Langton Capital – 2022-10-05 – PREMIUM – Disposable income, inflation, Five Guys, BrewDog, Black Sheep & other:
Disposable income, inflation, Five Guys, BrewDog, Black Sheep & other:PREMIUM EMAIL – PLEASE DO NOT FORWARD: A DAY IN THE LIFE: It’s a bit dark out there now. And the weather, too. But let’s stay upbeat. Bit busy today. On to the news: PUBS & RESTAURANTS: Consumer disposable income: Real wages are falling and specific, unavoidable costs, such as heating and accommodation expenses are rising. This could put downward pressure on spending. Indeed, if the Bank of England is successful in bringing down inflation, it will be precisely because this has happened. The average two-year fixed mortgage rate deal has now reached 6% after being 5.43% four days ago and just 2.34% in December. Somewhere between 100,000 and 150,000 homeowners each month are up for renewal on the fixed rates on their mortgage, meaning that the increased rates will have a significant impact on consumer spending power… • Of course not all mortgage holders will choose to fix. Some will move to floating rate in the hope that rates (and therefore fixes) will come down in due course. however, many will opt for certainty and they face the prospect of their monthly mortgage payments doubling or even trebling. • Banks may furthermore be incentivised to demand larger deposits. This because the risk of the customer not being able to pay their monthly bill rises as the size of that bill rises and it would be sensible for the bank to have a larger amount of customer equity in the property if they need to repossess. We are, thankfully, a way from this being a problem but it is undoubtedly the direction of travel. Retail Economics research indicates that this Christmas, British shoppers are expected to spend £4.4bn less on non-essentials – a fall of 22%… • Whilst it sounds – and indeed it is – dramatic, this is only to be expected as real incomes are dropping, real disposable income is dropping more rapidly and essentials remain, well, essential. The outlook piles further pressure on businesses which are already facing higher energy bills and labour costs as well as an increase in the cost of goods forcing many to cut back on trading hours. • Shopper footfall in December is predicted to be just 4.2% up on last year despite soft comps against last year’s Omicron crisis, according to Springboard. October and November are expected to be even worse than last year with numbers down 2.1% and 2.7%, respectively. • Retail Economics CEO Richard Lim says ‘inflation is set to peak at exactly the wrong time for retailers [read also many hospitality companies].’ He goes on to say that ‘shoppers’ budgets are already under intense pressure with inflation reaching decade-highs across international markets. Consumers are concerned, budgets are under pressure, and households are intending to cut back this year as they struggle to make ends meet.’ • Mr Lim says ‘against this weakening consumer backdrop, retailers are also facing a pincer movement of rising input and operating costs which is testing business models to breaking point’. Ditto hospitality companies. Retail Economics concludes ‘with profit margins under intense pressure, some retailers are planning to pass on costs through delivery and returns options, precisely the areas that encourage consumers to seek out alternatives.’ • Langton view. Whilst this, though realistic, is a tad gloomy, the winners will continue to win. For the moment, investors may not be willing to take this on board but, for companies that provide the goods and services that consumers wish to purchase at a price they are prepared to pay, the outlook, though uncertain, is much less dark. • Because capacity is likely to come out of the market and, if operators can look around, spot the losers and critically be sure that they are not numbered amongst them, then market share will be there for the taking and profits should come in due course. Just how long this process may take, of course, remains uncertain. Outgoing CEO of Shell, Ben van Beurden, has said that taxing energy firms within the oil and gas industry was “inevitable” in order to help the poorest people across societies… • It certainly seems reasonable to raise money ‘temporarily’ in order to deal with ‘temporary’ problems. That’s assuming that the spike in energy prices is short-lived and that governments, once they have imposed a tax, can be disciplined enough to remove it when its purpose has been fulfilled. The above would help to maintain spending power across consumers and would not be permanent – or at least long-lived – in the way that issuing 25yr government debt would be. Inflation: Inflation just got real as Greggs has announced that it is to raise the price of its sausage rolls for second time this year… • Greggs said yesterday that it expects its costs to rise by around 9% this year. It will put the price of its sausage rolls up to £1.15 from £1.10 having already raised them from £1.05 in May. The company tells The Telegraph ‘we absolutely want to retain our value leadership, so we always watch what our competitors are doing to make sure that if we are moving prices, we still are the value leader in the market.’ The co clearly believes that competitors are taking similar action. The RAC maintains that motorists should be charged some 10p less per litre for fuel than they are having to pay on the forecourts… • Spokesman Simon Williams says ‘drivers really should have seen a far bigger drop as the wholesale price of delivered petrol was around 120p for the whole month.’ It says ‘this means forecourts across the country should have been displaying prices around 152p given the long-term margin on unleaded is 7p a litre. In stark contrast to this, RAC Fuel Watch data has shown margins to be around 17p a litre – a huge 10p more than normal.’ • The RAC points out that supermarkets are currently only around 1.5p per litre cheaper than average. The margin below their competitors is usually 3.5p. Other news: Markit’s UK services PMI is out later today. COMPANY NEWS: Caravan Restaurants and Coffee Roasters is planning to expand outside London, with CEO Laura Harper-Hinton saying ‘we have a couple of projects in the pipeline’. The business currently operates six Caravan sites and one site for Vardo. Brakspear has launched its Giving Back campaign, a new initiative to support worthy causes chosen by its 120 pubs through a match funding scheme, and to upscale the company’s long-standing efforts to protect Britain’s bee population. Five Guys UK business reports revenue up 45% to £237.3m for the year to 31 December 2021, up from £164.2m the year prior… • Operating profit was £50.9m, compared to £21.2m in 2020 and profit after tax was £26.2m, versus £1.8m the year prior. Five Guys European Holdings, which includes its sites in the UK, France, Spain and Germany, ended the year with 209 stores, 136 of which were in the UK (+26). • The company says ‘while the group is now generating strong operating cash flows, it continues to invest in new store openings and expects to be reliant on continuing investor support in 2022.’ It says ‘given the disruption caused by the pandemic, we ended the year with a robust performance and believe the business is well positioned going into 2022.’ Brewdog Retail has reported full year numbers to end-December 2021 saying that revenue in the period rose from £25.2m to £36.9m with a loss before taxation of £7.0m vs a loss of £10.5m in the prior year… • The company reports that ‘subsequent to the year end we announced the BrewDog Blueprint which further shapes the future of our business by focusing on the three pillars of beer, planet and people.’ Accumulated losses since incorporation have increased from £13.8m to £20.8m. The group now has negative shareholders’ funds of £10.8m. Chopstix has reached a franchise agreement with Sparta Foods Ltd which will see 25 new stores open over the coming years. Sparta Foods plans to concentrate its portfolio of stores in the North-West of England and North Wales. The Black Sheep Brewery has reported full year numbers to 31 March 2022, saying that turnover rose from £13.3m to £14.3m with a loss before tax of £1.2m against a profit in the period to March 2021 of £863k. The 2021 result – as were those of most operators and even more so leisure retailers – was materially aided by exceptional government income… • Chairman Andrew Slee reports ‘the resilience and versatility of Britain’s pubs and brewers will shine through. Whilst the popular view may be that coronavirus is somehow “over,” its legacy and impact on our sector certainly isn’t.’ • He says ‘for evidence, look no further than. the recent closure of Kelham Island Brewery in Sheffield and the announcement of redundancies at Cloudwater Brewery in Manchester. Both multiple award winning and well respected innovative independent brewers.’ • Mr Slee says ‘whilst pub groups are recovering quickly, the economic impact on breweries, which received minimal government support during covid will be with us for some time.’ Burger & Lobster has released results for the year to 2 January 2022 saying that group turnover rose 40% to £22.8m with EBITDA of £1.8m and net assets of £2.5m… • The co says ‘despite cost-of-living headwinds, Burger & Lobster’s week-on-week sales continue to increase. This comes just as the brand have temporarily closed their iconic Soho restaurant for refurbishment. A further programme of site investment is planned for early next year.’ • MD Dino Sura says ‘whilst we remain cautious in the short term as we navigate through the cost of living and financial crisis, we are confident that our continued commitment to brand development and innovation will resonate with our loyal customers and attract new diners.’ Starbucks is reported to have settled its first National Labour Relations Board complaint with unionized workers… • SB Workers United says this ‘sets an example for everyone to see that they don’t have to get rolled over by big corporations.’ It maintains that ‘good workers should not be made to feel like delinquents.’ Burger company Fat Hippo is to open its first site in London, on Great Eastern Street in Shoreditch, on Friday this week. HOLIDAYS & LEISURE TRAVEL: Demand for holidays: A Travel Counsellors survey has found that 75% of its customers are looking to book a holiday in 2023, despite the ongoing cost of living crisis. Some 60% said they would book their holidays at around the same time as they usually did… • What people ‘usually did’ is now three years ago. The poll presumably means that 40% will not do the above. And the squeeze may be reflected in the fact that more than 60% of customers were interested in low deposit or flexible payment terms. Recent sales figures show Mediterranean destinations, the US, Australia, New Zealand and the Caribbean are doing well. • Travel Counsellors says ‘we are all feeling the effects of the credit crunch at the minute – some 64% of our clients have said the cost-of-living crisis is affecting their lives, but holidays are still a priority for many.’ It says ‘whatever their budget, customers are still looking for trusted travel advice and want to know they are in safe hands should anything go wrong during their travels.’ European value chain B&B Hotels plans to enter the UK market, targeting 100 new hotels by 2035. Established in 1990, B&B Hotels has grown to more than 650 hotels across 14 European countries. The firm is backed by capital from owners Goldman Sachs. Passenger caps are not unique to Heathrow, with Amsterdam’s Schiphol Airport announcing that it will place a further cap on passenger departures during the winter season due to ongoing staffing issues and a lack of available security guards. The new restrictions will likely remain in place until the end of March 2023, however a review and possible tightening of measures will take place at the end of January. Accor has said it is to sell its Paris headquarters, the Sequana Tower, for 465 million euros. OTHER LEISURE: Donald Trump is suing CNN, claiming defamation and seeking punitive damages of $475m, according to a Florida court filing on Monday… • The filing states that ‘CNN has sought to use its massive influence, purportedly as a ‘trusted’ news source, to defame the plaintiff in the minds of its viewers and readers for the purpose of defeating him politically’. The easiest and best defence against a defamation allegation is that what was alleged was true. Elon Musk is reported to have changed his mind again about buying Twitter and will proceed with the takeover at its original price… • Mr Musk says he would like to end the legal fight with the company and adds that, pending financing, he will proceed with the deal. Had he continued to refuse to proceed, he could have been looking at a $1bn break-up fee. FINANCE & MARKETS: Commenting on the government’s recent proposals, the CBI says ‘businesses are looking for the Government to deliver a credible medium-term plan for growth that includes concrete steps to boost investment in the UK…’ • It says ‘we welcome the commitment to delivering a plan alongside the OBR which will contribute to medium-term fiscal sustainability.’ That would be nice. The CBI further says ‘business backs an ambitious 2.5% target over the long term, and it was good to see the support for important supply-side reforms reiterated. They have been gathering dust and many, like addressing urgent planning issues, Net Zero investment and immigration reform, are long overdue.’ The next ‘fiscal event’ should be before the end of this month… • At least that is the best estimate as at the time of writing. Liz Truss, presumably on behalf of her current chancellor, has refused to rule out cutting benefits in real terms and has further declined to say that she (or he) would not cut the 45% rate of tax in the future. • Former PM Boris Johnson won the 2019 General Election on the promise that benefits would rise at least in line with prices – not in line with wages. Covid and the Ukraine invasion have intervened and it would appear that previously placed bets are now off the table. Cabinet minister Penny Mordaunt has told The Radio Times that it “makes sense” to increase benefits in line with inflation. She says ‘we want to make sure that people are looked after and that people can pay their bills. We are not about trying to help people with one hand and take away with another.’ Sterling mixed at $1.1432 and €1.1473. Oil up at $91.62. UK 10yr gilt yield down another 8bps at 3.87%. World markets better yesterday but London set to open down around 28pts as at 6.30am. RETAIL WITH NICK BUBB:
• Today’s News: The Tesco interims (for the 26 weeks to 27 Aug) are headlined “On Track And Delivering For Customers Despite Tough Backdrop”, so there is no obvious sign of a profit warning or increased investment in lower prices, but H1 operating profits were 10% down at £1315m, albeit Tesco boast that “solid trading performance and acceleration of our Save to Invest programme have contributed to a strong financial result for the first half”. Tesco go on to say that “As a result, despite ongoing challenges in the market, we are able to maintain our profit guidance within our previous range, albeit towards the lower end. We therefore expect full year retail adjusted operating profit of between £2.4bn and £2.5bn”. In other news, the Vertu Motors interims are well down on last year’s bumper profits, but the company has said that full year profits will be ahead of market • This Week’s News: Tomorrow brings the N Brown interims, whilst Friday could bring the Superdry finals and a pre-close update from Victorian Plumbing. |
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