Langton Capital – 2022-01-19 – PREMIUM – JD Wetherspoon Q2 & H1 update, inflation, December Tracker & other:
JD Wetherspoon Q2 & H1 update, inflation, December Tracker & other:
A DAY IN THE LIFE:
Best laid plans, eh?
We have a system, chez Langton, via which rubbish moves from wherever it started out, via the very large cupboard under the stairs, to either the garage and thence the tip or recycling or, if it’s organic, to the compost heap or the dog.
It looks good on paper and indeed it would work well if only everyone, including, it has to be said, me, would stop simply opening the cupboard door and throwing stuff in – bottles, plastic, newspapers, junk mail, broken electrical goods, old skateboards, three-legged chairs, zipless suitcases, clothing, torn pillows and cushions, spineless books, malfunctioning speakers, amps and laptops, un-watered plants, goldfish bowls etc – on the basis that, if you can close the door again, it’s a meh that can be addressed tomorrow.
Thankfully compost and soon-to-be dog food goes a slightly different route meaning that a plague of rats has thus far been avoided but the above does mean that the system fails at its first hurdle and a wall of junk will most definitely fall on somebody, sometime.
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INFLATION, TAX CHANGES & THE VALIDITY OF LFL COMPARISONS…
This was circulated to clients yesterday.
We’ve commented on rising costs and the challenge of pushing through price increases. But here we spare a few words for inflation in a more general sense:
• We’re just about old enough to remember inflation accounting going out of fashion in the 1980s.
• By the time it had been addressed, it seemed to be on its way out – but a bit of the information stuck and it’s more important now than it’s been for several decades.
Interpreting LfL sales:
• Like for like sales are made up of covers x price.
• The constituents can move in the same direction – in which case you get a ‘double-whammy’ in one direction or the other – or they can move in different directions.
• And that is very much happening today with prices up and volumes down.
• Furthermore, the lower rate of VAT can complicate things further.
• Consider, when a company says ‘LfL sales were up by 5.6%’, what does it mean?
• It should mean that sales after VAT were up 5.6% for pubs that are directly comparable with each other.
• Putting aside the thorny issue of how to treat capex, whether shut pubs (LfL minus 100%) should be excluded and other, game-changing issues, how was the 5.6% made up?
• We’ve worked the maths such that the above 5.6% can be made up of a 10% reduction in volume alongside a 10% increase in price – taking into account that VAT is 12.5% now but was 20% in the comp year (usually 2yrs ago).
• The VAT benefit will unwind and a reduction in volume, which can be disguised now by a mix of price rises and VAT benefits, perhaps gives a better indication of how things are going in the real world
• Some operators may embrace this and go for ‘trading up’ or ‘premiumisation’ whilst others, that maybe operate on low margins and Every Day Low Pricing, will not have that option
Another (nerdy accounting) comment:
• In inflationary times, companies make windfall profits just by holding stock. Margins widen if selling prices go up but more expensive stock has not yet been shipped in to replace the stock that was cheaper when it was purchased
• This is less of an issue where stocks are low or fast-moving. You can’t stockpile lettuce. But it is an issue for the car dealers who have seen the value of their second hand stock rocket
• This is down to arithmetic and not any marketing genius on their part.
• Comments welcome
JD WETHERSPOON – Q2 & H1 UPDATE:
JD Wetherspoon has today updated on its Q2 trading and our comments thereon are set out below:
• The company says ‘in the financial year to date (25 weeks to 16 January 2022), like-for-like sales decreased by 11.7% and total sales by 13.3%, compared to the similar period in financial year 2020.’
• It says ‘sales in the second quarter were affected by the “Plan B” restrictions announced by the government in December.’
• JDW adds ‘in the 12 weeks to 16 January 2022, like-for-like sales decreased by 15.6% and total sales by 16.6%.’
• This, largely as a result of increased restrictions (which are hopefully to end soon), represents a worsening of trends that were in place during Q1 (LfL sales were down 8.9$ in the first 15wks)
• The co does not comment on issues it raised earlier this financial year concerning the absence of older customers, trading in London or supply chain issue or balance sheet detail
Outlook & comments:
• Chairman Tim Martin says ‘as mentioned in our update on 13 December 2021, the uncertainty created by the introduction of plan B Covid-19 measures makes predictions for sales and profits hazardous.’
