Langton Capital – 2021-05-21 – PREMIUM – State aid, Gregg’s, Hot Choc, current trading, travel traffic lights etc.:
State aid, Gregg’s, Hot Choc, current trading, travel traffic lights etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Langton is facing something of a dilemma in that its lawnmower is at the menders and the grass won’t stop growing.
And the repair shop, obviously prioritising its big clients during what must be the busiest time of the year, has sat on the machine for nearly a month saying that it can’t get a part from Germany (I could have walked there and back by now) but that everything is being done to expedite matters.
Which would be fine if the grass had read the script and had taken a breather – but it hasn’t and now, after a week of solid rain, it’s heading for the sky at an alarming rate in an attempt to cut off the sunlight from about a billion happily flowering dandelions.
Anyway, being rude would just make matters worse so I’ve asked them to throw a weld on the mower (it’s a broken steering rod) and bring it back today. They can then get the steering rod when it turns up via three-legged pony express and then fit it on site.
That is, in my garden. Let’s see if that works. On to the news:
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PRIVATE COMPANY ACCOUNTS:
Accounts to end-March 2020, the period covered in the accounts reported to Companies House recently by a number of operators, are interesting if the comments contained therein refer to the Covid-19 pandemic but, if they do not, they have been well and truly overtaken by events. Here we look (very briefly) at Arc Inspirations (to 29 March 2020) today, and Rosa’s London (also to 29 March 2020) tomorrow.
• Northern bar company Arc’s accounts were signed on 26 March 2021 so, though the numbers did not include much of the Covid period, by the time the directors penned their report (or at least when they signed it), they had a year of Covid experience under their belts.
• Arc reports sales up from £27.2m to £30.1m. The company reports an operating profit sharply higher at £957k (2019: profit £213k) with a profit before tax of £261k against a loss in the prior year of £474k.
• Part of the increase (indeed more than all of it) was due to the reduction in exceptional and non-underlying costs from a charge of £2.3m in 2019 to £816k in 2020.
• The company has (or at least had a year ago) reduced its accumulated loss since incorporation from £1.3m to £1.2m. Shareholders’ funds have moved from a negative £1.2m to negative £1.1m.
• Arc says ‘overall, we had a good year and continued to invest in our core business and people. The sales performance of the 12 month period represents the most successful in the company’s 21-year history.’ It adds, unsurprisingly, that ‘the Covid-19 pandemic has caused the industry significant challenges.’ Costs have been cut.
• Arc says ‘the business has learnt from the Covid-19 pandemic the need to be agile and resilient.’ Re new openings, it says ‘we are constantly evaluating new sites in key cities across the North of England and the Midlands. As mentioned, we have a pipeline of sites, with two that we have exchanged on and others that are earmarked. We. have to make sure the timing is appropriate for any openings due to the Covid-19 restrictions.’
• Arc will not be alone in considering situations such as those set out below.
• The company says ‘there has been a severe disruption to the company’s trade during the last twelve months caused by the coronavirus pandemic.’ It says ‘frequently changing operating restrictions…and the uncertainty around future lockdown measures…have provided significant challenges in forecasting the future performance of the Company.’
• It says it ‘has successfully extended its financing facilities twice’ and says that, under its base case forecasts, it will not breach its banking covenants’. The company says they ‘remain confident that the Company has adequate resources to continue to meet its liabilities’ and ‘are also confident that the business will see a strong sales performance once the restrictions are eased.’ The have therefore prepared the financial statements on a going concern basis.
• Auditors KPMG point out ‘under the severe but plausible downside scenario modelled, there is a risk of breaching the company’s financial covenants within the forecast period and also a risk that the company requires additional cash funding over and above its current facilities.’
• KPMG says, therefore, there is ‘a material uncertainty related to going concern that may cast significant doubt on the company’s ability to continue as a going concern.’
• Note 1.2 to the accounts runs through the various moves including rescheduling debt, agreeing with shareholder creditors that they will not demand repayment and the suspension of covenant checks.
• Note 1.2 also states ‘the Directors believe that this strong trading performance, despite the significant restrictions, demonstrates the resilience of the Company’s three brands and the appetite of consumers to return to venues in the future.’
• Its ‘base case’ involves the UK remaining on the reopening path that it is currently on. So far, so good. the company says ‘taking a cautious view, the Directors have assumed that trade remains below FY2020 levels until September 2022 with sales increasing up to pre-pandemic levels from Q3 of FY2022 onwards.’
