Restaurant Group, Fevertree, Winter Plan, labour & product shortages etc.

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A DAY IN THE LIFE:

Meetings today. Geography and timing are the enemies. Plan to cross the river four times. No sensible Tube routes, may have to leg it, aargh. On to the news:

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RESTAURANT GROUP – H1 NUMBERS:

The Restaurant Group has this morning released H1 numbers and our comments thereon are set out below:

The numbers:

• RTN says that H1 sales this year were £216.8m compared with £227.2m in the prior year.

• The group has made an adjusted EBITDA profit in the period of £11.2m vs an adjusted loss of £18.3m in the same period last year.

• Given the periods of closure above differ, a more meaningful comparison may be the 15wks from 17 May to 29 Aug during which Restaurant group reports material outperformance:

• Wagamama’s LfL sales in the 15wks are +21%, representing a 13% outperformance against the market’s +8%. Pubs and Leisure outperformed by 14% and 10% respectively. Concessions, which were down by 53%, still outperformed their market by 21%.

• Critics may point out that RTN has shuttered some of its worst sites but the numbers are impressive nonetheless and Wagamama looks like an out and out winner

Balance sheet:

• RTN has raised equity twice. Re debt, it says it finished H1 with £200.3m of debt on an IFRS17 basis, compared with £308.3m in the prior year. The group says that it has headroom in excess of £235m.

Outlook:

• RTN last updated at its AGM on 25 May. At that time, it had virtually no trading to talk about. It said delivery and takeaway sales were ‘very encouraging’ and it had performed well when allowed to trade outdoors. It said sales indoors, when allowed, had also been encouraging.

• The group concedes that its ‘LFL sales [are] supported by [the] VAT reduction’ but feels able to say that the ‘trading performance since re-opening supports an increase in our FY21 EBITDA expectations.’

• RTN says that there are ‘ongoing sector wide challenges to navigate through FY22, including labour availability and increased inflationary cost pressures.’

• But, it is ‘progressing well on targeted organic growth avenues’ with ‘lower net debt and substantial liquidity.’

• CEO Andy Hornby says ‘we have made good progress in the past six months, securing the refinancing and recapitalisation of the Group in the first quarter before focusing our attention on the re-opening of the business and welcoming back dine-in customers as government restrictions eased. ‘

• He says the teams have ‘pulled together to support one another, ensuring a great experience for our customers and delivering a strong LFL sales outperformance versus the market.’

• Commenting on current challenges, he says ‘whilst there are some well documented sector challenges to navigate in the short-term, particularly around labour availability and supply chain, we believe the Group is well positioned for the long- term.’

Langton Comment:

• RTN has been exceedingly active (CVAs and division closures, two equity raises, debt refunding etc) and it is now positioned relatively well.

• We have mentioned previously that the pandemic has given RTN the cover (and the incentive and need) to push three or four years’ restructuring into one year.

• The equity raises and debt restructuring arguably give the group a) flexibility and b) a war chest.

• The numbers (the meaningful ones, at least) cover only a short period but the implications of the group’s current outperformance are positive.

• Shorn of its worst performing divisions and stores within the surviving divisions, the group maybe should be outperforming the market. But it is delivering on this and keeping the above units would never have been a sensible option.

• RTN has previously said that organic growth is its priority but, with perhaps 10-20% or more of the UK’s restaurant sites maybe on the market and available at what should be attractive rents, there are expansion opportunities elsewhere.

• Pub freeholds may be harder to come by with more potential buyers on the market.

• We have moved past ‘survival’ and are now beginning to look at the earnings power of – and the expansion opportunities for – the remaining assets. Any profits will need to be shared across a wider share base post the share placings but we believe that the group is emerging as a) a survivor and b) a possible winner.

• As we have mentioned previously, RTN may face a number of choices – and it’s better to have choice than no choice. It could a) expand organically, b) buy good outlets at what might look like a full price (as it did with Wagamama) or c) buy less good outlets cheap. Perhaps c) (and maybe only c)) is better avoided.

