in 5yrs
• EU / US spat on trade moves on to targeted reprisals. Johnnie Walker, Harleys and the like may take the hit.
• New Look, Maplin & many, many casual diners shuttering shops & sacking staff. Shopmageddon is alive & well & living on your street…
• Milk price flat lining. End of the good news after price rose 60% from its 18-month-ago lows. Farmers have something to moan about again?
• Voting open for British Pie Awards. It’s manufacturing them not scoffing them that’s going to be judged
• Langton has got the keys to its new office. Triumph of persistence over bureaucracy. Refurb delayed & now moving in hampered by recalcitrant furniture. We’ll be occupying rooms 80-81, no65 London Wall, EC2M 5TU. No telephone number yet so for the moment, please communicate via email. MIFID II is now in operation.
START THE DAY WITH A SONG:
Yesterday’s song was indeed The Kinks with ‘You Really Got Me’. But today who sang:
So, if you’re lonely,
You know I’m here waiting for you
I’m just a crosshair
I’m just a shot away from you
RETAIL NEWS WITH NICK BUBB:
Conviviality; After the interims at the end of January, the share price of the drinks distributor and retailer Conviviality weakened somewhat, on concerns about margin pressure, but the Directors were soon in the market buying shares and plenty of people have been saying that the shares look oversold (including today’s Investors’ Chronicle magazine, alas). So anybody at their desks at 3.07pm yesterday afternoon will have been staggered to see the company issue a big profit warning, flagging that following a review of y/e April projections, the company now expects that adjusted EBITDA for the current year will be c20% below current market expectations. The shortfall comes solely in the Conviviality Direct business (the old Matthew Clark operation), including the impact of weaker than expected margins over the last two months, but the City was horrified to hear that there has also been “a
Today’s Press and News: The disappointing John Lewis Partnership results get plenty of coverage in today’s papers, with lots of headlines about “lowest Partnership Bonus in 64 years”, with lots of fingers being pointed at Waitrose (indeed the Times has an article headlined “Finger of blame points at Waitrose”) and some negative Editorial comment. The Business Editorial in the Guardian asks whether Waitrose is “Past its sell-by date?”, whilst the City editorial in the Daily Mail weighs in on how “Waitrose feels the squeeze”, noting our view that Waitrose’s pricing strategy is unsustainable and concluding that “If Waitrose is going to survive, it’s going to have to chop heavily into its margins, which have been too fat for years”. The other big focus is on the shock profit warning from Conviviality (aka “the Bargain Booze owner”): this is the lead story in the Daily Mail stockmarket
BDO High Street Sales Tracker: We flagged on Wednesday that mighty John Lewis had a tough time last week, given the snow disruption, but today’s BDO High Street Sales Tracker for small/medium-sized Non-Food chains for last week, w/e Sunday March 4th, is even worse…flagging that Fashion Store LFL sales collapsed by as much as 31.2%, even though the comp of -3.5% last year was pretty soft. Including Homewares and Lifestyle chains, total Store LFL sales were down by 28.1% (vs -4.4% a year ago), which is the worst performance on record. And overall Online sales were subdued, only up by 6.6% (versus +16.2% a year ago), with Online Fashion sales 5.9% up.
Trade Press (1): Today’s front cover of Retail Week magazine is a photo of Maplin and Toys R Us stores, with the headline “A black week for retail”, to flag up a feature on “As Maplin and Toys R Us go into administration, what can be learned from their mistakes?”. RW also has features on “Sheds Shake-up” (“Robots, wage wars and the race for warehousing space”) and “New force in Food” (“How Tesco and Booker could reshape the grocery sector”). In terms of News stories, RW focuses on the news that Carpetright and Mothercare have sounded financial alarm bells and that New Look is seeking up to 60% rent reductions under its CVA proposal. And the Editor thunders in his column that “Toys R Us was undone by its failure to change”.
Trade Press (2): In Drapers magazine today, the Editor looks in her column at International Women’s Day this week and thunders that “Only culture change can engender equality”, highlighting the feature interview with the Karen Millen CEO Beth Butterwick, who is a leading advocate of equality in the workplace. The main News stories are that Jigsaw CEO Peter Ruis’s exit this week heralds an uncertain future for the retailer and that House of Fraser’s Chinese owner is “in advanced talks” to sell a controlling stake in the troubled business. Drapers also looks at the background to the redundancies announced at the Online fashion business Missguided (“Tough decisions as fast fashion grows up”) and flags that the fashion industry has welcomed the news that Givenchy’s Riccardo Tisci will succeed Christopher Bailey as chief creative officer at Burberry and that many are hopeful that he and CEO
News Flow Next Week: The big event next week is the great Cheltenham Festival of horseracing, which kicks off on Tuesday (and “Honest Nick” will be bringing you his Tips each day). Otherwise Tuesday bring us the French Connection finals and the Spring Budget. Wednesday is then a busy day, with the Dignity finals, the Morrisons finals, the Inditex finals and the Signet Q4/finals.