• Under its ‘severe but plausible downside scenario, the Company is forecast to breach all three of its covenants in each of the future quarters tested.’ The company itself concludes ‘based on the above indications the directors believe that it remains appropriate to prepare the financial statements on a going concern basis. However, the severe but plausible downside scenario detailed above indicates the existence of a material uncertainty which may cast significant doubt on the company’s ability to continue as a going concern and that the company may, as a consequence, be unable to realise its assets and discharge its liabilities in the normal course of business. The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.’
• A sobering statement but, as we mention above, Arc is by no means alone in facing an uncertain future.
PUBS & RESTAURANTS:
More help may be required:
• UKH CEO Kate Nicholls has sent a letter to chancellor Rishi Sunak saying that the hospitality industry will need further support, even as trading restrictions are removed, reports Sky News. UKH calls for low interest loans and for help for tenants who are (or will shortly be) in discussions with their landlords as to how to deal with outstanding rent arrears. The moratorium on evictions is currently due to expire at the end of next month. With regard to debt, UKH says that government loan schemes have been ‘received positively’ but it says there has been some overpromising in that banks are not always interpreting the rules in line with Treasury comments. UKH says ‘many of our members report that they are being denied access to the full loan schemes by their banks. In particular, very few are able to extend their [CBILS] to the full ten years that is available to them [while] others
• Langton comment: Chancellor Sunak said in the early days of the pandemic that the taxpayer would not be able to save every job and every business. He quickly went quiet on that but, at some point, the Treasury will have to make a call as to what is salvageable and what isn’t. Building castles in the air – by supporting the financially unsupportable – will not work over the longer term. This will be a very tough decision. It will involve disaggregating the secular from the cyclical (or in this case, the pandemic-inspired temporary) changes. This may be virtually impossible as, though the Treasury has more information than we do, it doesn’t have a crystal ball.
• Ultimately, therefore, it could be a political decision. If we knew what the new normal would look like, which we don’t, it would be less daunting. For the changes that may be permanent (or so long-lasting that they may as well be permanent), there will have to be decisions made as to how much, if any, of the viable economy will be used to prop up the unviable parts. This sounds brutal, but it is an everyday political decision. Though a larger one than most, it stands alongside questions such as how much to pay for pensions and other non-economically active parts of society etc.
The path to further relaxation of restrictions:
• PM Boris Johnson will today update on the proposed changes to regulations due to come in on 17 May. It is planned – and there are no reasons to think this should have slipped – for pubs and restaurants to be allowed to reopen indoors a week today. Hotels and theatres should also be allowed to reopen. The Sun reports an ‘insider’ as saying ‘the number of people dying or in hospital has fallen dramatically over the past few weeks and with two-thirds of adults now vaccinated, the risk of spreading the virus is also pretty low. At this stage there is nothing to suggest the PM will slam the breaks on his roadmap out of lockdown or that he will want to slow it down. But he’ll want to weight up all the evidence first before he fires the starting gun for the next step.’
• The weather, since reopening, has moved from good to dreadful to mixed. The latest CGA’s Drinks Recovery Tracker repeats its view that trading was good in mid-April but it says that ‘the week to last Saturday (1 May) proved much more challenging for pubs, bars and restaurants. Average like-for-like drinks sales were down by 38% on the equivalent week in 2019—nearly twice the deficit of 21% in the previous seven days.’ This is just for units that are open. Pubs and restaurants that have not reopened, still the majority, are down 100% (ex-delivery). CGA reports ‘the crucial Bank Holiday weekend was a washout for many operators, and drinks sales on Sunday (2 May) were down by 35% on the same Sunday in 2019. Worst hit of all was Bank Holiday Monday (3 May), when they dipped 66%. Wales bore the brunt of the weather, and takings were 85% down as a result.’
• Langton comment: We have heard suggestions that trade on the Sunday of the Bank Holiday weekend, when the weather was mixed, was 7x what it was on the Monday (when the heavens opened) and, having been out and about pretty much wearing flippers and a snorkel on the Monday in question, we think that was a ‘good’ result under the circumstances. CGA says ‘pubs, where drinks sales were down by 33% across the week, continue to outperform restaurants (down 54%) and bars (down 59%), thanks to their greater availability of outdoor trading space.’
• We see this as the continuation of an established trend. The ‘investment’ that the customer makes in having a drink is clearly less than that should he or she take a meal. The Ivy in York handed out large black umbrellas to its brave outside diners. Said umbrellas were then battered almost flat by the rain. No gazebos or council-inspired temporary roofing solutions in evidence in St Helen’s Square in York, more’s the pity. CGA says ‘the success of outside trading was always going to be very reliant on the British spring weather. While consumers remain eager to eat and drink out, the climate is making it very hard for many to do so at the moment.’
