Langton Capital – 2020-03-24 – PREMIUM – Full lockdown, more RNSs, Tasty, 888, Games Workshop & others:
Full lockdown, more RNSs, Tasty, 888, Games Workshop & others:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
We’ve been very busy these last few days.
And so it goes on today but, with the industry in hibernation, it’s hard not to conclude that a deathly silence will at some point descend.
There will be plenty of stuff going on beneath the surface but results are likely to be delayed (in line with official requests) and comments on current trading will be 1) short and 2) samey.
Anyway, in a bit of a rush at the moment so let’s move on to the news:
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CORONAVIRUS – INDUSTRY FEEDBACK: What has the stay-away advice and then the lockdown actually meant for our industry? 24 March 2020:
The immediate impact:
• PM Boris Johnson’s ‘stay away from pubs & restaurants’ have an immediate and devastating impact on industry footfall.
• From being down perhaps 10% to 15% two weeks ago, the fall accelerated until, ahead of the official closure mandates, footfall was down by over 70%.
• In the couple of days since the closure mandate, around 94% of customers have been staying away with the small minority still coming out presumably visiting takeaway sites – many of which have closed in the last couple of days
Seeing the wood for the trees:
• With hindsight, trying to keep pubs open (was it really only two working days ago that Tim Martin said pubs should carry on trading and that they didn’t spread the virus?) was not realistic
• Singling them out for specific mention was perhaps unfair but, as the PM has now extended the closure notice to basically all shops ex-food outlets and chemists’ shops (the same as much of Europe), we all find ourselves now in the same boat
The immediate impact:
• Perishable food has had to be eaten, given away or binned. Freezers presumably stay on – but this will be hard to maintain over time
• The amount of money involved will vary across outlets but it must run into the hundreds of pounds per site when you include milk, veg, fresh meat and much of the beer that hasn’t been pasteurised etc
• Beer pipes and the like will need cleaning. Perhaps once on shut down and once again on re-opening (see Cask Marque for advice)
• Shuttering sites has led insurance companies in some cases to insist that, after a period of time, they be boarded up. See Soho (that is if you can legitimately travel there).
• This is reasonable as break-ins can and will occur. Damage of this sort would make a return to normal more difficult but it does increase the cost of shutting down
Labour and rent:
• The cost of goods sold will go to zero but the other two big costs on the P&L, labour and property, will need dealing with
• The government doesn’t want staff sacked. But when will government cash make its way into corporate coffers? Not for a while yet meaning that March payroll may have to be paid on a promise
• Any corporate has a fiduciary duty to mitigate its losses. So hourly staff will have no hours and fixed contract staff may have to take a cut or unpaid leave
• Needs must and, if there is no cash, there can be no wages. The government, to be fair to it, is trying to move money as quickly as possible – but this is unknown territory
• The problem here is that the staff you lose may not be the staff that you can get back in three months or so. Staff will get on with their lives
• At the employee level, LIFO will probably operate. Staff with less than two years’ notice don’t accrue as many rights. These tend to be younger people meaning that what’s going on now could blight a generation
• Re property, the micro-solution for a landlord is to hang tough. But at the macro level, that would lead to many, many companies going bust
• Monthly payments (so tomorrow industry has to pay just one month’s rent rather than three) are probably a base minimum. Many landlords, such as Network Rail and TFL, are allowing rental holidays.
• These are state-owned or state-influenced. Langton is in discussions with its own landlord and the clue is in the email address – www.cityoflondon.gov.uk
• It would appear as though the moratorium on evictions has been extended to commercial premises for at least three months.
• This will be a great relief to the industry and, to be fair, it could lead to operators who could have otherwise paid their rent, to withhold it
• We have commented on a number of occasions that poo rolls downhill. The banks cop it from operators and then turn to the government (aka the taxpayer) to bail them out
• It would be surprising if that didn’t happen here
• But banks can’t be made to lend. Particularly to loss-making companies or to those which haven’t had to borrow in the past but now need to
• Who was in a super-bad position (e.g. restaurants in travel hubs with high reserve rents reliant on tourists and operating in the London area) is now moot as all units are closed
• Closure costs (or rather safe’ closure costs) should not be underestimated. And nor should the costs of reopening – both physical and re re-recruiting staff etc.
