Langton Capital – 2021-06-22 – PREMIUM – Recovery, debts, inflation, landlords, WFH, Gear 4 Music etc.:
Recovery, debts, inflation, landlords, WFH, Gear 4 Music etc.:
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A DAY IN THE LIFE:
I thought I could hear a remarkably tuneless bird hammering out some sort of ditty in the garden at six-o’clock this morning.
But it turned out to be my nose that was whistling. These things happen from time to time and, if you’re short of someone to talk to, it could keep you company through the day.
Anyway, I should have realised that the dawn chorus at this time of year is at some truly crazy hour and that it was over well before I rolled out of bed. The news is looking a little thin this week but let’s move on to what there is of it:
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PUBS & RESTAURANTS:
• The Lloyds Bank UK Recovery Tracker shows that the UK’s economic recovery accelerated in May as tourism and recreation firms reopened, but the delay in ending Covid-19 restrictions is putting hospitality firms at risk.
• The Tracker reported eleven out of 14 UK sectors reported faster growth in output month on month in May, up from nine in April, with tourism and recreation recording the sharpest rise in output growth. The survey also showed that companies across the economy raised their prices in May.
• Jeavon Lolay, the head of economics and market insight for commercial banking at Lloyds Bank, said ‘While UK inflation jumped higher than expected in May and stronger demand saw more businesses pass on rising costs to their customers, it’s arguably still too soon to worry about inflation spiralling out of control’.
• The Guardian quotes Graeme Smith, MD of AlixPartners as saying ‘Many operators will have reopened in anticipation of restrictions falling away on 21 June, and likely forecast and accepted suppressed trade for the period up to that point…A further delay of four weeks is a devastating blow, creating significant uncertainty and further financial strain.’
• The Prime Minister is being threatened with legal action by a coalition of more than 45 hospitality and events directors if 19 July’s reopening is pushed back. Sacha Lord described the gradual reduction in support despite continued restrictions as ‘a clear and inevitable crisis about to take place.’
• Scottish first minister Nicola Sturgeon is due to make an announcement to the Scottish Parliament in Holyrood today at which it is expected she will confirm a delay to the easing of Covid-19 restrictions in Scotland. A move to level zero is likely to be pushed back by three weeks to around mid-July to allow the vaccination of more people. The BBC points out ‘while large parts of Scotland moved into level one earlier this month, and some islands went down to level zero, many parts of the central belt remain in level two, where there are stricter limits on the size of groups that can meet.’
Debt when you have to:
• The ICAEW says that business confidence remains robust but it adds that companies relying on an ‘economic surge’ to allow them to pay down their debts are taking something of a risk.
• Further comment. The ICAEW quotes Bhimal Hira, a partner at Jeffrys Henry, as saying that companies could be in trouble ‘if they don’t keep their debt in check and evolve with the times.’ This has maybe always been the case but, in these Covid times, taking on debt has been easier than it might have been in the past and there is a certain feeling of security (not to say perhaps complacency) in that companies see a great many of their peers taking on similar liabilities.
• This comment comes after comments from Company Rescue on Friday that directors using bounce-back loans for purposes other than specific company uses could be personally liable for the debt. The ICAEW quotes Hira as saying there is ‘a lot of optimism, perhaps even over-optimism’ out there. He says ‘there is a bubble of pent-up demand where people just want to go out, go to restaurants or bars, go shopping, and we will have a big uptake in money moving around in the market.’ He questions whether this is sustainable and points out that companies not addressing their debts in the short term are taking a bet on the outcome.
• Some suggestions that this could go to 4% later this year. This sounds high but it’s already 5% in the US. The Resolution Foundation says ‘with the US experiencing the fastest rise in inflation in nearly half a century, and the UK also experiencing sharp increases, many people are getting increasingly worried about a possible price spiral.’ It adds that, ‘while UK inflationary pressures are nothing like as stark as the US, we could still see inflation breaching 4% this summer – a figure well in excess of the OBR and Bank’s expectations.’
• Further comment: Inflation sometimes feels worse than it is. But this is a bit like saying a river, on average, is three feet deep. It may be ten feet deep in places and, if you can’t swim, that’s rather a big deal. Inflation in the price of essentials is something that nobody can avoid, even if the price of their iPhones and flat screen TVs are level or falling. The Resolution Foundations suggests that the Bank of England may deem price rises temporary and try to ‘look through’ them. This simply won’t be possible for those on lower incomes whose food costs have risen. Such workers may have no choice other than to ask for pay rises in order to afford their everyday essentials.
All in this together?
• The May Market Recovery Monitor from CGA and AlixPartners found that 25,000 licensed premises were still closed at the end of May but also interesting was the news that these (hopefully still temporary) closures were not evenly spread across the industry. The Monitor says that ‘about two thirds (66.9%) of independent venues in the on-trade have now reopened compared to 93.1% of managed sites.’ Larger operators, therefore, have been markedly quicker in finding their feet.