• Cask beer sales have ‘surged’. We reported last week that Cask Marque maintains that cask ale has been the ‘most-missed’ drink for UK pubgoers during and coming out of lockdown. The drink is not easily replicated at home. Sky now reports that the ‘unbelievable’ surge in post-lockdown demand for cask beer is offering “a glimmer of hope” for the struggling UK pub industry. Production is said to have been ‘ramped up at breweries after some underestimated just how many pints would be sold in pubs after they reopened in last month.’ Sky quotes Timothy Taylor as saying ‘the last two weeks we have done similar volumes to what we did in the same two weeks of 2019 so that is unbelievable against the forecasts that people gave us.’ Brewing is a chemical process that can’t be hurried up. Long range weather forecasts aren’t really accurate enough to provide promises as to what the weather will be
Other Covid news:
• The Night Time Industries Association says, with 77.6% of the late night economy businesses more than three quarters in arrears on their rent, it has ‘campaigned for many months regarding the issue of commercial rents’. It says ‘with the end of the Forfeiture Moratorium looming the industry is desperate for a long term solution.’ CEO Michael Kill says ‘businesses Owners will continue to take on further rent debt through this period, which will inevitably compromise their future. This needs Government intervention.’
• Langton comment: Certainty is a) desirable but b) impossible. The late night operators have had a particularly tough time of it but, in all likelihood, landlords may not be keen to evict non-payers as, frankly, who on earth will they get to replace them? The landlords would be faced with maintenance and insurance costs and would ultimately be looking at business rates payments. This isn’t a solution in itself, of course, and the industry is right to say that a solution needs to be found. The NTIA says ‘thousands of businesses have been lost already, with many employees and freelancers, hanging off every announced press statement.’
• Tech. In the US, Restaurant Dive reports that ‘ninety-two percent of restaurant customers who are fully vaccinated plan to continue ordering online at least as often as they do now, while just 8% plan to return to dine-in as they did prior to the pandemic.’ Working out what will be the ‘new normal’ is critical (but hardly easy). The journal says the study ‘suggests that robust digital ordering capabilities are more critical for restaurants than other sectors, as online restaurant customers plan to maintain more of their current digital habits than grocery and retail shoppers, who are more willing to return to brick-and-mortar businesses.’
Company & other news:
• Gregg’s has updated on trading saying that it has seen a strong recovery in sales levels following the easing of restrictions. It says that its two year LFL in latest eight-weeks was down only 3.9% ‘with positive two-year LFL since non-essential retail reopened’. It says that its two year LFL for first 18 weeks was down 13.5%. Gregg’s says delivery is now available from 800 shops with delivery sales up to 8.2 per cent of company-managed shop sales in the most recent eight weeks. The group has opened 34 new shops in the first 18 weeks of this year with 11 closures. Gregg’s says that ‘considerable uncertainty remains but profits for the year could be around 2019 levels, materially higher than the Board’s previous expectation.’
• Gregg’s concludes ‘sales have recovered well in recent weeks as out-of-home activity levels have increased, albeit in the absence of competition from indoor seated catering operators.’ It says ‘if restrictions continue to ease in line with current plans then we now expect our overall sales performance for the year to be stronger than we had previously anticipated. Costs have been well-controlled and the rate of cost inflation we are experiencing is in line with our plans for the year.’ The group says ‘providing guidance on the profit outcome for 2021 remains difficult given the uncertainties surrounding trading conditions. However, given our recent trading performance, the Board now believes that profits are likely to be materially higher than its previous expectation, and could be around 2019 levels in the absence of further restrictions.’
• Hotel Chocolat has also updated on trading saying that ‘despite physical retail locations in England being closed for six weeks during the period, including for both Mother’s Day and Easter, the Group’s revenue increased 60 percent compared to the prior year (during which physical retail locations were closed for 5 weeks, however, were open for Mother’s Day). The Group’s revenue for the eight-week period is also 19 percent higher than the comparative eight-week period in 2019, being the most recent comparable pre-Covid trading period during which all physical retail locations in England were open.’