PUBS & RESTAURANTS:

Winter plan:

• Details have leaked out over recent days but the Winter Plan, outlined by Sajid Javid yesterday, confirms much of what was already known. Javid says that mandatory face masks, vaccine certificates, and work from home orders could return this winter as part of a “plan B” to deal with the pandemic. This is very much not Plan A. Vaccine certificates could be mandatory with just a week’s notice, says Javid. He told the House of Commons that ‘any responsible government must prepare for all eventualities, and although these measures are not an outcome anyone wants, it’s one that we need to be ready for just in case.’

• Downing Street has said there was no key metric that would trigger these measures. A spokesman said a range of data would be considered and said that it ‘is right to look at a range of metrics and not be overly prescriptive and consider the latest advice we are getting from experts, like Professor Whitty and others.’ Earlier in the week, PM Boris Johnson was said to have ‘all but ruled out’ further lockdowns.

• Meanwhile, the BBPA has said that the repeal of COVID powers ‘should signal end of disruption to beer and pub sector’. It says that it ‘is very welcome news for our sector that powers to close-down or apply restrictions to our pubs will be repealed.’ It says ‘forced closure during lockdowns and unnecessary restrictions such as the 10pm curfew, rule of six and substantial meals rule have greatly damaged our sector.’ CEO Emma McClarkin says ‘publicans across the country will sigh in relief knowing they have stability to keep trading over the winter months. We also urge the devolved administrations to follow the approach that has been outlined today’ but adds that ‘Plan B’ measures suggesting working from home are concerning as they would impact the recovery of our sector – particularly city centre pubs – if implemented. It is also vital covid certification continues to be ruled out for
pubs under any future plans.’

• On the same subject, UKH says that it is ‘critical for the recovery of the hospitality sector and the wider economy that businesses are allowed to continue to operate in viable conditions throughout this winter. Hospitality venues are still in a fragile state with significant debts, making their first steps on the road to recovery and rebuilding broken balance sheets, any setbacks over the coming months will result in more businesses closures. The announcement from the Secretary of State, the continued focus on vaccination roll out and boosters, is much welcome, as their success has been critical to protecting our healthcare system while allowing for the reopening of the economy and businesses to trade without restrictions.’ It calls for reserve measures to be left in reserve and says ‘the use of vaccine passports, logistically unworkable and with questionable effectiveness, will have
a devastating effect on nightclubs and large-scale events.’ It adds that ‘work from home orders or guidance would have a significant impact on our city and town centres, not only damaged by restrictions and enforced closures but also significantly reduced footfall.’

Labour issues:

• See also Finance & Markets below. The ONS reports unemployment has dropped and the number of people in jobs (and, more importantly, the number of vacancies) are at all-time highs. The ONS says there are 1,034,000 vacancies across the UK’s jobs market, a number over a million never having been recorded before. Outlining the shortage in workers as a proportion of the workforce in each sector, the ONS says there are 3.4 job vacancies for every person employed across the UK as a whole. The most acute shortage, is in Accommodation and Food Services, which has 5.9 vacancies per 100 employee jobs. This equates to 134,000 vacancies, up 75.4% on the previous three months.

• Further comment: Anyone associated with hospitality and leisure knows of the difficulties in recruiting and retaining staff. The Institute of Directors says ‘with 44pc of IoD members reporting staff shortages, across all skill levels, the challenge for government is to put its money where its mouth is and demonstrate in practice how we can fill vacancies by investing in our domestic workforce in a post-Brexit world.’

• Along the same lines, the British Chambers of Commerce says ‘the jobs market has continued its summer revival….but record vacancies also highlight the acute hiring crisis faced by many firms. With Brexit and Covid driving a more deep-seated decline in labour supply, the end of furlough is unlikely to be a silver bullet to the ongoing shortages.’ Indeed, many staff withing the one million people on furlough may have no intention of returning to the workforce whilst others, e.g. those in travel, may not be asked to do so.

