Langton Capital – 2019-03-08 – Goals Soccer, Pat Val, EBITDA (the big lie), delivery etc.:
Goals Soccer, Pat Val, EBITDA (the big lie), delivery etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD: (PREMIUM TEXT WILL NO LONGER BE IN BLUE FROM MONDAY)
A DAY IN THE LIFE:
I’m sure our dog is immensely thick but, on some occasions, he does display an animal cunning that’s hard not to recognise.
Or admire even, for example, we don’t like him tearing for the door & terrorising the postman. Hence, we try not to draw attention to it if we’ve heard the van, or the gate open or that we’ve seen somebody on the drive but the dog’s wise to that.
Because he’ll watch all of us closely.
Even when he’s draped like a sack of potatoes on the rug with only one eye half open, he’ll be watching what’s going on and, at certain times of the day, if he catches me glancing towards the door, he’ll glance towards the door.
Then, if he sees me move, he’ll glance again and then he’ll see me move more & he’ll move. And then I’ll move quicker and, before you know it, we’re both running towards the door, one of us barking like, well, a dog and the other cursing and shouting like Attila the Hun and the postman throws our letters in the mud & makes a run for it.
Of course, the dog thinks we’ve been in on this together. We’ve seen off an intruder and he’s after high-fives and treats while I’m just thinking about writing another letter of apology ot the Post Office. On to the news:
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IN AN EVOLVING MARKET, THERE IS NO END GAME: PUBS VS RESTAURANTS No6, THE DELIVERY ANGLE – 8 March 2019:
• Supply won’t come out of the market quickly, demand may falter & pubs are better-positioned than restaurants
• In the longer term, delivery companies, if they don’t go bust, may buy bricks & mortar operators following the Amazon model (and as witnessed in the gambling industry)
• Longer, longer term (when, as Mr Keynes said, we are all dead), money will flow to the talent. It has in football and in Hollywood. Good, authentic restaurants selling what people want to buy at a price they are prepared to pay, will prosper.
• In a dynamic market such as that for eating & drinking out of the home, there may not be an ‘end game’.
• But there may be periodic steady states and, with delivery eating into the market for food, CVAs forever in the news & some new capacity trying to come onto the market, it doesn’t feel that we’re currently in one of them
• Hence, what might we see over the next decade or so?
• The free market is wonderful but it’s not perfect.
• There’s no braking mechanism when it comes to restaurant & coffee shop capacity, but there’s a pretty effective crashing mechanism – and that’s in evidence now via CVAs and the like.
• But even here, the next best use of a busted restaurant is a restaurant and, unless landlords or Councils get involved, there may be several downward rotations before a site either prospers (possible) or fails (more likely)
• Hence supply may be slow to come out
• People gotta eat. And they may not want to cook but, if the economy slows, we’ll find out once more that there’s a difference between what people want and what they can afford.
• Hence there may be a secular move towards eating out (or having food delivered) but, in the short and perhaps the medium term, this may be in abeyance
• CVAs (like pre-pack administrations before them) are interfering with the market – and not always in a good way
• Pubs may be better positioned than restaurants. They pitch to lower price points. They are more flexible in their tenure and they have been reducing rather than increasing in numbers
• It would be surprising if delivery companies did not follow the Amazon model. Dark kitchens could be a move in that direction.
• Indeed Deliveroo Editions is a move in this direction.
• Delivery companies are already capturing customer data. They are being fed it by the very companies that they may ultimately put our of business
• In a market where the macro response perhaps should be to shun delivery, the micro response of many operators is to embrace it in order to drive LfL sales
• An alternative would have been to set up an industry-owned, Deliveroo lookalike but, given the egos and the historic lack of cooperation common in the F&B market, that was never gonna happen, was it?
FROM THE ARCHIVES: EBITDA: THE BIG LIE – ACCOUNTANCY No1 – 8 March 2019:
Langton writing on 12 July 2006, 2yrs before the crunch:
• At that time looking back on the dotcom boom, we wrote ‘valuation measures moved 1) up the P&L (from PAT to PBT, EBIT, EBITDA, EBITDAR** and ultimately to sales) and then 2) to the right (current year, year one, year two, year five etc).’
• We said ‘profit was an old-fashioned concept. The idea of a positive cash-flow this side of an England World Cup win was laughable.’
• We poured a bit of scorn on ‘efficient balance sheets’ and questioned whether share buy backs were a good idea.
