Langton Capital – 2023-01-30 – PREMIUM – DPEU, 888, services, Red Flags, rail strikes, WM Morrison, FlyBe & more:
DPEU, 888, services, Red Flags, rail strikes, WM Morrison, FlyBe & more:PREMIUM EMAIL – PLEASE DO NOT FORWARD: A DAY IN THE LIFE: We were mulling the source & impact of superstition over the weekend. You know, putting your socks on in a specific order to secure a win on a Saturday afternoon and suchlike. It worked spectacularly well for Hull City vs QPR this weekend, so I’m reluctant to knock it but it did bring to mind one of our dog’s habit of wittering to go outside of a morning because, one time when he did so, bits of mackerel and toast crusts and crumbs appeared in his bowl while he was out and he was sure that, if he tried it 1,000 times more, it would happen again. Which is both silly and evolutionarily understandable because a) there probably was at least one more time that it happened, b) what’s the harm in it anyway and c) there’s a certain logic in repeating what you did when something pleasant happened. Certainly it wouldn’t pay you to repeat what you did when something nasty befell you but anyway, we’re running out of time so let’s move on to the news: PUBS & RESTAURANTS: Services sector: The CBI has produced its lates monthly services sector survey & growth indicator. It reports that ‘business volumes continued to fall in the three months to January, at an accelerated pace.’ It says ‘the decline in consumer services volumes, while slowing slightly, remained significant. Business and professional services saw volumes fall, after stagnating at the end of 2022. Meanwhile, employment in both sub-sectors was relatively unchanged…’ • The CBI adds ‘in the next three months, average selling prices are expected to rise strongly again, business volumes will keep falling – albeit at a slower rate – while there will be a renewed fall in employment in consumer services.’ It says ‘across the economy as a whole, private sector activity declined in the three months to January, at broadly the same pace as last month (-16% from -13% in December). This marks the sixth consecutive rolling quarter in which activity has fallen and, looking ahead to the next three months, private sector activity is expected to fall again, but at a slower pace (-8%).’ • CBI economist Alpesh Paleja says ‘the economy has continued to show signs of struggling at the start of 2023. The services sector has repeated the falls in business volumes that we saw in the second half of last year, especially within consumer services firms.’ The CBI adds ‘inflation continues to stalk businesses in many sectors, but especially those dependent on money in the pocket of consumers. While pipeline cost pressures are showing signs of peaking, they will remain a drag on business growth in the near-term.’ • In conclusion, the CBI reports ‘the Government will need to set out urgent growth actions in the coming weeks – especially at the Spring Budget – to get firms investing, if the economy is to regain some momentum and not limp through 2023.’ The chancellor & economic growth: Following the chancellor’s comments on the economy last week, the CBI, the BCC, UKH and several other trade & industry bodies have commented. The BCC has said times remain tough. It says ‘while wholesale energy costs might now be starting to fall, the reality is that thousands of businesses were locked into new contracts last year at prices that will remain far higher for months to come. This will be unsustainable for many and must be addressed….’ • The BCC adds ‘it is also very disappointing that he did not mention exports at all’ and says ‘vision is important, but the mechanics of delivery matter too.’ • UK Hospitality Chief Executive Kate Nicholls has similarly commented on Chancellor Hunt’s statement saying ‘staffing is critical to that and the Chancellor was right to mention the need to get the economically inactive back into work.’ She adds that the hospitality sector has ‘the determination to overcome challenges, the innovation to embrace new trends and the capacity to offer jobs to so many. I hope it recognises that when delivering its plan for growth.’ • Tony Danker, CBI Director-General, says ‘the Chancellor has rightly now shifted gear to renew his focus on growth.’ It says ‘it’s only by improving the UK’s languishing performance on productivity that we can realise the huge economic potential in every corner of the country.’ Red Flags. Begbies Traynor’s latest Red Flag Alert suggests that some 18,905 bars & restaurants are under significant financial distress. It says that the businesses in question are being hit by rising labour and other costs as the economy looks set to head into recession… • In an indication that the financial strain may be cumulative, the numbers are up 36% on Q4 last year. Begbies’ Julie Palmer says we came into 2022 hopeful that the pandemic was fully behind us and better times were ahead, only for Russia’s invasion of Ukraine to unsettle the global economy, leading to spiralling inflation and soaring energy bills and laying the foundations for what looks like a global recession. In the UK, in particular, strikes are just piling on the pressure as staff struggle to get to work and customers stay away.’ • She adds ‘we’re taking calls from company bosses who are having trouble digging deep enough to keep battling on. They are already having to pay back the support they took to get through Covid and, anecdotally, we are hearing that both the Government and HMRC are becoming more determined in pursuing debts, while other creditors are increasingly turning to the law to recover their debts.’ • Ms Palmer concludes ‘throw in a such a gloomy economic outlook, with inflation at 40-year highs and interest rates at levels not seen for 14 years, and you can see why more and more companies are starting to feel the burden of their debts, making directors question whether they can go on.’ Demographics: KAM looks at the over-65s market and concludes that it will become an increasingly important demographic. KAM says the over-65s accounted for 11.8 million people, some 18% of the population in 2016. The age group will expand rapidly over the coming decades. KAM says ‘spending by those aged 65 and over increased by 75% between 2001 to 2018, compared with a 16% fall in spending by those aged 50 and under during the same period…’ • KAM adds ‘by 2040, older people will be spending 63p in every pound spent in the UK economy– up from 54p in 2018.’ KAM says that hospitality may not be serving the older demographic well. It says ‘getting it right for this demographic could be mutually beneficial.’ Looking to the future: The Insolvency and Restructuring team at legal firm Weightmans has been considering the major trends likely to emerge in 2023. With regard to insolvencies, Weightmans says there was a record number in 2022 and it says ‘we anticipate those numbers to rise over 2023 as businesses struggle to tackle the following issues… • It says wage costs, supply chain issues, the energy crisis, fuel prices and other costs will impact adversely. It says ‘liquidity issues [will emerge] as COVID loans are required to be repaid and [there is a] lack of refinancing options.’ It says debt collection may become an issue, suppliers may tighten terms and landlords may attempt to pass on interest rate rises. The law firm says there could be a reduced ‘investor appetite to fund cash-injections.’ • As regards ‘sectors in the spotlight’, Weightmans says that Retail and Leisure will be particularly impacted. It says ‘as the cost-of-living crisis continues we would expect retail, hospitality and leisure companies to suffer the brunt of consumer hesitancy as they tighten their purse strings on discretionary spending.’ • It says ‘there have been notable retail insolvencies in 2022 including Joules, Studio Retail Group and Made.com, and we anticipate more consolidation in this space in 2023 as the year kicked off with fashionable high street stalwart Paperchase seeking buyers urgently to avoid an administration.’ • Weightmans adds ‘according to statistics from the Insolvency Service, restaurant insolvencies increased 46% in the quarter to the end of September 2022 with the night-time economy particularly hard hit. It will be interesting to see how helpful the Energy Bills Discount Scheme launching in April 2023 will assist given a lot of businesses in this sector, especially independents who do not have the capacity to absorb temporary cash flow issues, are already hanging on by a thread.’ Rail dispute: RMT boss Mick Lynch has said it will be up to his members whether to accept an offer to end the long-running rail dispute over pay & conditions. Much of the hospitality industry will be hoping that some agreement can be reached. Mr Lynch says members will be consulted over the coming days. Other news: This week. Quieter for trading statements. DPEU full year update (Mon) with SBUX on Thurs. Possible announcements from RTN, Brighton Pier & CINE. Fed likely to jack rates 25bps on Weds with B of England 50bp likely Thurs. Updates on strikes likely, further political turmoil not out of the question. Digital community operator Rest Less has suggested that ONS stats show over 1.6 million adults aged 50 and over are not working because of long-term sickness. It says the number is up 20%, or 270,000, in three years… • Rest Less says ‘not only is this a national health issue with thousands of people suffering silently but it’s increasingly an economic issue too – not least because many of these people would like to work in some capacity, if the right opportunities were available to them.’ COMPANY NEWS: DP Eurasia has updated on full year trading to end-December saying that total system sales were up 76.5% on last year. LfL growth was 46.2% across the group, Sales were up 62.2% in continuing territories and down 9.8% in Russia. The company says ‘group system sales increased by 13.1% (pre-IAS 29: 76.5%), reflecting our ongoing focus on network expansion, strategic pricing, and product innovation, as well as excellent growth and demand…’ • DPEU says a ‘good performance in Turkey was delivered against a strong prior year comparative’ and points out that it opened a net 48 stores in Turkey during the year. • The group says it ‘continues to evaluate its presence in Russia and, as previously announced is considering various options which may include a divestment of its Russian operations.’ As this review is going on, ‘the Group continues to limit investment in Russia and remains focused on optimising the existing store coverage. Following the closure of 29 stores over the course of 2022, the number of Russian stores stood at 159 as of 31 December 2022.’ • CEO Aslan Saranga says ‘trading momentum sustained into the final months of the year, as we continued to implement our targeted action plan in reaction to and in order to overcome macro factors largely outside of our control.’ He adds ‘as a result, we anticipate adjusted EBITDA for 2022 will come ahead of current market expectations.’ • Mr Saranga continues ‘we have a clear and targeted strategy that has focused on three areas – strategic pricing & product innovation, continued digital innovation, and operational efficiencies to generate sustainable profitability. This approach has enabled us to combat the high levels of volatility in the regions in which we operate, and the impact of our efforts is visible in terms of volume generation and customer acquisition.’ • The CEO does not comment directly on Russia. He says ‘2022 was the year that our own brand, COFFY, strengthened its presence in the Turkish market with an accelerated expansion programme.’ He says ‘franchisee demand currently stands very strong owing to COFFY’s proven sales performance. This demand, alongside our ambitious targets for 2023, will enable us to add further scale to our coffee business.’ Loungers UK is reported set to open its newest site in the former TSB branch in Wimborne on Wednesday, April 12. Moody’s reports that Wm Morrison Supermarkets’ lates figures were a ‘weak set of results’ and they represent a credit negative. Moody’s says ‘adjusted gross debt to EBITDA, stood at 8.75x at the end of October, compared to our expectation of around 6.5x…’ • Moody’s reports ‘as such, leverage has yet to recover to the guidelines we had set for the B1 rating of between 5.75x and 6.5x.’ This implies the credit agency is considering its position. It says ‘the decline was driven by lower sales, rising input costs including energy, wages and transport, and only partly offset by higher fuel margins (Morrisons owns and operates 339 petrol stations across England, Scotland and Wales) and cost savings.’ Rémy Cointreau last week reported Q3 numbers showing that revenues were down 6% at €437.6 million. This was deemed a better-than-anticipated number as sales to China picked up… • Remy says despite disruptions triggered by unprecedented levels of Covid, the group successfully generated robust sales growth ahead of the Chinese New Year and in anticipation of a full recovery in business.’ EMenu Now has partnered with MarketMan to help hospitality businesses boost their profitability. It says the JV partners’ aim is to ‘help as many businesses as possible to overcome the challenges being posed by the current cost of living crisis, by increasing sales, cutting administrative costs, streamlining operations and reducing wastage.’ HOLIDAYS & LEISURE TRAVEL: Birmingham-based Flybe has ceased trading. The collapse follows that of the earlier version of Flybe, which collapsed in 2020… • Flybe says on its website ‘on 28 Jan 23 David Pike & Mike Pink were appointed joint administrators of Flybe Limited. Flybe has now ceased trading. All Flybe flights from and to the UK are cancelled and will not be rescheduled.’ • Prompting a scramble for replacement flights, it adds ‘if you are due to fly with Flybe today or in the future, please do not travel to the airport unless you have arranged an alternative flight with another airline. Please note that Flybe is unfortunately not able to arrange alternative flights for passengers.’ • The CAA comments ‘all Flybe-flights have now been cancelled. Please do not go to the airport as flights will not be operating.’ It says ‘Flybe customers who still need to travel, will need to make their own alternative travel arrangements via other airlines, rail or coach operators.’ Director Paul Smith says ‘we urge passengers planning to fly with this airline not to go to the airport as all Flybe flights are cancelled. For the latest advice, Flybe customers should visit the Civil Aviation Authority’s website or our Twitter feed for more information.’ • The airline was reported to be losing around £5 million a month prior to its collapse. Interpath Advisory says ‘since its launch, the company has had to withstand a number of additional shocks, not least of which was the late delivery of a fleet of 17 aircraft ordered from lessors.’ • It adds ‘whilst the company was still in its start-up phase, the impact of these delays and reduced demand for travel led to an estimated £30 million in lost revenue and additional costs. The company was losing money at c£4-5 million per month just prior to filing.’ OTHER LEISURE: 888 Holdings has announced ‘that Itai Pazner, Chief Executive Officer and Executive Director, is immediately leaving office as CEO and as a Director.’ It says ‘the Group’s Non-Executive Chair, Lord Mendelsohn, is assuming the position of Executive Chair on an interim basis while the Board searches for a permanent CEO.’ No reason for the departure is given in this morning’s RNS… • Lord Mendelsohn, Executive Chair says ‘on behalf of the Board I would like to thank Itai for his significant contributions to the business over more than 20 years, including the last four as CEO. Itai has played a very important role in building a business with powerful proprietary technology, and has overseen successful early stages to the William Hill integration process. We wish him well in his future endeavours.’ The Mail on Sunday reports that ‘Cineworld’s creditors have contacted its rival Vue about a possible sale as part of efforts to salvage the business…’ • It says ‘advisers have approached Vue and at least 30 other potential buyers since the start of December.’ It would be surprising, perhaps, if they had not. Last week, Vue said it had refinanced its own business and now had £75 million in new funds available. Apple is set to report what analysts believe will be reduced sales and earnings on Thursday. Sky reports that Morgan Stanley is to sell GameNation, Britain’s biggest independent operator of high street slot machine venues with some 50 sites across the UK. Scunthorpe has reportedly been served with a winding-up petition for an alleged unpaid tax bill by HMRC. Begbies Traynor told BBC Radio Humberside the winding-up petition “shows the urgency required by any potential purchaser”. FINANCE & MARKETS: See Pubs & Restaurants for responses to Chancellor Hunt’s speech. The Telegraph quotes The Investor Forum, which represents fund managers including Blackrock, Aviva, UBS and Norway’s sovereign wealth fund, as saying that British stocks have had a fall from grace and are no longer seen as assets that need to be owned. It says ‘the declining relevance of UK equity markets over the last 25 years has been breath-taking. The CEBR suggests that tens of billions of pounds in additional taxpayers’ funds will be needed to keep public services running this year because of a collapse in productivity. The CEBR has reported that GDP in France is estimated to have been 0.7% higher than pre-pandemic levels across 2022, marking the best performance on this measure amongst Western Europe’s five largest economies. Sterling higher at $1.2395 and €1.1405. Oil lower at $86.09. UK 10yr gilt yield up 2bps at 3.33%. World markets mixed on Friday with London set to open some 27pts lower as at 6.30am. RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-page headlines in the Saturday papers were largely focused on the plans by the Chancellor Jeremy Hunt to entice people over 50 back into the workplace, eg the Daily Express trumpeted that “Hunt’s perks will help millions work again” and the Daily Mail reported that Hunt is considering raising the £1m lifetime allowance on tax-free pension savings, a limit that it says has helped drive thousands of doctors and other professionals into early retirement. The Times reported that the Chancellor wants to boost the economy by prioritising tax cuts for businesses over those for workers (“I will boost business to fix economy, says Hunt”). In other news, the FT led with a report that HMRC has admitted that it gave misleading information when it said last year that no government minister was under tax investigation (despite the then-Education Secretary
• Saturday’s Press and News (2): In terms of Retail news, there was plenty of coverage in Saturday’s papers of the news that Bestway has bought a 3.5% stake in Sainsbury for just under £200m and most of the headlines noted that Bestway owns the Costcutter convenience store chain and is a big grocery wholesaler, although the Guardian flagged that Bestway may also be angling to replace the Lloyds pharmacy concessions in Sainsbury with its own Well Pharmacy chain. The Times had a profile of the founder of Bestway, Anwar Pervez and the Telegraph highlighted that Bestway discussed a merger with Sainsbury ten months ago. The widely followed Lex opinion column in the FT (headlined “Shrewd for thought”) looked at the industrial logic behind the move, a la Tesco/Booker, and concluded that “As rising costs put the squeeze on every part of food supply chains, greater collaboration between Bestway • Saturday’s Press and News (3): There wasn’t that much coverage of the profit warning from Superdry, but the Times flagged that the warm autumn didn’t help Superdry and the Daily Mail highlighted that Julian Dunkerton has denied any plans to take the business private. The weak Q4 results from H&M were noted in the FT, the Times and the Telegraph. The “Share of the Week” in the Daily Mail was Amazon, ahead of its upcoming Q4 results. And the News pages of the Guardian noted the successful opening of the “charity superstore”, Charity Super.Mkt, in the former Top Shop unit in Brent Cross shopping centre.
