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Morning Briefing for pub, restaurant and food wervice operators

Fri 15th Mar 2019 - JD Wetherspoon, TRG and Wagamama results, Ei Group disposal
Wetherspoon reports like-for-likes up 6.3%, profits down: JD Wetherspoon has reported revenue rose 7.1% to £889.6m (2018: £830.4m) in the 26 weeks to 27 January. Like-for-like sales rose 6.3%. Profit before tax dropped 10.5% to £48.6m in the six weeks to 10 March, like-for-like sales rose 9.6%. Tim Martin, the chairman of JD Wetherspoon, said: “The vexed debate about Brexit has continued since the referendum, nearly three years ago. Although the public voted to leave, the majority of ‘the establishment’, including most MPs, most universities, the Bank of England, the CBI and media organisations such as The Times, the Financial Times and The Economist favoured ‘Remain’. The result has been a barrage of negative economic forecasts from those quarters, predicting that the UK will go to hell in a handcart without a ‘deal’ with the EU – which will effectively tie the country into EU membership and taxation, yet without representation. The doomsters ignore the most powerful nexus in economics, between democracy and prosperity – and the fact that the EU is becoming progressively less democratic, as it pursues an ‘ever-closer union’, for which there is no public consensus. Previous referendum results on major constitutional issues have always been respected in the UK, but if parliament votes either for Theresa May’s ‘deal’ (which keeps us in the EU by the back door) or to remain in the EU, the referendum result will not have been respected. This may well have significantly adverse economic consequences, as the country turns in on itself to endure months, or years, of stifling constitutional argument. In the six weeks to 10 March 2019, like-for-like sales increased by 9.6%, helped by excellent weather this year and snow last year, and total sales increased by 10.9%. As previously indicated, costs in the second half of the year will be higher than those of the same period last year. The company anticipates an unchanged trading outcome for the current financial year.” On property, he added: “During the period, we opened two new pubs and closed six, bringing the number open at the period end to 879. Following a review of our estate, in recent years, we placed around 100 pubs on the market, most of which have now been sold. Ten years ago our freehold/leasehold split was 41.7/58.3%. At the half year end it was 60.2/39.8%.”

Wagamama reports 9.1% UK like-for-like sales growth: Wagamama has reported turnover increased 13.2% to £81.6 million in Quarter Three to 3 February 2019 with 9.1% UK like-for-like sales growth and 10% US like-for-like sales growth. The information is contained in a quarterly report to bondholders. Adjusted Ebitda was up 11.9% in Q3 2018/19 to £12.9 million from £11.5 million in Q3 2017/18. The company claimed a 8.7% UK outperformance of the market in Q3 2018/19 and traded ahead of the competition consistently for almost five years (251 weeks). One new US restaurant opened in early Q4 (Murray Hill, New York City). Six refurbishments have been completed in Q3, bringing Kaizen design and new covers where possible to the existing estate. One new franchise restaurant opened in Paris in early Q4, the first opening in France. Chief executive Emma Woods said: “The latest Wagamama results show the business momentum remains robust and we are continuing to grow strongly. It reflects our relentless commitment to building a brand with purpose, which cares deeply for its teams and its guests and focuses on anticipating their needs.”

The Restaurant Group reports like-for-likes up 2.8% in first ten weeks, developing grab-and-go format for Wagamama, Mamago: The Restaurant Group has reported revenue up 1% to £686m in the 52 weeks ended 30 December 2018 with like-for-like sales down 2%. Like-for-like sales are up 2.8% in the first ten weeks of this financial year. The company also revealed it was working on a grab-and-go variant of Wagamama called Mamago, which will be launched in the Second Half of this year. Chairman Debbie Hewitt said: “2018 was a pivotal year for the group. The acquisition of Wagamama and the development of our Pubs and Concessions businesses have accelerated our progress into growth sectors and we continue to make improvements to the customer proposition and our execution across our Leisure business.” Statutory profit before tax was £13.9m (2017: £28.2m) including exceptional charges of £39.2m. Hewitt added: “The acquisition of Wagamama formally completed on 24 December 2018. The business has a differentiated, high growth, pan-Asian proposition which has significantly and consistently outperformed its core UK market. It is well aligned to the key structural trends in our sector and addresses customer demand for speed of service, delivery and healthy options. We continue to believe that the acquisition will be transformative for the group, allowing us to accelerate Wagamama’s UK roll-out with selected TRG site conversions, expand the UK concessions presence leveraging our existing relationships, address delivery opportunities via restaurants and delivery kitchens, pilot pan-Asian cuisine ‘food-to-go’ offerings, explore international growth options and deliver at least £22m of synergies. The enlarged group now derives c.70% of outlet Ebitda (on a full-year 2018 pro-forma basis) from high growth segments (Wagamama, Concessions and Pubs) and is well equipped to address compelling growth avenues.”