• Online operators are presumably booming. They are taking on staff. Amazon is de-emphasising books and selling essentials etc.
• Some delivery restaurants will be doing well – but this isn’t really good for anyone.
• There is a scramble for cash. Capex is gone, new sites are toast, bills aren’t being paid etc. This will take some time to unravel.
• Many, if not most, dividends will be scrapped. The government may not like to see shareholders rewarded if the taxpayer is on the hook
• London was worse in terms of footfall, but the misery is now evenly spread
• If you stopped everyone dead on the M1 for a day or two and then tried to sort out who goes what and where, you might see a fraction of the practical problem now being faced by the hospitality industry
• Hospitality’s fate is now shared by all non-essential retailers. The hit to GDP (and to the national psyche) will be substantial
• Bottlenecks will appear. The internet is creaking. The daughter’s school web crashed as pupils accessed it etc.
• There will be a cost to mental health. A fit person (mentally and physically) with a garden, a bicycle and a pile of unread books may be ok but a worrier on the 14th floor of a tower block is in a different position
• RNSs – and there have been at least 40 of them in the last 4 working days – have been similar
• They have expressed sadness, stated that the company’s priority is the health of its customers and staff and have gone on to say that the outcome of the Covid-19 shutdown is unclear
• All companies are cutting costs, many have cut dividends, some have said they are ‘well-positioned’ but all are very uncertain
Longer term impacts:
• These are all uncertain.
• But people may get out of the habit of going out.
• They may permanently rely more on delivery.
• They may hoard cash for a rainy day. There may not be one for another generation but, as Covid-19 proves, who knows?
• This situation continues to unfold and we would welcome feedbakc
THE CORONAVIRUS OUTBREAK & THE ON-TRADE.
A truly remarkable result’
• Covid-19 is primarily a human tragedy but the financial consequences of delaying the spread are huge. Only government is of a scale to do much about it.
• And it has – at least verbally – with 80% of payroll underwritten, rates free for a year, VAT bill postponed, £330bn in loans and moratorium on corporate evictions.
• There are plenty of known unknowns (not much detail) but the powers that be have taken this all very, very seriously.
• Analyst Peter Backman has said that forecasts made as recently as the middle of last week are now good only for the bin. Mr Backman now believes that the shutdown will be a) more complete and b) longer than previously imagined.
• Whilst all sit-down venues are shut, the number of takeaway venues also shutting is perhaps something of a surprise. Of course, it accords with the government’s view that unnecessary travel should be avoided but a total shutdown of the likes of McDonald’s & Gregg’s was maybe not anticipated until very recently.
• Backman reckons the foodservice market will be down by 9% in Q1 and an almost total 93% in Q2. Some workplace (and obviously hospital) foodservice companies as well as a number of takeaway and delivery companies will maintain operations.
• A spring back is somewhat unlikely. Backman reckons on a 53% decline in Q3 to give a £22bn hit in terms of lost revenues to the sector for the year as a whole.
The view from across the Channel:
• It’s said that Italy is 15 days ahead of us, Spain perhaps half that amount and France only a few days so what could we imagine the future holds? Frog Pubs operates ten pubs including the Frog en Rosbif in Paris alongside a number of breweries across France.
• Founder Paul Chantler says for the last three weeks, ‘LfLs have been plus 7%, minus 16%, minus 30%, and now we’re at zero.’
• The move from less than 100 people to full closure came abruptly leaving the company facing a major issue in disposing of its perishable food.
• The group does not believe the current situation will be ending any time soon. Pubs in France are officially shut until 15 April but the feeling is that the closure will be extended.
• A skeleton crew is still brewing some beer but all others, though paid, have been laid off. The French government should reimburse 85% of the cost – and maybe up to 100%.
• The French pub chains do not have to pay national insurance charges (unclear if this is a loan or a gift from the government) and banks have been leaned on to offer 6mth debt repayment and interest standstills. Landlords are being pressed for rent holidays.
• All very similar to the UK.
• The French (and now the UK) government is attempting to freeze rather than kill the economy. Mr Chantler says his ‘guess is that it’ll take us a full couple of years for us to get back to where we were even a month ago.’
• This, however, is ‘better that than a bankruptcy in which the banks would end up owning everything, but nothing would have any value’.