• He says ‘the company will be loss-making in the first half of the financial year, but hopes that, with the ending of restrictions, improved customer confidence and better weather, it will have a much stronger performance in the second half.’
• Nothing on the balance sheet but the company does comment on Partygate, corporate governance and the VAT regime
• Re Partygate, JDW says the government is guilty of hypocrisy. It points out that, though politicians and advisers were reportedly partying in Boris Johnson’s No10 Downing Street, they were denying that opportunity to ordinary people in what could well have been the safer environment of UK pubs
• Re Blackrock, JDW says that the shareholder has made decisions about JDW without ever meeting anyone from the company
• On VAT, JDW says that supermarkets are reporting record profits at a time when VAT is set to rise to 20% for pubs & restaurants. It says that it is an ‘accepted principle that taxation should be fair and equitable.’ It adds ‘the end of the pandemic is an excellent opportunity for a sensible rebalancing of the tax system.’
COFFER CGA TRACKER FOR DECEMBER:
The Coffer CGA Tracker for December shows that ‘Britain’s managed restaurant, pub and bar groups suffered a double-digit drop on sales from pre-COVID-19 levels in December after widespread cancellations of Christmas celebrations.’
• The Tracker shows total sales down 11% in the month versus the same month in 2019. It says this decline is after ‘four successive months of 2021-on-2019 growth, and shows the damaging impact of the Omicron variant of COVID-19 on the hospitality sector, as many consumers opted to stay at home in the run-up to Christmas.’
Pubs vs restaurants:
• The Tracker says food outperformed drink. It says this ‘indicates a tougher Christmas for managed pubs and bars, where sales were down by 12% and 19% respectively, than for restaurants, where they were down by 8%.’
• London, once again, underperformed the wider market. The Tracker says its result ‘highlights a particularly difficult month for London, with sales down by 19% within the M25—more than twice as big as the drop of 8% beyond the M25.’
CGA & Sponsors’ comments:
• CGA’s Karl Chessell saus ‘these figures show the hugely damaging impact of consumers’ anxiety and restrictions on trading at what should have been the busiest time of year.’
• He says ‘restaurant groups in particular did well to shore up sales as much as they did, but on top of rising costs, supply problems and staff challenges, the difficult December leaves many businesses without the buffer of cash they would normally rely on in January.’
• CGA maintains ‘demand for eating and drinking out remains strong, but the sector needs support on tax and other pressures if it is to help power the UK’s economic recovery when COVID-19 restrictions finally ease.
• Coffer Corporate Leisure says ‘the results are not surprising. If anything, many anticipated worse. The pre-Christmas growth was euphoric and in stark contrast to the major drop-off in the most important trading months of the year.’
• David Coffer adds ‘the industry lives in hope that the impending lifting of restrictions, especially working from home, will see a spike in demand in the early part of the year. The industry is desperately in need of cash injection and there are many, no doubt, who will be on the brink of closure as a result of the impact of Omicron.’
• Coffer says ‘London was a virtual desert throughout the seasonal period as a result of the restrictions of congestion charge, parking and health warnings which made punters consider a visit to the central core over the festive period with great caution. The big question is whether the culture of central city leisure has changed irreversibly – only time will tell.’
• RSM adds ‘these figures represent a devastating month for the UK eating and drinking out sector. December is such a crucial period for most operators, often representing three times the trade of a normal month.’
• It says ‘alongside a fall in sales, profit margins will have been more acutely hit when stock wastage and lower staff productivity are factored in. The relaxation of Plan B restrictions cannot come soon enough.’
PUBS & RESTAURANTS:
The YouGov / CEBR index of consumer confidence slid in December as the Omicron variant spread across the country.
• The fall was relatively modest and is in line with hopes that the variant will have a limited (though negative) impact on the economy as a whole. YouGov says ‘both the backward- and forward-looking business activity and job security metrics fell and, crucially, the household finance measures are notably below where they were this time last year.’ GfK updates on Friday.