• Hotel Chocolat says ‘the Group’s revenue growth during the eight-week period ended 25 April 2021 was driven largely by its digital channels and subscription products which further demonstrates the strength of the Company’s omni-channel sales model. Since the re-opening of physical retail locations in England on 12 April 2021, sales across all the Company’s channels have been encouraging. The Board now expects trading for the full year ending 27 June 2021 to be significantly ahead of expectations.’ CEO Angus Thirlwell says ‘I’m pleased we are able to look forward to further growth and significant investment this year with strong job creation, particularly in our UK chocolate making and supply teams.’
• Starbucks franchise 23.5 Degrees has secured a £17m funding package from HSBC UK to grow its number of sites. The company says ‘during the pandemic we were able to open nine stores which led to 200 jobs around the country.’
• Black Sheep Coffee and Tortilla are to open sites in the St James’s Quarter development in Edinburgh.
• The Daily Mail reports that a study in the US has found that drinking a moderate amount of alcohol daily can lower the rate of heart disease.
• Wendy’s, the second largest burger chain in the US, is reported set to return to the UK after an absence of 20 years. The group plans up to 400 outlets nationwide creating at least 12,000 jobs. The first site will open next month, in Reading, followed by Stratford and Oxford. The company says ‘when we looked at where we wanted to grow the brand outside the US, we wanted to do it where we could grow to a significant scale. That needed to be several 100 restaurants, to be able to grow and be able to compete and to steal market share… We’re talking about 300-400 hundred restaurants.’
• Hofmeister is launching two new beers it believes will help it capture its share of two of the fastest growing beer trends – a Weisse beer and a 0.5% Ultra Low Helles variety.
• Beyond Meat last week reported a larger Q1 loss than had been expected.
• Frosts in early April in Champagne may cause output losses of between 20% and 80%, depending on the location.
HOTELS & LEISURE TRAVEL:
Traffic light scheme:
• The colours were announced on Friday. Green countries such as Iceland, Brunei, Gibraltar, the Falklands, South Georgia, St Helena etc are unlikely to move the travel dial. Australia, New Zealand & Singapore are not mass-market destinations. Israel is putting on holiday capacity leaving Portugal, a destination to which bookings are reported to have exploded, as the only mass market holiday destination currently on the green list. Spain and Greece and France are amber. The new rules, which will see travel allowed to the above and other destinations – with different rules applying on return – from 12.01am on 17 May.
• Response. TTG reports that AITO believes the government’s traffic light list is a deliberate move by to keep Brits spending in the UK this summer. AITO says ‘we believe that keeping the British people stuck at home rather than on holiday abroad has been the government’s intention throughout – to ensure that its furlough payments are used solely to boost the UK economy, whether UK residents go on holiday in the UK or simply stay at home.’ Whether this allegation is true or not, keeping Brits in the UK will help domestic pubs & restaurants alongside hotels and holiday accommodation providers.
• Cabinet minister George Eustice has defended the reopening, saying that the move is a “modest first step”. The lists will be reviewed regularly with the first review due in three weeks. Thomas Cook reports that searches for Portugal holidays are up 264% whilst those for Gibraltar are up 277%. Thomas Cook says, however, that bookings are still lower than they normally would be at this time of year. Fellow cabinet minister Grant Shapps has said there will be delays at the border and he warned holidaymakers only to book holidays offering a refund if travel rules changed.
• Travel Weekly has labelled Portugal the ‘clear winner’ from the traffic light rules. It quotes Travel Supermarket as saying that 29% of all price-comparison web searches on its site were for holidays to the country. It says the share of search for Spain dropped from 17% to 9% and Greece 9% to 5%, pretty much halving between Wednesday and Thursday and Friday and Saturday on the back of the green list announcement. Travel Supermarket says ‘hopefully, the Canary Islands and some of the Greek islands such as Crete and Kos, which have little virus incidence and are advanced with vaccinations, will make the green list soon. We expect to see a rush on Greek and Spanish escapes when this happens.’
Other holiday & hotel news:
• Hull-based holiday home company Willerby is teaming up with Club Jupiter to “make caravans cool”.
• Viking will restart voyages from Malta for vaccinated guests this summer.
• STR reports that US hotel trading softened in the last week of April saying REVPAR for the week to 1 May was 65% of the 2019 level, the lowest number in the last seven weeks.
• Nintendo last week reported record full-year profits as its Switch console sold nearly 85m units. Unit sales are slowing but sales are ultimately expected to beat Wii’s 101 million lifetime sales some time during this year. Gaming has been one of the undisputed winners during lockdown.
FINANCE & MARKETS:
• The US economy added 266k jobs in April. This was a shade fewer than hoped, given the scale of the stimulus package in the US. The unemployment rate edged up to 6.1% with 9.8 million workers unemployed.