• Responding to the above, Kate Nicholls UKHospitality Chief Executive says ‘the latest official job numbers underline the significant impact the ongoing tightness and disruption to the labour market and associated labour shortages are having across the economy. However, hospitality is clearly suffering most when compared to other sectors.’ She adds ‘the industry has been at the forefront of job creation as the economy begins to recover and rebuild. But with additional pressures and uncertainties, as well as being the last sector to reopen, hospitality has been hamstrung in its attempts to fill vacancies.’

• Further comment: Ms Nicholls calls for government schemes to be stepped up and potential ‘temporary immigration reforms.’ She says the sector is a ‘job creator and can drive economic growth and job creation, but further support from Government is required to realise this.’ UKH also calls on the 5% rate of VAT on food to be made permanent. There’s a chance that asking the government for more money and more immigration may not be well received.

• The CGA Prestige Foodservice Price Index shows that labour shortages, insufficient manufactured stocks and post-Brexit challenges on imports are combining to create disruption and inflation across the foodservice sector. The shortage of HGV drivers was of particular concern for the industry.

• Shaun Allen, CEO of Prestige Purchasing, said ‘With the removal of the VAT reduction and a wide range of rising costs the balancing act of menu pricing and cost management to deliver optimum cash will be tougher than ever’

• The Mayor of London, Sadiq Khan, has called on the Government to introduce a ‘Covid Recovery Visa’ to address chronic labour shortages. The visa would ‘help attract international workers into key roles to support our economic recovery.’

• Regarding wage growth, the NIESR says ‘underlying wage growth excluding base effect is around 4 per cent. But the combination of a skills mismatch and the end of the furlough scheme is creating unusual uncertainty about the future path of wages. With consumer price inflation rising and expected to reach also 4 per cent at the beginning of next year, there is a risk that price inflation feeds into wage inflation.’

Product shortages:

• The UK looks set to delay introducing post-Brexit checks on food and farming imports to England, Scotland and Wales. This should prevent any red tape impacting deliveries (for a while, at least). The government blames Covid disruption and pressure on global supply chains rather than Brexit. The EU imposed checks on product going the other way as soon as the initial legislation required it to do so at the start of this year.

• Further comment. The problem has just been kicked down the road. That’s fine if you can keep kicking. Paymaster General Penny Mordaunt told MPs ‘the government’s own preparations, in terms of systems, infrastructure and resourcing, remain on track to meet that timetable.’ However, it was not going to do so, she said, commenting ‘the pandemic has had longer-lasting impacts on businesses, both in the UK and in the European Union, than many observers expected in March.’ She says ‘there are also pressures on global supply chains, caused by a wide range of factors including the pandemic and the increased costs of global freight transport.’

• The Morning Advertiser reports on problems getting beer kegs where they need to be. They are, unsurprisingly, heavy and, if drivers are in short supply, they may be side-lined in order to make way for higher value products. The BBPA’s Emma McClarkin says ‘like many other industries across the UK, the Heavy Goods Vehicle driver shortage and other labour shortages are having an impact on our sector. For some, this is leading to keg shortages and longer return times on kegs.’ She says ‘as a sector our members are working with third-party logistics partners around the clock to minimise disruption within the supply chain and ensure as many deliveries as possible. Whilst we are grateful for Government engagement to date on the issue of the driver shortage, it is clear the immediate situation will not be rectified without further intervention.’

High Street closures.

• The Local Data Company has commented on vacancy rates over H1 this year, saying that, ‘for the first time since the onset of the pandemic, there may be some cause for optimism when it comes to the performance of our high streets.’ It says ‘the latest LDC figures show a slowdown in the speed of decline, with store losses far more significant in the first half of 2020 when compared to 2021. Interestingly, the independent sector has returned to growth for the first time since 2017 as the number of closures dropped and openings have steadily increased year on year, boosting the overall figures.’ Chain stores have continued to shed sites.