Can delivery in the UK take up the slack?
The position re rents:
• To an extent, attention has moved from how to pay staff (payroll will be due this Thursday) to rental costs (where Q2 rent will be payable on Wednesday).
o Network Rail has said that it will cancel rent payments due for Q2 for tenants in its commercial estate portfolio. Where rents are based on turnover, it will remove the base rent, which will come as a relief to a number of operators.
o We have not yet heard from the airports, where base rents can be two thirds or thereabouts of average rental payments.
o Network Rail says ‘we work in partnership with retailers and tenants to provide positive experiences for passengers and communities. In challenging times, it is important we step up to the plate and show our partners they are valued, and we are ready and willing to help. That is why we have taken this decisive action today.’
• Most hospitality companies would like to avoid, postpone or at least smooth this week’s Q2 rental payment and many may not be in a position to pay it at all.
• UK Hospitality yesterday morning reminded us that, under the terms of many leases, the landlord will be able to seize properties if the rent is not paid for 28 days. In some instances, this is the case after a shorter period.
• There were calls for a moratorium on debt enforcement, evictions and the like. UKH says ‘our analysis suggests the quarter rent day for bars and restaurants is worth billions of pounds. This is money that simply isn’t in the system and most businesses cannot pay.’
• This has effectively been granted by the government, which has extended the 3mth moratorium on residential lease default evictions to commercial properties. UKH says ‘with the next pending rent day falling this Wednesday, this move by the Government is hugely welcome and will help to protect jobs across the sector. The industry has been pressing ministers for several days to act on this crucial issue, and we are thankful they have responded positively to our concerns.’
• UKH goes on to say ‘while this removes the immediate cashflow pressure of quarter rent day, the Government has made clear that the negotiation is now with lessee and landlord to reach a solution on payment. Hospitality businesses want to work with landlords constructively during this crisis to find solutions and the hope now is that they enter into meaningful discussions on the optimum way forward.’
• The truth of the matter is that you can’t get blood out of a stone and, if you try, you’ll destroy the stone (and still get no blood).
• In the world of Covid-19 accepting realpolitik, landlords should have little incentive to take back a unit that they can do little with, full of plant, equipment and fittings that they are unable to sell. Some jewels may be more attractive and tenants might be well-advised to ensure they do not lose their better sites.
• Pub investment vehicle Imbiba, which is involved in some 25 rent negotiations at present, last week told the MCA that some landlords were offering concessions whilst others were hanging tough. The sanctions that the latter group of landlords could bring to bear have now been diminished.
Other Covid-19 news:
• Harrogate-based food entrepreneur Saffron Tree is to give away free Indian meals to ‘vulnerable people’ during the C19 outbreak.
• Majestic Wine’s website crashed over the weekend as would-be customers rushed to fill their cellars.
• Pub aid has said that a 12wk lockdown would cost charities and grassroots sports organisations perhaps £35 million in funds that would otherwise be raised by pubs.
• The FT reports that ‘Burger King, Carluccio’s and Yo! Sushi are among hundreds of businesses in the UK planning to withhold rents this week as they battle to conserve cash to survive the coronavirus outbreak.’
• Needs must.
• Burger King says it will ‘skip rent payments due on the chain’s more than 500 British restaurants to free up funds to pay staff, after the government announced that those who did not pay would not forfeit their lease.’
• ABInBev has updated saying that ‘since 27 February 2020 [the day of its FY19 results], the scale and magnitude of COVID-19 has increased significantly, resulting in restrictions imposed on many customers, as well as other limitations and social distancing measures in many countries in mid-March 2020. Given the uncertainty, volatility and fast-moving developments of the pandemic in the markets in which AB InBev operates, the Company is withdrawing that 2020 Outlook in its entirety because of the impact of COVID-19.’
• New River yesterday said its pub business, Hawthorn Leisure, ‘has closed all its sites with immediate effect. The Company had anticipated pub closures at some stage soon and was therefore well prepared for this outcome.’ It said ‘NewRiver remains a financially sound business with a liquidity position and capital structure that is well placed to absorb a prolonged period of uncertainty. It is worth noting that NewRiver’s retail portfolio represented 70% of the Company’s net rental income as at 30 September 2019. This portfolio is focused on occupiers in the food & grocery, health & beauty, discounter and essential services sub-sectors, and almost two-thirds of our retail assets are anchored by a major food and grocery brand. Given the fast-changing situation, the Company will provide the market with further updates in due course.’
