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Thu 16th Jul 2015 - Update: June like-for-likes, National Living Wage impact
Analyst – National Living Wage to put pressure on forecasts over medium term: Deutsche Bank analyst Geof Collyer has argued that the introduction of the National Living Wage (NLW) will affect ‘some significantly more than others’. He said: “The introduction of the National Living Wage comes at a time when everyone is hoping that sector trading will start to recover from a subdued last 12 months. The NLW will now place significant pressure on companies in the hospitality space and could stunt profit growth for a few years. It will take much inventiveness and hard work to mitigate its impact, with some groups better placed than others. We see Whitbread (‘Buy’), Merlin (‘Buy’) as the least affected of our UK group, with Greene King best placed, having just completed an acquisition that should provide a lot of hidden potential upside to offset much of the extra burden. According to the Low Pay Commission, the hospitality sector has the highest proportion of jobs paying the National Minimum Wage at 26%. In addition, Leisure, Travel & Sport would take that total to 30%. We estimate that for the major quoted UK hospitality groups, labour costs range from 25% to 33% of revenues, with most companies here having circa 40% of their employees on the NMW. We estimate that the imposition of the NLW will take between -36bps to -265bps off Ebita margins by FY18E. We estimate that this could translate into a pre-mitigation PBT impact of between a -2% hit for Merlin, up to circa 25% negative impact for Mitchells & Butlers & JD Wetherspoon, though we just have downgraded JDW by -9% today due to the 8% starter pay rise just agreed for August 2015. The obvious opportunities, apart from the 200 bps drop in UK Corporation Tax, would include (i) better staff retention rates from higher pay – implying increased productivity; (ii) companies will put prices up; (iii) smarter use of technology; (iv) better labour scheduling; and (v) any recycling of cash back into the sector’s outlets from the 38% increase in the NMW between now and April 2020. There will likely be a number of negatives amongst which are (i) What happens to pay differentials? (ii) Will potential for recycling the higher income levels for the currently lower paid get eroded by loss of state benefits? (iii) Will the unit supply side growth eat away all of the extra benefits of more disposable income? (iv) The cost of many services currently outsourced like cleaning will go up. We have downgraded M&B from ‘Buy’ to ‘Hold’, with our price target dropping from 540p to 500p. We have reduced the Ebita multiple we use to drive our price target from 13.5x to 13.0x (same multiple that we use for JDW) to reflect the greater medium term pressure on M&B’s cash flows from the introduction of the NLW, as well as the potential to push even further out the reinstatement of its dividend, to maybe FY18.”

NewRiver Retail reports progression on leisure portfolio: Property developer NewRiver Retail has reported progress on lettings to restaurant operators and its 202-strong Marston’s portfolio, where it is developing c-store opportunities. It stated: “Responding to evolving consumer demand, NewRiver has made good progress advancing its strategy to create attractive food and leisure offers undertaking a number of restaurant lettings including three Burger King restaurants in The Promenades, Bridlington; Hill Street Shopping Centre, Middlesbrough; and The Packhorse, Huddersfield. Additionally NewRiver agreed terms with restaurant operators Roosters, El Taco Mexican and a craft beer microbrewery at The Packhorse, Huddersfield, part of the company’s strategy to reposition the centre and create The Packhorse Kitchen. Typical lease terms for these new restaurants are 20 years with rents ranging from £65,000 to £85,000 pa.” Of its Marston’s portfolio it said: “(We) submitted six further planning applications during the quarter to meet the development programme targets, bringing the total submission to date to 45. During the period NewRiver successfully secured three further consents equating to a total of 13 planning consents successfully secured to date. The current portfolio Ebitda is performing 0.46% above the four-year guaranteed income of £12.2 million pa received from Marston’s.”

Coffer Peach Tracker reports June like-for-likes up 1.7%: The growing popularity of branded restaurants was a major factor in boosting eating-out sales in June, latest data from the Coffer Peach Business Tracker show. The country’s leading managed pub and restaurant groups collectively saw like-for-likes sales grow 1.7% against June last year – with restaurant chains’ like-for-likes up more than twice that at 3.6%. “We expected pubs to do relatively less well, and restaurants better, this month because of the boost that drink-led pubs in particular received this time last year from the football World Cup. But the truth is that restaurant chains have been outperforming the pub sector for some time now,” said Peter Martin, vice president of CGA Peach, the business insight consultancy that produces the Tracker, in partnership with Coffer Group, Baker Tilly and UBS. “The World Cup, and especially the weeks that England were still in it, helped both pub and drink sales grow last June – in what was otherwise a flat market for branded restaurants and the market as a whole. So last month’s trading is more than just a bounce back, as even pub sales were up slightly,” he added. Martin said that while casual dining brands were generally trading ahead of the market, it was their performance away from London that was particularly impressive, “Collectively restaurant chains saw same-store sales grow 5% outside of the M25 compared with June 2014 – and that is also where those groups are concentrating their brand roll-outs,” he said. “Total sales for branded restaurants outside of London, which reflect the impact of those new openings, were ahead 12.8% compared to last June. That compares with a 5.8% total sales uplift for the sector as a whole,” Martin added. Managed pub groups, including the major pub restaurant operators, saw like-for-like sales up 0.8% for the month against last June, with food sales making up for a poorer drink performance, even in drink-led sites. Pub food sales grew 3%, while drink was down 0.5%, the Tracker showed. “The strong showing of restaurants in June also meant that overall London trading was less good than the rest of the country – at least among established players. Even with the distortion of the World Cup, the underlying market is showing steady progress,” added Martin. Paul Newman, head of leisure and hospitality at Baker Tilly, said: “The eating and drinking out market continues to demonstrate rates of growth significantly ahead of the wider economy. Despite an unremarkable June in terms of the weather and sporting events, the industry’s sustained feel-good factor amongst consumers is unrelenting. Households have led the charge in the recovery since the recession. The key question for us is whether that spending growth will continue to sustain the significant new site rollout plans of so many well-funded branded operators.” Mark Sheehan, managing director of Coffer Corporate Leisure, added: “Yet again we are seeing pub and restaurant like-for-like growth outperforming inflation. This growth is no longer dominated by London and we are seeing the rest of the UK continuing to power forward. The sustained growth of restaurant chains in the provinces will be hurting independent operators and we expect to see an increased number of casualties in the future.”

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