• Further comment: The LDC strikes an optimistic tone but the numbers do not altogether support that. It says ‘we can attribute this improved performance [above] to a few things; the success of government support schemes which will remain in place until March 2022; the growing appetite for categories such as take away food and convenience stores, boosted by several lockdowns, and a consumer which is increasingly concerned with the provenance of products, sustainability and supporting local businesses. Independent operators are also benefitting from the volume of available units, many of which come with attractive deals from a new market of shopping centre landlords who are now looking to the independent sector to fill the significant number of stores being vacated by chains.’

• This is fine as far as it goes but, whilst independent stores (the 10 largest categories including barbers, beauty salons, ice cream parlours as well as mobile phone shops) saw a net increase of 804 units in the 12mths to H1 this year, multiple stores (typically much larger and including department stores) fell in number by some 5,251 units. The LDC says the positive performance from independents is ‘in stark contrast to the significant loss in units seen across the chain retail landscape, which saw a net loss of 5,251 in the first six months of 2021. This was an improvement on the figure for H1 2020, but still significantly higher than pre-pandemic losses.’

• LDC says ‘as a result of the reduction in multiples, independent occupiers have had access to an increased volume of vacant units, often with attractive deals from landlords including rent-free periods and capital expenditure contributions to encourage take-up of empty units.’ This is true. But it would take a lot of nail bars and barbers to fill an empty Debenhams and they would never anchor a site or drive footfall (to help the likes of Costa, Pret etc) in the same way that a department store or a destination site would have done.

Company & other news:

• Fevertree Drinks plc has reported H1 numbers to 30 June 2021 saying that it has delivered ‘strong sales growth’ across ‘all Fever-Tree’s key markets in the first half of the year with revenue growth of 36% year-on-year.’ Sales were £141.8 m vs £104.2m in the prior year. The group has adjusted EBITDA of £29.2m (up 23%) with EPS up 17% at 17.4p and a dividend up 2% at 5.52p.

• Fevertree CEO Tim Warrillow ways ‘our ambition and confidence in the global opportunity continues to grow and we have been encouraged by the initial re-opening of the On-Trade, the ongoing strength of the Off-Trade with sales exceeding pre-Covid levels across all our regions, as well as the response to our new product launches, all of which is a testament to our increasing brand strength, growing presence, marketing investments, and relationships across the industry.’ He says ‘looking ahead, the long-term opportunity for Fever-Tree continues to be enhanced by the structural trends we are seeing, including the growing interest in premium mixers and spirits, and the popularity of long mixed drinks. These trends are being supported by our retail and spirit partners, and Fever-Tree’s ability to capitalise and drive this opportunity is unmatched by any other premium mixer brand.’

• Pub operator J D Wetherspoon is to cut the price of all food and drink in its pubs by 7.5 per cent on Thursday September 23 – to highlight the benefit of a permanent VAT reduction in the hospitality industry. It says ‘prices at the company’s 862 pubs (not including Republic of Ireland) will be reduced for one day only to mark Tax Equality Day. At present all food and drink in pubs is subject to five per cent VAT as a result of the VAT cut by the Chancellor in July 2020.’

• The Lumina Intelligence Operator Data Index shows that the pub market is expected to further consolidate with the 10 largest firms set to grow by 7%. Stonegate was forecasted to remain the largest estate by the end of 2021, with just over 4,700 pubs, 60% bigger than the second largest pub group, Star Pubs & Bars.

• Lumina said that despite pent-up consumer demand driving sales post-lockdown, overall turnover among the top 10 pub groups is expected to decline in FY2020/2021 with the overall 2021 forecast of £3bn turnover significantly lower than the £9bn turnover recorded in 2019. 

• Lumina said ‘Unsurprisingly, the impact of the pandemic saw the majority of the leading pub groups rationalise their estates. However, with merger and acquisition activity increasing, we expect many to grow their estates by the end of the year’.