Of Wagamama, the company stated: “The Wagamama team have identified clear opportunities to grow like-for-like sales further in 2019, including: Development of the drinks range to help drive higher participation; Investment in local marketing and events to drive greater awareness, using new data sources to more effectively target audiences and win share; Further expansion of the vegan range, including new collaboration hero dish ‘Avant Gard’n’, which features a vegan ‘egg’, being launched in partnership with vegan chef Gaz Oakley; Increased delivery growth via greater reach of aggregators and technology integration both within and between restaurants; Six major refurbishments planned for this year which will add 300 additional covers (equivalent to two new restaurants) The business is also progressing well on driving future growth via the levers identified at the time of the transaction. We expect to open between three to four new restaurants this year in the UK, as well as converting eight Leisure sites to Wagamama. The business has won a tender for a site in Heathrow Terminal 3 which is due to open in the second half of this year. A site has also been secured in the planned redevelopment of Manchester airport and is due to open in the first half of 2020. The business is also exploring a variety of other airport opportunities. The delivery kitchen in Battersea has been successfully trialled and we will be rolling out further delivery kitchens in the year. We opened a new restaurant in Murray Hill, NYC earlier this year and will open in Midtown Manhattan in the Summer. A strategic review of our options for the US business has commenced and we will update investors on our plans later in the year. The business has developed a new grab and go concept which is to be branded “Mamago”. The concept will offer a newly developed Asian menu to capitalise on increased customer demand for convenience. The initial pilot is planned for launch in the second half of this year. We will convert eight Leisure sites to Wagamama restaurants this year, with a similar number expected next year. Teams across the business have well developed people, marketing and design and build plans to ensure the new restaurants launch successfully. The eight sites are in locations which align well with the Wagamama customer demographic, and in competitive markets where we have high confidence that we can take share from less differentiated offerings. The eight TRG sites collectively make a modest profit today and we expect them to generate incremental Ebitda returns in excess of 50% of the cost of capital to convert. The converted sites will open between August and November 2019. We have continued confidence in delivering an incremental Ebitda benefit of at least £7m per annum at maturity in 2021 from our site conversion programme. We are progressing well with our cost synergy plans and collaborative cross-functional working groups across the business have been established. We have continued confidence in delivering at least £15m of cost synergies per annum in 2021.”

Of its Concessions business, the company stated: “Our Concessions business operates a wide variety of food and beverage formats, across over 35 brands, primarily in UK airports. This includes bespoke concepts designed with airport partners, The TRG Group’s own leisure brands, and well-known third-party brands, which operate under franchise arrangements. Our trading continues to be strong and we continued our strong track record of retaining sites with c.85% having received contract renewals beyond the term of the initial contract. In particular during 2018 we successfully renewed contracts for existing large spaces at both Gatwick and Heathrow airports. On average our contracts have been extended for 90% of the original concession term. Our unique capabilities enabling us to consistently deliver high operational standards at high volume and peak-load intensity, along with our format development and partnering skills, position us well for further contract wins in the future. In 2018 we have been successful in winning 21 new units and adding five new clients in UK travel hubs as well as four new brand partnerships. These new openings were a mix of multiple formats and categories showcasing our operational capability strength and ability to provide full solutions to airport partners. This included a “Spuntino” restaurant in Heathrow, the first “BrewDog” bar in a UK airport in Edinburgh, two outlets for “Barburrito” and our first “Crepeaffaire” franchise unit. We also developed several in-house concepts such as the “Hawker Bar” in Luton and “Distilling House” pub in Aberdeen. We expect to open at least five to ten Concessions units in 2019. In addition to this we have secured a contract to operate a number of significant sites for the planned redevelopment at Manchester airport, due to trade in 2020. Plans to grow our business outside of UK airports are progressing well. We have developed two new brands, “Mezze Box” and “Grains and Greens” with Sainsbury’s. The initial trial has commenced with five counters opened so far this year. We are also building a team to support our longer term plans for growth into international airports.” 