• But, as they say in the stock market, if you’re early, you’re wrong & the markets carried on going up for a year before faltering, going up again & then collapsing
• We wrote at the time that we believed the upward momentum would continue & said that, as ‘the readership of this email is too gentlemanly to rub my nose in it for the next couple of years, it is tempting to suggest that as debt multiples expand further and asset values continue to rise, the markets could boil over.’
IFRS will see rent move below the line. EBITDA will actually increase…
Talking about EBITDA, the big lie, we said in July 2006:
• ‘EBITDA is not necessarily a good measure of worth’. We suggested ‘in a steady state, D = maintenance capex and, with customers able to shop around, in the longer term, if there is no maintenance capex, then there will be no customers.’
• We commented ‘interest on debt is not optional whereas (in theory at least) the dividend on equity is.’ We added ‘in a volatile or evolving market, a debt-encumbered player will struggle to compete.’
• Regarding debt (and now lease payments) as somehow benign, could be fatal. When rent payments move below the line with IFRS16, this may be the default position.
• But look what happened when Pat Val declined to pay its rent. In 2006 we wrote ‘presumably lenders want their capital back at some point. Maybe that’s old-fashioned but, if they can’t get it back from the borrower, then they will have to get it back on a refinancing. A sort of pass-the-parcel that requires the existence of a player that, somewhat unkindly, used to be known as the “bigger fool”’.
• We then waffled on about CLOs, CDOs and all that other toxic nonsense. At least we haven’t got that this time around.
Timing is everything:
• We may have been early crying wolf but we did add on 12 July 2006 ‘it’s tempting to say that, for those companies (and VCs) that keep their powder dry, 2007 and 2008 will be more profitable years in which to buy assets than will 2006.’
• However, as Bear Stearns said, when the music’s playing, you gotta dance. That turned out to be both 1) true and 2) fatal for many players concerned.
COMING ON MONDAY:
• A bit more from the archives & perhaps some behavioural stuff, Occam’s Razor & maybe the power of incentives.
GENERAL NEWS – PUBS & RESTAURANTS:
• The FT quotes Pat Val’s new owner as insisting that it has the money and skill to rebuild the company despite sacking the café chain’s top management.
• Irish PE house Causeway Capital says that the remaining 96 cafes are trading profitably. The business has around £50m in revenues suggesting that the units turn over around £10k per week each.
• The FT qotes Causeway as saying it is committed to Patisserie Valerie and would not have invested ‘if we didn’t think there were sensible risk-adjusted returns to be made.’
• Barclaycard has found that overall consumer spending across the on- and off-trade grew by 1.2% year on year in February, which equates to a slowdown in real terms when adjusting for inflation.
• The Access to Cash review has found that over 80% of people in the UK pay taxi drivers, newspaper sellers, window cleaners and gardeners with notes and coins. The report did go on to state, however, that the nations cash infrastructure is on the verge of collapse, as contactless payments continue to increase.
• Imbiba has contributed towards Farmer J’s £1.9m fundraise, that will see the group expand across London. Farmer J’s is a ‘build-your-own’ grab and go field tray concept.
• CEO of Social Entertainment Ventures (the parent company to Bounce), Toby Harris has announced the group’s plans to open up in 70 metropolitan areas in the US, Big Hospitality has reported.
• Ei Publican Partnerships has teamed up with multi-site operators, Adam and Sue Franklin, and have jointly invested £300k into The Spitfire Pub & Kitchen in Ainsdale.
• Admiral Taverns has completed the £250k renovation of the 18th-century pub the Borough Arms in Lymington, Hampshire.
• US restaurants have seen a 0.6% fall in LfL sales during February, research from TDn2K has found. Vice President to Victor Fernandez commented: ‘February was the month with the worst same-store sales growth rates for both 2017 and 2018, and it was a disappointing month again this year. Sales growth has been negative for the month since 2017, and the cumulative effect was a concerning 5.2 percent drop in sales for February over the last three years’.
• Mike Ashley, Chief Executive of Sports Direct is set to leave his current role and focus on running Debenhams, as he tries to turn around the struggling department store group.
• Market research from Mintel suggests almost 90% of UK shoppers use Amazon, with 40% having access to a Prime membership. Most Amazon shoppers visit the online retailer at least once a month and just under a fifth once a week.
• Alibaba partners with Office Depot in an effort to empower small and medium-sized businesses.