• The MCA reports that ‘Bain Capital Credit, in partnership with EBITDA Investments, has acquired Bread Holdings – parent company of the Gail’s Bakery chain and wholesale business The Bread Factory – from Risk Capital Partners in a deal worth more than £200m.’ it says ‘Luke Johnson, chairman of RCP will retain a shareholding, believed to be around 15%, and remain on the board following the sale.’ RCP says it has made a double-digit multiple of its original investment.

• Lumina also released data showing average dish counts across both chain and fast food restaurants, as well as managed pubs and bars, remain ‘significantly smaller’ than before the pandemic. Menus remain on average 20% smaller than pre-pandemic, with staff shortages, supply chain disruption, price fluctuations and ongoing uncertainty all contributing to the decrease.

• The MCA reports that Fulham Shore CEO David Page has unveiled a new restaurant format, the light kitchen. Light kitchens will aim to promote growth in delivery and takeaway with one oven catering solely for delivery and takeaway orders and another oven, which will likely be more of a mix.

• The MA reports that Oakman Group saw total growth of 39.3% and LfL growth versus 2019 of 16.2% during the first ten weeks of its new financial year. Peter Borg-Neal, chairman, said trading would have been better if not for the impact of the ‘pingdemic’ and staff shortages.

• Rosa’s Thai Café annual results show income down by 16.5% to £16.3m during the 12 months to 28 March 2021, with Government support measures and a reduction in rents helped to minimise the fall in turnover during the pandemic. The group also recorded a loss before tax of £258,868.

• Rosa’s – further comment: The government’s furlough scheme, grants and EOTHO netted Rosa’s £2.3m, £0.7m and £253k respectively and offset all but a smidgeon of the group’s costs for the year. The group did make a loss and its retained earnings for the year declined, but only slightly, from £2.1m to £2.8m. The group’s accounts were signed recently, on 27 July this year, and its auditors have cleared the use of the going concern principle re its accounts.

• Rosa’s says, during lockdowns, ‘the Company was able to continue to trade the majority of its estate as delivery only for most of the period under review, with the teams subsequently adapting to the various restrictions in place for periods where dine in trade was permitted.’ It says used the furlough and other government schemes and this ‘meant the Company did not need to secure any significant increase in its debt levels during this period.’ The company adds ‘despite the difficult trading background, during the period the Company opened four new restaurants in London, Queensway, Waterloo, Finsbury Park and Greenwich, and four delivery only kitchens.’ It concludes that it ‘expects to continue its expansion plans opening six to eight new restaurants each year, both within London and elsewhere in the UK. A further new site, in Birmingham, has opened since the financial period to 28
March 2021, with several others committed to.’

HOTELS & LEISURE TRAVEL NEWS:

• Luton airport has reported that summer passengers numbers fell by 66% compared to pre-pandemic levels. The airport handled 1.2 million travellers in July and August 3.6 million in 2019. The numbers was also down 4% on last year. CEO Alberto Martin comments ‘we recognise the effort government is making to try to help the sector navigate this difficult period, but these figures make clear the need to urgently overhaul the current travel system in order to restore passenger confidence and enable the sector to trade its way through the winter season and out of the crisis.’ He adds ‘further specific financial support is also needed while the outlook remains so uncertain.’

• Trainline reports that its UK business recovered to 95% in Q2 compared to the same period pre-pandemic. The firm also noted an accelerated shift to digital ticketing, with UK eticket penetration increasing to 40% in Q2. Jody Ford, CEO of Trainline, commented ‘While it remains unclear how long it will take for demand to fully return, we remain positive about the long term tailwinds for the industry, including the significant planned investment in rail capacity, particularly on high speed routes’. 

• Roomex has said that softer demand will see UK average hotel daily room rates at three-star hotels fall by an average of 7.6 per cent during September.

• NHS Test & Trace data has shown that around 1% of arrivals from amber list destinations have tested positive for Covid-19.

• Data carried out for the Business Travel Show Europe finds that 14% of travel buyers expect their spend to get back to 2019 within a further two years. This may not be all that comforting. Some quarter of companies will spend a quarter less on business travel and 39% will spend between 25% and 50% less than previously.