The UK labour market:
The ONS yesterday updated on the employment market and commented on unemployment levels, vacancies and average earnings. The main takeaways seem to be that the labour shortage could persist and that real wages are now falling.
• Unemployment: The UK’s unemployment rate fell again, to 4.1% in the quarter to November, down from 4.2% in the prior month. Some 184k jobs were added in the month. The EY ITEM Club says ‘the latest healthy set of labour market numbers reinforced hopes that job losses arising from the end of the furlough scheme in September were offset by strong demand for workers elsewhere in the economy.’ It says ‘there were no signs that the economic effects from the spread of the Omicron variant held back job creation in December.’
• Vacancies: There are around 1.25m job vacancies in the UK, a high for the period that such records have been kept.
• Average wages. Wage growth was solidly behind inflation (where numbers are out this morning). Average wages including bonuses rose by 4.2% on an annual basis in the quarter. This compared with the CPI (updated today for December), which rose by 5.1% in the year to November. It was the first fall in real wages since July 2020. Regular pay was unchanged in real terms over the quarter. Real wages including bonuses edged up fractionally. Both measures fell in real terms over the single month of November.
• The EY ITEM Club warns that wages will fall further behind inflation in coming months. It says ‘regular pay growth in the three months to November fell to 3.8% year-on-year (y/y) from 4.3% y/y in the previous month, reflecting, in part, a near unwinding of distortions from the furlough scheme and base effects. This means average pay fell in real terms, an unwelcome development which is likely to worsen over the next few months.’
• Political & business reaction. There are various reports that the squeeze will have some way to go and that help for various groups may be necessary. Chancellor Rishi Sunak has said that ‘today’s figures are proof that the jobs market is thriving, with employee numbers rising to record levels, and redundancy notifications at their lowest levels since 2006 in December.’ He does not mention falling real wages.
Elsewhere, Starbucks and Chipotle in the US are reported to be cutting hours in the face of surging Omicron cases and continued labour shortages.
• Starbucks says that the staffing shortage is ‘putting some pressure on things like operating hours, where we might be dialling back late night for example from what we would ordinarily be doing.’ Shake Shack says ‘no one is immune to it.’
First Minister Nicola Sturgeon has said that nightclubs will be allowed to reopen and other restrictions on hospitality will end next Monday. Ms Sturgeon says the country is on a ‘downward slope’ of infections.
• The three household limit on indoor gatherings will also be dropped from Monday but Ms Sturgeon says ‘we will continue to ask people to work from home whenever possible at this stage – and for employers to facilitate this.’ She says ‘we will engage with business now about a return to a more hybrid approach from the start of February.’ Trade bodies have welcomed the changes but insist that the sector needs more financial support from the taxpayer.
Dr David Nabarro, a World Health Organisation (WHO) special envoy for Covid-19, has said there is now ‘light at the end of the tunnel’ for the UK in tackling the disease. The statement came as national hospital admissions fell for the sixth day in a row on Monday, from 2,180 to 1,604.
The Night Time Industries Association (NTIA) calls for vaccine passports to be scrapped, saying they are ‘neither proportionate nor effective’. An announcement could be made confirming the Government’s decision to drop Plan B measures as soon as this week.
COMPANY & OTHER NEWS:
Constellation Brands reportedly plans to initially invest $1.3bn in a new brewery in Veracruz, Mexico. The investment is part of a previously announced $5-5.5bn investment in Mexico through to 2026.
Poke House, an Italian poke restaurant chain, plans to IPO as well as open 65 sites in the UK over the next 2 years. The business acquired Ahi Poke last year and opened its first site in the UK in September 2021.
The Inn Collection Group has secured a £42m loan from OakNorth Bank. The new loan will be used to refurbish 13 of the 26 inns in its portfolio and support continued redevelopment of the current property portfolio.
Aldi has opened its trial checkout-free supermarket in Greenwich, London. Customers will have to download the Aldi Shop&Go app and will then be automatically charged for their purchases once they leave the store.
Aldi is now the UK’s cheapest supermarket reports Which.