• Tasty has confirmed that it ‘has decided to cease offering all takeaway and delivery services, across all of its restaurants.’
In the US:
• Constellation Brands has reminded investors that the closure of the US’s borders with Mexico and Canada does not impact commercial traffic.
• The Cheesecake Factory has said that its move to take-away and delivery sales ‘is enabling the company’s restaurants to operate sustainably.’
• Papa John’s outlets are reported to be looking to hire up to 20,000 staff as the chain’s delivery product has seen increased demand.
OTHER PUB & RESTAURANT NEWS:
• Gregg’s has updated on trading saying ‘given the current and likely impacts of coronavirus we are now planning for the closure of our shop estate by close of business on Tuesday 24 March in order to protect our people and customers.’ The company says ‘it is impossible to provide clarity on the outlook for the weeks and months ahead.’ The company says it will be ‘distributing any remaining unsold food and offering support for those in hardship through the Greggs Foundation.’
• Gregg’s says in the most recent week, the week to 21 March, it saw a decline in LfL sales of 9.9%. It says ‘the rate of decline has been increasing each day as more and more customers heed the Government advice on social distancing, and we would expect this to increase further if we were to continue to trade.’ The company says that it has a strong balance sheet but says it ‘will not now pay the previously-announced final dividend for 2019, which was due to be paid on 21 May 2020, and have stopped the programme of share purchases by our Employee Benefit Trust. These two actions will avoid around £40 million of cash outgoings this year.’
• Gregg’s concludes ‘providing forward guidance is impossible in the current environment but the Board no longer expects to make year-on-year profit progress, which we stated was our expectation at the time of our preliminary results announcement on 3 March 2020. As and when we are able to provide further information we will do so.’ It says ‘Greggs is a resilient business with strong growth credentials and we should be confident of its ability to navigate this event and return to growth when the economy recovers.’
• The Society of Independent Brewers says that its members ‘have seen their orders cancelled and their sales dry up. With little or no money coming in, thousands of breweries are faced with closure and cancelling this Wednesday’s beer duty payment is now critical to give a lifeline to small, independent brewing businesses across the UK.’
• CAMRA says ‘these are unprecedented times in the brewing, cider and pub industry, and it is now that we all have to pull together to help keep the UK’s producers and pubs afloat.’ It says ‘pubs and breweries need our help now more than ever – without a strong show of support from local communities, many are destined for permanent closure’.
• A jobs portal has been launched by Hospitality Unite in order to help newly-redundant hospitality workers. Harri, the hospitality workforce platform, is making the Hospitality Unite portal free-of-charge. The portal went live yesterday.
• Tweets yesterday: 1) Langton Leisure email (sign up www.langtoncapital.co.uk) may have been the longest ever today. But, one fears, though there may be more updates this week, thereafter, a deathly quiet may descend. Let’s hope it lifts in due course. 2) Big push for a moratorium on lease evictions. If the industry’s going to be easy (or even possible) to restart, it would be very helpful
• Fuller’s has announced that industry veteran and former Yo! Sushi CEO Robin Rowland is to join its board as a non-executive director.
• Major share price movements yesterday. Cineworld down 22%, New River down 20%, Time Out 16% off, Compass 10% down, Marston’s 10% off and Gregg’s down by 8%.
HOLIDAYS & LEISURE TRAVEL:
• British tourists overseas have been told to return home immediately. They haven’t been told how.
• STR has reported that hotel occupancy in France has fallen as low as 3%. Many operators will mothball their operations at this sort of level. STR says ‘dDaily occupancy in the country was as high as 65.3% on 26 February and had been positioned above 30% through 12 March.’ It was 3.3% on 17 March.
• Occupancy across Parisian hotels, which was running at 97.2% a year ago, is now running at 1.8%.
• Britannia Hotels, which was ranked the worst hotel chain in the UK for the 7th year on the trot back in October, has said that a letter in which a member of staff was told they were being made redundant and were asked to leave hotel accommodation ‘immediately’ was ‘an administrative error’. The chain says ‘we apologise for any upset caused.’