• China’s exports rose rapidly in April on the back of increased demand in countries, chiefly the US, that are now coming out of lockdown. Comps were heavily impacted by the start of lockdowns in a number of countries last year.
• Sterling stronger at £1.4034 and €1.1544. Oil higher at $68.72. UK 10yr gilt yield down 2bps at 0.77%. World markets better on Friday with London set to open around 28pts this morning.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-pages of the Saturday papers were dominated by the aftermath of the Labour defeat in the Hartlepool by-election (with many carrying the same photo of Boris Johnson celebrating in front of a 30 foot inflatable double) and the headlines made grim reading: eg “The day Boris blew up Labour” in the Daily Mail, ”PM eyes decade in power” in the Times and ”Labour in turmoil after Tories inflict huge defeats” in the Guardian, whilst the FT ran with the more neutral “Johnson rides “vaccine bounce””, although the Telegraph went with “PM: No new Scottish referendum”.
• Saturday’s Press and News (2): In terms of Retailing and other stories, there wasn’t much to report, although the Guardian had an interesting article about the shortages and price increases in the building materials market. The Telegraph flagged that Asda is trialling food delivery in locked boxes and the Times had a feature interview with the boss of the retail platform Shopify, Harvey Finkelstein, who argued that the “future of shopping isn’t just Online”, albeit the article noted that one of Shopify’s big selling points to retail clients is that it isn’t Amazon…The FT stockmarket report highlighted that the newly demerged Wickes got a boost from a Buy report from Citi on Friday. Finally, we spotted that, out of the blue, The Economist magazine on Friday picked up on the success of the discount retailer B&M, noting that it does not try and sell Online…
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were also dominated by the aftermath of the local and regional election results: the Observer ran with “Angela Rayner fired as Labour gripped by post-poll rancour”, the Sunday Times went with “PM: I’ll stop brain drain to the cities”, the Sunday Telegraph summed it up as “Sturgeon falls short of majority in Scotland as Labour civil war erupts” and the Mail on Sunday flagged “We must unite as Team UK, PM urges Sturgeon”.
• Sunday’s Press and News (2): In terms of Retail stories, the most noteworthy news was the Sunday Times article fanning speculation that the 68 year old JD Sports boss Peter Cowgill could soon hang up his executive boots (“Will JD Sports’ striker step back?”), noting that he is “a tough Lancastrian who works like a dog and relaxes in the pub” and that he has no obvious heir, despite showing off his senior management team on an investor trip to Manchester 3 years ago. The Mail on Sunday flagged that Ikea has held advanced talks to take over the former Top Shop site at Oxford Circus as part of its plan to open city centre stores. The Mail on Sunday also highlighted, along with the Sunday Times and the Sunday Telegraph, that the American burger chain Wendy’s wants to take on McDonald’s by opening up to 400 outlets in the UK and pushing a new slogan (“All Beef, No Bull”), starting with a
• Sunday’s Press and News (3): In terms of all the Economics comment columns in the Sunday papers, we would, as usual, highlight the column by the Sunday Times Economics correspondent David Smith (“The makers are marching again. Can it last this time?”), in which he noted that, although the revival of the manufacturing industry is good for “levelling-up”, the services sector will probably quickly make up lost ground. And we would also give the usual shout-out to the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph: “Globalisation can still be good for the West. Don’t let China derail it”.
Today’s News: On top of the scheduled update from the embattled funeral services business Dignity (which saw revenue up 14% in Q1, despite losing market share), today has also brought unscheduled trading updates from Hotel Chocolat and Greggs…and both are strong. At Hotel Chocolat, revenue in the 8 weeks to April 25th was up 60% on last year, despite the lockdown, and up 19% on 2019 levels, thanks to very strong Online growth. As a result, “the Board now expects trading for the full year ending 27 June to be significantly ahead of expectations”, despite repaying c£3m of “furlough” money to the Government. Greggs has also reported a strong recovery in sales levels, with LFL sales only c4% down on 2019 levels over the last 8 weeks, with 2-year LFL positive since shops re-opened on April 12th. As a result, “the Board now believes that profits are likely to be materially higher than its
This Week’s News: Tomorrow brings the BRC-KPMG Retail Sales for April (which fell by 19.1% on a total basis last year so, on a 2 year view, should be over 20% up this year), the Morrisons Q1 update, the Angling Direct finals and the Capco AGM. The Just Eat AGM is then on Wednesday, with the Burberry finals and the Ocado AGM following on Thursday. The Greggs AGM is on Friday.