• Further comment: The divergence in behaviour extends through tenure type and estate size to encompass also geographical differences and product-type differences. The ‘better’ performers feature larger chains, the suburbs, food-led offers and non-late-night venues.
• The Monitor reports that some 91.9% of food-led pubs are now open alongside 92.9% of high street pubs and 93.9% of casual dining restaurants. Only 49.9% of nightclubs and 72.9% of bars have reopened.
• Slightly counter-intuitively, city centres have outperformed the suburbs (at least in terms of reopening) with 81.3% of city centre sites open against 75.4% in the suburbs and 72.8% in rural areas. We would suggest that causality is questionable here – it may be that smaller operators tend to feature in the suburbs rather than city centres and that it is this, rather than the geography itself, that has led units to remain shut.
• Interestingly, there are more units reopened in England (76.5%) and Scotland (77.6%) than there are in Wales (69.8%). CGA says that the delayed ‘freedom day’ will cause issues for some operators. It welcomes the extension of the ban on corporate evictions. Alix Partners says ‘at a time when Euro 2020 is in full swing and there is a feel-good factor across the country, this extension to restrictions could not have come at a worse time for pubs and other drink-led venues.’
Leases & property occupancy costs.
• Landlords have their own financial liabilities to service. The Times reports comments that property companies are haemorrhaging cash and do not get the support that some high street retailers and hospitality operators have received. This may be a) true but b) unlikely to stir up much sympathy across any constituency of hard-pressed tenants.
Working from home & staffing issues:
• Hamptons estate agency reports that house prices are rising by 14.2% a year in countryside locations on average compared with less than 7% in urban areas. A contributing factor to this disparity could be the search for a nicer space as more people work from home.
• Hiring bottlenecks. Indeed Flex has reported that hiring bottlenecks in the UK’s hospitality sector are leading pubs and restaurants to turn to temporary staff to meet demand. Indeed Flex also says that average hourly pay for a weekend shift has risen by nine per cent compared to this time in 2019 and that weekday pay rates have risen by an average of five per cent across the UK. Indeed Flex says ‘we’ve seen an influx of people opting for temporary work as a post-lockdown lifestyle choice – as it gives them a variety and a work-life balance that a permanent job cannot.’ It adds ‘temporary workers offer hospitality businesses vital flexibility in the current uncertain trading environment in which customer demand is strong, but margins are squeezed.’
• Further comment: We have suggested that labour shortages will lead to higher staffing costs. The data here is patchy but it is beginning to come through. City AM reports ‘with venues scrambling to find the staff they need, firms are turning to temporary workers to fill rotas, but the data reveals that they are paying more to attract the best people.’ Quoting Indeed Flex data, it says ‘pay growth has been the strongest in Greater Manchester and Cheshire, rising by almost 14 per cent since May 2019, whereas London has seen only a 3.73 per cent rise.’
• Indeed Flex says ‘the combination of booming demand from customers and the table service-only rule means thousands of pubs and restaurants need more staff – and fast.’ It adds ‘but with bottlenecks holding up the supply of workers, forward-thinking businesses are increasingly turning to temporary staff to fill shifts and raising wages to woo the best people.’ At the moment, margins are flattered by the 5% VAT rate on food and by the absence of business rates. Both of these benefits will fade away later this year and into 2022 leaving operators with the tricky task of passing pay rise costs on to their customers.
• Maven Leisure has raised £4.3m through Growthdeck to fund the opening of seven new premium London bars. The money will be used to take advantage of favourable conditions for acquiring prime landmark London sites.
• Riley Sports Bars reports growth of 9% compared to 2019 across its estate for the three weeks since reopening on Monday 17 May. Rileys CEO Craig Mayes said ‘We have made significant change to our operating model, which in turn is generating strong sales levels.’
• Pied à Terre has had to pause lunch service due to staffing issues, joining other high profile London restaurants such as Le Gavroche in doing so.
• Further comment: We have mentioned a couple of times that companies can only move at the speed of their slowest ‘component’. If there is an issue with food or drink supply, then sales can’t be made – and the same is true re labour. If staff are not available to complete shifts, then shifts will have to be cut. Pied a Terre is not the first to say this and we would imagine that it will not be the last.
• The Inn Collection Group has announced its purchase of the Ripon Spa Hotel in North Yorkshire. The 40-bedroom site is set in six acres of gardens, with public rooms including a ballroom, terrace bar and self-contained Turf Tavern Bar Bistro.
• UKHospitality urges the govt to delay its plans for mandatory calorie labelling on menus in the out of home sector, stating that the additional cost will hamper the sector’s ability to recover from the pandemic. CEO Kate Nicholls said ‘with the burdensome requirements of allergen labelling for pre-packed food also coming into effect in October this year, this new legislation adds further costs at the worst possible time.’
HOTELS & LEISURE TRAVEL:
• The WTTC says that the UK stands to lose £639 million each day during July if international travel remains effectively suspended. It says this would add up to a £19.8 billion loss if international travel is delayed until August.