• Boeing has said it does not believe the airline industry will recover to 2019 levels until end-2023 or early 2024. It believes long-haul international routes would take the longest to recover.

OTHER LEISURE:

• Ministers are reported to have appointed Wall Street bank JP Morgan to advise it on the taxpayers’ options for its Channel Four holding.

FINANCE & MARKETS:

• The ONS yesterday reported on the UK jobs market and, as the media has made clear, the shortage of workers is making itself felt. The headline is perhaps the employment levels are back to those seen pre the pandemic and unemployment fell from 4.7% to 4.6%. The number of people employed rose by 241,000 in August to 29.1 million.

• Further comment. The ONS says that employment in all regions except London, Scotland and the South East are now above pre-pandemic levels. The ONS also reports that average wages rose by 8.3% in the year to the 3mth period to end-July, driven by worker shortages. Excluding bouses, pay rose by 6.8%. See also Pubs & Restaurants above. The ONS says ‘the total number of employees is around the same level as before the pandemic, though our surveys show well over a million are still on furlough.’ The Institute of Directors says ‘the economy is now well-prepared for the end of furlough, with unemployment demonstrating a clear downward trend and the highest level of vacancies in the economy since records began.’

• The FT reports that house prices globally are rising at their fastest rate since 2005. At that time, low interest rates created an asset bubble that burst. This time, well…

• NIESR comments on the labour market saying that it is showing signs of a U-shaped recovery. It says ‘the fact that the furlough scheme ends September, after several months of robust employment growth, provides hope that nearly all of the furloughed workers will be able to return to active employment.’

• Fears of inflation in the US have abated slightly as the headline rate of inflation there dropped to an annual rate of fell to 5.3%, down from 5.4% in July.

• Sterling weaker at $1.3807 and €1.1695. Oil price up at $74.08 and the UK 10yr gilt yield was unchanged at 0.74%. World markets were mostly lower yesterday and London is set to open down around 3pts as at 7am.

RETAIL WITH NICK BUBB:

• Today’s News: This morning brings the Dixons Carphone AGM (at 9.30am) and the Games Workshop AGM (at 10am), but neither company has yet made any update announcements. The Motor dealer Pendragon (best known for its Evans Halshaw and Stratstone brands) has released its interims, however, for the six months to end June. Bill Berman, the new CEO, says that the business exceeded management’s initial expectations for H1 and delivered an underlying PBT of £35m, despite the Q1 lockdown, given the shortage of new and used cars post-lockdown: “While we acknowledge the positive market tailwinds, much of this progress has been underpinned by our new strategy, which has resulted in significant improvements to the Group’s digital capabilities and cost savings associated with the restructure of our store estate and the improved efficiency of our operating model”.

• Grocery Market Share Watch: Food Retail sales are holding up reasonably well against the strong comps of last year and, as a timely guide to what’s going on, the latest monthly Kantar figures (for the 4 weeks to Sept 5th) came out at 8am yesterday. And the Kantar overview was headlined “Shopping patterns show flicker of change as commuters return”, flagging, inter alia, that Online Grocery sales penetration dipped again from 13% to 12.2% in the past four weeks and that there are “signs of fatigue” with home cooking. Kantar also noted that Waitrose is outperforming its peers: “At a time when total market sales are contracting, Waitrose bucked the trend and found growth both online and in-store. With spend up by 2.2% in the past 12 weeks, it was the fastest growing supermarket for the second month in a row”. The food industry price inflation rate has edged up from -0.8% a month ago to
+0.1%. The published Kantar supermarket sales figures focus on the last 12 weeks, but the privately disclosed figures for the last 4 weeks are what the City focuses on and in this period grocery industry sales fell back by 0.7% on last year (up 7.3% on 2019).

• This Week’s News Flow: Tomorrow brings the JLP interims, the THG interims, the Wickes interims, the Dixons Carphone/Currys name-change and an ASOS Capital Markets Day on Sustainability. Friday then brings the ONS Retail Sales figures for August.