• Sunday’s Press and News (1): On Sunday, the front-page headlines were again very mixed. The Observer highlighted that Rishi Sunak was warned of the reputational risk to his Government when he appointed Nadhim Zahawi as Conservative Party Chairman last October, but its main story was the claim by a whistleblower that children staying at a Home Office-run hotel in Brighton while seeking asylum in the UK were “threatened with violence and subjected to racist abuse by staff”. The Sunday Express flagged that Rishi Sunak is on a “collision course” with civil servants over plans to end the right of anyone who enters the UK illegally to claim asylum. The Mail on Sunday said that the King has asked the Archbishop of Canterbury to broker a deal to allow Prince Harry to attend his Coronation. The Sunday Telegraph led with a report that over half a million patients a year could be treated via
• Sunday’s Press and News (2): On Sunday, in terms of Retail news, the Sunday Times followed up on the Bestway/Sainsbury news with a feature on the “Billionaire in the Bagging Area” (the founder of Bestway, Anwar Pervez), noting that Bestway may well end up making a full bid at some stage and that a year ago the private equity giant Apollo was thinking of bidding for Sainsbury. The Sunday Times also highlighted the pressure on the Issa brothers of Asda/EG fame from their big debt mountain and rising interest rates. The Sunday Times also had an interesting feature on the huge profit made by 3i from the stake it took in the Dutch household goods discount chain Action in 2011 (“Private equity’s most lucrative deal ever”). The main Business story in the Sunday Telegraph was that Frasers is finalising plans to lend up to £2000 to customers and that Mike Ashley is said to be really excited • Sunday’s Press and News (3): In terms of Economics comments in the Sunday papers, we give our usual shout-out to the column by the Sunday Times Economics correspondent, David Smith (“Growth is the problem, and there’s no obvious solution”), in which he noted that interest rates of 4% should be the peak, but that “The Tory appetite for unaffordable tax cuts has not yet been extinguished”. We also enjoyed the columns by the veteran City commentator, Hamish McRae, in the Mail on Sunday (headlined “My five tips for the Chancellor,”), by the veteran City commentator, Jeremy Warner, in the Sunday Telegraph (headlined “It’s not all doom and gloom, says Hunt, but he gives us little light”) and by the Economics correspondent, Philip Inman, in the Observer (headlined “History tells us that Hunt is doomed as Chancellor”).
• Today’s News/Friday’s News: There have been bullish year-end updates from the two big West End landlords, CapCo and Shaftesbury, ahead of their merger, which is expected to complete in Q1. Ian Hawksworth, CEO of Capco, says: “There is continued momentum at Covent Garden with robust trading conditions, in particular a successful Christmas period with customer sales in aggregate exceeding pre-pandemic levels” and Brian Bickell, CEO of Shaftesbury, says: “London’s West End has seen buoyant footfall and trading throughout the important festive period, with occupier trading, on average, ahead of levels seen prior to the pandemic”. Back on Friday morning we didn’t have time to flag that there was a profit warning from Motorpoint, the second-hand car superstore chain, as, despite a return to year-on-year retail volume growth in December and into January, gross profit per unit has been below • BDO High Street Sales Tracker: Although we must make our normal caveats (ie that the weekly BDO High Street Sales Tracker for medium-sized Non-Food chains is statistically flawed, is focused on relatively upmarket businesses and is very skewed to Fashion), the latest survey, for what it’s worth, shows that January trading has continued to be surprisingly good, notwithstanding the boost from price inflation. In the w/e Jan 22nd Total BDO sales (including a few Homewares and Lifestyle retailers, as well as the Fashion retailers) were up by 12.0% LFL on the year before (with Store sales jumping by 21.9% and Online sales rising by only 0.3%), whilst Fashion sales alone were up by nearly 20% LFL, perhaps helped by the cold snap. • News Flow This Week: As January draws rapidly to a close and February looms on the horizon, the pace of news picks up this week, with tomorrow bringing the Pets at Home Q3 update and the Wickes Q4 update, together with the latest monthly Kantar grocery sales figures. On Thursday, we get an update from ScS, plus the latest MPC interest rate decision (at noon) and in the afternoon JD Sports are holding a Capital Markets briefing (in London). In the evening on Thursday, in the US, Apple will be announcing their Q1 results and Amazon will be announcing their Q4 results. |
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