• Further comment: Being realistic, this is likely to happen. There will be a compensating benefit if (as is probable), UK travellers do not go abroad and, whilst the West End and hotels in London & Edinburgh may suffer, the UK seaside and countryside could be net beneficiaries. The airline industry would be a net loser as few people fly to Filey.
• The WTTC is calling on the UK government to “immediately unlock the doors” to international travel but, being realistic, that is hardly likely. The WTTC says ‘stalling the resumption of international travel until August could cost the country dearly. We simply can’t afford any further delay – we are running out of time and money, with many businesses facing going bust if international travel doesn’t resume in July.’ Unfortunately for some industries, what ‘simply can’t be afforded’ by one industry may be seen as a necessary sacrifice elsewhere.
• Boris Johnson told Sky News that ministers are looking at plans to end the 10 day self-isolation requirement for people who have had two Covid-19 jabs. The move could also mean that people returning from amber list countries with both doses don’t have to quarantine.
• British Airways has reportedly revived plans to abandon Gatwick, according to the Telegraph. BA has launched a review into concentrating the national flag carrier’s operations at Heathrow.
• Destination Analyst in the US says that ‘the majority of American travellers [are] now feeling that the U.S. is more than halfway back to normal for leisure activities.’ It says three quarters of consumers are ‘planning to take at least one vacation or getaway over the next 3 months. Beach destinations in particular look poised for another year of stellar tourism performance. Americans are also asking for more inspiration when it comes to travel, with 73.1% highly excited for travel content.’
• STR comments on the London hotel industry saying that its ‘short-term rental industry recorded its highest monthly occupancy and revenue per available room (RevPAR) since February 2020, according to May 2021 data.’ It says May occupancy for the sector was 64.1%, which represented a 12.5% increase from April (57.0%) and the highest level in the market since February 2020 (65.1%). Short-term rental occupancy was significantly higher than the 31.0% recorded by hotels in London. Room rate was up 16.5% in the month and REVPAR was up 30.9% in May versus April.
• Gear4music (Holdings) plc has reported full year numbers to 31 March 2021 and says its ‘transformational performance has established a broader platform for further growth’. It says that revenues rose by 31% to £157.5m with EBITDA up by 154% to £12.6m. Net profit has almost quintupled to £12.6m.
• Further comment: CEO Andrew Wass says ‘FY21 has been a transformational year for the Group, during which we have delivered an exceptional financial performance whilst rising to the unprecedented operational challenges presented by COVID-19 and Brexit.’ He adds ‘we had an exceptional period of trading during FY21, particularly during the initial COVID-19 lockdown in Q1’ and says ‘the number of potential customers in our market significantly increased, as traditional high street retailers were unable to operate as normal and people sought activities in which to participate whilst spending more time at home.’
• Wass adds ‘the Group is in a strong position to build upon the significant success of FY21, as we accelerate the development of our bespoke e-commerce platform and strengthen our European distribution network by launching new operational hubs in Ireland and Spain.’ He adds ‘we have started to consider acquisition opportunities’ and says ‘trading in Q1 FY22 has been stronger than the Board previously expected and, having retained a good proportion of the gross margin gain achieved during FY21, financial results for FY22 are likely to be ahead of the Board’s previous expectations.’ Wass concludes ‘the outlook and general demand for musical instruments and equipment remains positive, and with the strategies and actions we are taking, we remain confident of delivering sustainable and profitable growth in the long-term.’
• Ebay has sold its South Korean subsidiary to a local consortium of businesses for $3.1bn. Ebay Korea has around 13% market share of the South Korean ecommerce market.
FINANCE & MARKETS:
• The Telegraph suggests that ‘the Treasury is looking at pensions taxation as one way to pay for the cost of the pandemic.’ It adds ‘there are no plans to make changes to the triple lock.’ The amount that individuals can save in a lifetime tax free may be lowered.
• Sterling weaker at $1.3907 and €1.1682. Oil up at $75.04. UK 10yr gilt yield up 1bp at 0.77%. World markets broadly better yesterday & London set to open around 32 points higher.
RETAIL WITH NICK BUBB:
Today’s News: One of the excuses for last week’s poor IPO debut of Made.com was volatile market sentiment about the rush of post-lockdown flotations, but the Online bathroom retailer Victorian Plumbing has got a good reception for its IPO and the company has chosen a good day to launch first dealings in its shares today (at 8am, under the ticker “VIC”). The placing last week at 262p is said to have “attracted strong support from high quality institutional investors and was significantly over-subscribed”, capitalising the business at a hefty £850m (ie more than Made.com), so a useful premium can be expected this morning.
This Week’s News: The latest monthly Kantar grocery sales figures (for the 4 weeks to June 13th) come out at c8am today, which will be timely in view of the Morrisons bid…Tomorrow brings the Dignity AGM and Strategy update and the Joules pre-close update. The THG AGM is on Thursday and the Tesco AGM is on Friday, whilst first thing on Friday we get the monthly GFK Consumer Confidence index. Over in the US the Nike Q4 results on Thursday night will be a focus for JD Sports followers.