HOLIDAYS & LEISURE TRAVEL:
• Outbound sales for summer 2019 were up 12% yoy last week, with GfK senior client insight director David Hope saying it was ‘a sign of positivity…[Comparison with] the ‘Beast from the East’ made last week very strong, but bookings would still have been 3% to 4% up.’
• The European Commission has proposed a regulation to ensure air connectivity in the event of a no-deal Brexit. A final draft of the proposal has been provisionally agreed by the EU and is expected to be confirmed shortly, according to Transport secretary Chris Grayling.
• The owner of Hoseasons and James Villas has rebranded as Awaze with a new senior leadership team. Previously known as European Vacation Rentals it was sold as a group to Platinum Equity by global hospitality giant Wyndham Worldwide for $1.3 billion last May.
• The government has assured overseas nationals that visits to the UK will continue to be visa-free for European Union nationals after Brexit.
• Direct Ferries data indicates customers are avoiding Dover in favour of other ferry departure points due to ‘scaremongering’ about Brexit disruption. February saw a rise of 29% in bookings from Harwich to the Hook of Holland and 21% from Hull to Rotterdam yoy.
• Brexit has had a relatively limited impact on travel plans for 2019 with only 11% of Brits saying it affected them, STR has reported. STR found that 36% of Europeans thought it was best to avoid the UK when travelling in late Marcha in April due to Brexit concerns.
• STR has reported that US hotel occupancy was down 1% to 65.3% with ADR up 1.3% to $127.59 and RevPAR also increasing 0.3% to $83.36, for the week ending 2 March.
GOALS SOCCER PROFIT WARNING, BANKING BREACH ETC.
• Goals Soccer profit warning, breaches bank covenants and finds ‘accounting errors.’
• Goals Soccer has updated on trading saying it ‘expects the 2018 full year results will be materially below expectations and that the reporting date (previously 12 March 2019) will be delayed.’
• Goals has identified ‘certain accounting errors.’ It says it is ‘reviewing some accounting practices and policies. The company says: ‘it is likely that the Board will take a more prudent approach both for 2018 full year results and going forward.’
• Goals says ‘whilst the majority of these accounting adjustments are of a non-cash nature, this does nevertheless mean that the Company will have exceeded one of its banking covenants at 31 December 2018. We are in discussions with the bank with a view to agreeing re-negotiated facilities.’
• Current trading is good. Goals says ‘the Board would also like to confirm that trading in the first two months of the year has been strong with an increase in like-for-like sales, in both the UK and US, over the comparable period in 2018.’ Goals adds it will make further announcements in due course.
• Facebook Inc has removed 137 fake pages, groups and Instagram accounts in the UK for engaging in hate speech and make divisive comments.
FINANCE & ECONOMICS:
• Interest rates in the Eurozone are unlikely to rise until 2020 at the earliest. This on the back of reduced growth estimates. ECB president Mario Draghi has said that ‘incoming data have continued to be weak, in particular in the manufacturing sector.’ He says ‘the near-term growth outlook will be weaker than previously anticipated.’
• Halifax reports house prices rose by 2.8% in the three months to February. Prices are now some 1.8% higher than a year ago.
• Chinese exports saw their largest fall in three years in February, down 20.7% from a year earlier. Imports were down 5.2%.
• Sterling down at $1.3088 but up vs Euro at €1.1682. Oil down at $65.93. UK 10yr gilt yield down 4bps at 1.18%. World markets all lower yesterday & Far East down in Friday trade.
• Brexit, politics etc.:
o Telegraph says cutting tariffs will strengthen Britain’s hand in EU negotiations.
o Meaningful vote due next Tuesday. ERG flip flopping with Mr Rees Mogg now sounding fierce again. Most MPs believed to want Article 50 extended.
o Jeremy Hunt has said he is still hopeful that the government can secure a Brexit breakthrough over the weekend. The next meaningful vote is Tuesday.
PRIOR DAY LATER TWEETS:
• Later tweets: Gregg’s good numbers & poss H1 special dividend. Veggie sausage rolls a knockout. But cautions on tougher comps in H2
• Delivery v restaurants. Widening market? Or are restaurants letting the fox in the henhouse, feeding it warm milk & biscuits? See Prem e/m
• Labour in restaurants vs pubs. Costs rising & more of an issue for the former than the latter. Bar service saves money. See Prem e/m
• OECD cuts growth forecasts for Germany (to 0.7%), UK (to 0.8%) and Italy (to minus 0.2%) alongside other cuts elsewhere.