LEISURE TRAVEL & HOTELS:
STR reports that Asia Pacific is the only region in the world where hotel construction activity has increased in Q4 last year. Construction in Europe was down 7.6% in Q4 vs the same quarter a year ago, whilst in the Americas it was down 16.8%. Asia Pacific was up by 5.0%.
UK Inbound says that figures reported yesterday by the Tourism Alliance ‘lay bare the devastating impact the pandemic continues to have on the UK’s inbound, outbound and domestic tourism industry, along with the entire supply chain. We are seeing green shoots, but the crippling border restrictions and ever-changing government guidance continue to stifle recovery.’
Savills has reported that some £1.42 billion worth of hotels changed hands in Q4 last year. It says total 2021 transactions of £4.14 billion took place, up 84.3% on 2020 volume.
• Savills says ‘the hotel sector has had a resilient year with strong momentum in the final quarter showcasing the appetite for UK hotel assets. While there remains operational challenges in the short-term, investors continue to be positive on the long-term outlook of the sector and we anticipate another strong year in 2022 for the UK hotel investment market.’
On The Beach admits that it ‘let customers down’ during the pandemic as it struggled to rescue passengers stranded due to sudden government-imposed travel restrictions. The company also said the whole travel industry suffered ‘reputational damage’ as airlines failed to offer refunds for flights cancelled due to Covid-19.
Manchester Airports Group predicts a strong recovery in 2022 following the easing of travel restrictions early in the new year. Figures released for December show overall traffic fell to 54.8% of 2019 levels, equating to a 30% month-on-month decline.
Travel Weekly reports that Genting Hong Kong, owner of Crystal Cruises, is considering filing for liquidation. The company is in a legal tussle over the refusal of an $88 million ‘backstop facility’ sought to address its ‘potential liquidity needs’.
VDR reports that more than three quarters of German companies are only allowing business travel in ‘exceptional’ cases. Only 21.5% of business travel buyers said they were allowing unrestricted business travel.
A survey by YGAM youth gambling charity and Gamstop reports that out of 2,000 students, 80% said they gambled, with 35% of those who did admitting using their student loan, bank overdrafts, borrowing from friends or taking out payday loans. On average, students are spending £30 a week on betting with 41% said it had led to them missing lectures, assignment deadlines or social activities.
Microsoft is set to acquire Activision Blizzard for $68.7bn. The all-cash takeover will give the Xbox maker a leap into the mobile gaming sphere and ‘play a key role in the development of metaverse platforms’.
FINANCE & MARKETS:
The CEO of the Recruitment & Employment Confederation has said that capacity constraints will continue to hold back the UK’s economic recovery.
Oil was yesterday at 7yr highs.
Hargreaves Lansdown has said that investor (rather than consumer or company) confidence slid in December as a result of inflation and the upcoming cost of living crisis.
EU car sales fell by 22% in December. They were down by 1.5% on the year as a whole.
Exports to the Republic of Ireland from the UK have fallen by over a fifth since Brexit.
Sterling mixed at $1.3607 and €1.201. Oil price higher at $87.95. UK 10yr gilt yield up 3bps at 1.21%. World markets down yesterday and London set to open down around 36pts as at 7am.
RETAIL WITH NICK BUBB:
• Today’s News: The Burberry Q3 update (for the 13 weeks to Dec 25th) is headlined “Momentum builds”, highlighting that “Full-price sales continued to grow at a double-digit percentage compared with two years ago, accelerating from the previous quarter and reflecting a higher quality business”. Overall Retail LFL sales were only 7% up on the previous year and down 3% over 2 years, but the company has said that “Assuming no further changes in the external environment, we expect current year adjusted operating profit to grow in the region of 35% at constant currency compared with the prior year”. There is no mention of profits in the AGM update from the embattled WH Smith this morning…but the statement (for the 20 weeks to January 15th) is headlined “Good progress across the Group; further store wins in North America”. CEO Carl Cowling highlights that “Our High Street business performed
• This Week’s News: Tomorrow brings the ABF (Primark) update, the Superdry interims, the N Brown Q3 update and the Wickes Q4 update, whilst Friday brings the latest monthly GFK Consumer Confidence survey, the ONS Retail Sales figures for December and The Works’ interims.