• UK Hospitality has advised hotels against taking any leisure bookings. UKH says that bookings should only be taken from business customers in key occupations.
• Carnival Corporation has said it will take ‘time and effort’ to rebuild its business once the C19 outbreak has abated. Micky Arison said this is a ‘difficult time’ for the cruise industry.
• Royal Caribbean Cruises has agreed a $2.2 billion loan facility with banks to protect its cashflow. It says ‘this is a period of unprecedented disruption for the cruise industry’ and adds ‘we continue to take decisive actions to protect the company’s financial and liquidity positions as they enable us to keep focused on our guests, our crew and our long-term plans.’
• In the US, hotel brand owners including Marriott, Hilton and Hyatt have been furloughing and laying off staff.
• The UK government has promised commuters that they will receive a refund on their rail season tickets if they choose to stay at home during the present Covid-19 outbreak.
• Singapore Airlines is to cut capacity by 96%, Etihad by 100%.
• Hoseasons has asked customers to transfer holiday dates rather than ask for their cash back.
• 888 has updated saying that ‘during the year to date, the Group has traded well and in line with the Board’s expectations with average daily revenue 18% above the comparable prior year period.’ However, it says ‘the postponement and cancellation of sporting events will impact 888’s Sport vertical, which accounted for 16% of revenue in 2019.’
• Games Workshop says ‘trading for the Group in the nine months to the end of February was in line with expectations. However, in March since the COVID-19 outbreak has spread more widely, the Group’s performance globally has been impacted.’ It says ‘we will be temporarily closing globally all of our stores, headquarters, factory and warehouses with immediate effect.’
• Games Workshop says ‘as the situation develops, we will provide an update on the possible impact of these necessary actions on the Group’s performance for the year to 31 May 2020 and going forward.’
• Netflix has halted TV programme production and has created a $100m fund to support actors and crew that have found themselves suddenly unemployed.
• The Musicians’ Union in the UK estimates its members have lost nearly £14m in missed earnings as a result of the coronavirus outbreak. Live venues, schools, pubs & clubs have all been shut down.
• The Tokyo Olympics look likely to be postponed. Inevitable bowing to the etc. Athletes can’t train, attendees can’t attend and there is no certainty that the Covid-19 outbreak will have abated by late-July. Canada and Australia are reported to have taken moves to pull their squads out.
FINANCE & ECONOMICS:
• KPMG has said that the Covid-19 outbreak could lead to the UK economy shrinking by 5.4% this year. There could be a rebound in the second half of next year. Such a recession would be more severe than that seen in 2008-09.
• Sterling down at $1.1608 and €1.0768. Oil up at $28.16. UK 10yr gilt yield down 12bps at 0.42%. World markets down yesterday but heading up in the Far East with UK set to open up about 200pts.
START THE DAY WITH A SONG:
Yesterday’s song was Brown Eyed Girl by Van Morrison. Today, clearly lamenting the temporary disappearance of his neighbourhood pub, who sang?
There’s a hole in my neighbourhood,
Down which of late I cannot help but fall
RETAIL WITH NICK BUBB:
• Today’s Market: The FTSE 100 index is expected to rally strongly this morning (according to the Proactive private investor website), even though Wall Street ended the day 3.0% down, as Congress failed again to agree the fiscal stimulus package, with Asian markets responding well to the latest huge monetary stimulus package from the Fed (the Nikkei jumped by 7% overnight). The spread-betting firms expect the FTSE 100 to open c220 points up at around the 5200 mark, despite more gloomy corporate news out this morning and the new Government lockdown…
• Today’s Retail News: As well as the news late on yesterday afternoon that even Greggs is closing its stores and suspending its dividend, together with car dealers like Lookers and Marshalls, today has brought news from many other retailers highlighting the trading downturn over the last 2 weeks and confirming store closures, in compliance with the new Government mandate on stopping “non-essential” shopping…The DIY and hardware retailers (along with pet shops) look to be exempt (hence the rallies in stocks like Kingfisher yesterday), whilst Frasers is wriggling on the subject in a rather unseemly manner (as Sports Direct sells a bit of fitness equipment). But JD Sports is closing (and has noted that Online sales are providing only a “comparatively small mitigation”), as is Games Workshop (including its factories and warehouses) and Dunelm and ScS.