• Halifax reports house price surge in Feb (up 1.8% in the 3mths to Feb) to take annual increase to 2.8%
START THE DAY WITH A SONG:
Yesterday’s song was Ramones with I Wanna Be Sedated, today who sang:
It was the third of June, another sleepy, dusty Delta day,
I was out choppin’ cotton, and my brother was balin’ hay
TOPICS FOR CONSIDERATION IN PREMIUM EMAIL:
• Thematic pieces including Pubs vs Restaurants, Delivery, Experiential Leisure, Crowd Funding, CVAs, Employemnt levels (& costs) etc.
• Occasional ‘deep dives’ into stocks (Pat Val, RTN etc.), trends etc.
• Book reviews. Black Swans, The Honest Truth about Dishonesty, Dark Pools, Lean Start Up, Smartest Guys in the Room, Client Nine, Black Edge, The Billionaire’s Apprentice, Thinking Fast & Slow, Wizard of Lies & many others.
• Accountancy, Audit & other, thrill-a-minute topics
• Behavioural economics. Over-confidence, Hofstadter’s Law, confirmatory bias etc.
• Other. Guest contributions, From the Archive etc.
RETAIL NEWS WITH NICK BUBB:
Debenhams: At the unholy time of 6.16pm last night, Sports Direct announced the bombshell that it is requisitioning an EGM to vote most of the Directors off the Board and install “Mad” Mike Ashley as the boss of the embattled Debenhams business. Extraordinarily, #MadMike is even prepared to step down as CEO at Sports Direct to indulge his new-found obsession with department store retailing, with Chris Wootton (who is currently Sports Direct’s deputy CFO) ready to take over at the helm! Debenhams has 21 days to respond and it then has to give 28 days’ notice, so a meeting at the end of April looks on the cards, which may or may not fit with Debenhams’ timetable for a big funding exercise and CVA. What #MadMike thinks of a CVA plan is not clear, but presumably he is unhappy at the thought of his c30% stake in Debenhams being heavily diluted by a debt-for-equity swap…This saga will
QUIZ: We somehow missed yet another profit warning from the embattled fashion chain QUIZ yesterday, which, after the shares halved, meant that the company has now snatched the “worst performing recent Retailing IPO” award from the beleaguered Footayslum (which, after the recent rally, is now only 70% down since it floated)…At just 16p, QUIZ is now 90% down from the 161p level that it floated at in July 2017 (despite touching 200p last summer), capitalising the company at just £20m (despite claiming to have £9m of net cash). Although Online sales have been reasonably strong, it said yesterday that Store sales since Christmas had been way below budget, requiring increased discounting to clear stock…
John Lewis Partnership: The much-awaited John Lewis Partnership finals yesterday at 9.30am were a bit worse than expected, with underlying PBT 45% down (we forecast a c40% fall), despite a good outcome at Waitrose. But we were right to think that the partners would get something rather than nothing, with the annual Bonus coming in at 3% (down from 5%), in a triumph for expectations management. On the conference call for analysts at 12 o’clock, the Chairman Charlie Mayfield expressed confidence that Waitrose would deliver increased operating profits again in the new financial year and Waitrose MD Rob Collins talked about the momentum in the business and the potential for further gross margin growth, via range reviews.
News Flow Next Week: For horse racing fans next week is all about Cheltenham (and “Honest Nick” will be bringing you his Tips every day), but for politicians it is all about Brexit, with the key vote scheduled for Tuesday evening, just before the Spring Budget statement on Wednesday morning…In retailing, however, there is plenty going on, including the prestigious “Retail Week Awards” on Thursday evening. Otherwise, Tuesday brings the French Connection finals and the Pendragon finals. On Wednesday we get the Morrisons finals, the Lookers finals and the Dignity finals. Thursday brings the DFS interims and the Signet Q4 (in the US) and on Friday John Lyttle takes over as CEO of Boohoo.
BDO High Street Sales Tracker: We flagged on Wednesday that sales at John Lewis picked up well last week, thanks to the big shift in the weather year-on-year, and the BDO High Street Sales Tracker for medium-sized Non-Food chains for last week, w/e Sunday March 3rd, is very strong, with BDO Fashion Store sales up by as much as 45% LFL (up 33% LFL including Online), against a comp of -32% a year ago, on the back of the “Beast from the East”. Total BDO LFL sales (including Homewares and Lifestyle sales) were up by 26% last week, versus -20% a year ago (up 37% in Store sales and up by 8% Online).