Of its pubs business it stated: “Our Pubs business is well positioned in the market with a premium offering tailored to local markets. The business continued to outperform the pub restaurant sector in 2018, with the extent of outperformance increasing year-on-year. During the year we optimised our menu pricing architecture and developed a more flexible approach to our menus, with an expansion of the nibbles and sharing sections, and smaller plate options on some of the core dishes. In the year ahead we will be launching a gluten-free menu in all our pubs. We continue to refine our drinks range to ensure we cater for an increasing trend in craft beer and low alcohol/no alcohol drinks. We continue to look at opportunities to leverage the existing space in our estate. Benefitting from the warm weather over the summer we ran an increased number of events such as our gin and prosecco festivals as well as live music events which are proving increasingly popular. During the year we opened three new private dining rooms and our first separate function space at the Red Fox pub which has been used for larger functions, including weddings. Following the successful opening of our first pub with accommodation in September, we opened another in February 2019. We anticipate additional revenue opportunities by continuing to leverage our existing space in the year ahead with further function space, private dining rooms and all-weather external terraces currently under consideration. Our estate expansion plans are progressing well. We opened 21 new pubs in the year including the acquisitions of Ribble Valley Inns Ltd (consisting of four leasehold pubs) and Food & Fuel Ltd (consisting of 11 leasehold pubs and café-bars predominately situated in affluent London neighbourhoods). We have now refurbished three of the Ribble Valley sites and these are delivering a sales uplift in excess of 30% post refurbishment. The Food & Fuel Ltd sites are trading in line with expectations and plans are in place to further develop these propositions through 2019. Our single site Brunning and Price acquisitions are trading well and we expect to open at least seven more pubs in the coming year.”

Of its Frankie & Benny’s brand, the company stated: “The brand has seen considerable activity over the last twelve months, progressing well on a number of initiatives. In May, we saw the launch of our new Feel Good Range, offering our customers increased and improved healthier options. The range has proved popular with penetration at c.10% of sales, with the top performers in this range being the Nashville Chicken Skewers and Skinny Chicken Pizza. We launched on Comparethemarket’s ‘Meerkat Meals’ partner platform in June and have seen really strong engagement with it becoming one of our most popular promotions. We launched our Squishies campaign in October through to November where we gave away a free Squishie toy with every kids meal. This proved successful in driving repeat visits. Our payment at table feature, “pay my bill”, is improving in popularity with customers, with over five percent of transactions being made through this channel. Our customers are responding to these initiatives, and this has resulted in an improvement in our social review scores throughout the year as well as improved sales momentum. We are currently trialling “order ahead” functionality in 25 sites. This gives our customers the ability to order and pay for their meal in advance, alongside a booked table, and have it ready for them when they arrive at the restaurant. Initial feedback from customers has been positive and we will look to roll out more broadly later in the year. Upcoming activity includes continued improvement in the core proposition via new menus. We will shortly trial a simplified core menu with a large reduction in the number of dishes to help our teams improve operational consistency. Our marketing campaigns will become increasingly targeted to specific occasions and highlight new food development via limited time offers. We will invest in service and operational improvements in underperforming sites and actively manage the structurally disadvantaged tail.”

Of its Chiquito’s brand, it stated: “The brand has evolved its offering over the course of the year with a number of initiatives employed. In January 2018 we launched a new core menu aimed at reinstating value, improving choice, simplifying navigation and focusing on more authentic Mexican dishes such as our ‘build your own’ tortillas option. We invested in a stronger senior operational team throughout the year. This in turn allowed us to focus on the quality of our General Managers and drive standards up through peer group benchmarking. Our promotional strategy has become more centred around Mexican favourites, generating a very encouraging take-up from customers. We also launched a virtual brand “Kick-ass Burrito” which, across all delivery aggregators now has 131 points of sale. Our customers are recognising these improvements with a notable increase in our social review scores throughout the year as well as improved trading momentum, with like-for-like sales improving in every quarter. Our plans for the year ahead include the launch of a new menu in April which will feature a strong range of dishes catering for people with dietary restrictions as well as improving our vegan and vegetarian offer with dishes such as our jackfruit burrito with benefits, beetroot and feta lettuce wrap and bean and red chilli burger. We will also offer exciting trade-up options with premium ingredients such as our Picanha surf and turf dish and Barabacoa beef build your own option.”

Ei Group completes sale of 348 commercial properties: Ei Group has completed the sale of the first tranche of the commercial property portfolio comprising 348 of the 370 commercial properties to be sold. Total expected gross aggregate consideration in respect of the sale of the 370 commercial properties is £348.0 million, of which £336.6 million has now been received. Completion of the sale of the remaining 22 commercial properties, the gross proceeds of which will in aggregate amount to £11.4 million, is subject to superior landlord consent and each sale will complete after the relevant consent is obtained. Total proceeds, net of costs of £3.9 million, from the sale of the first 348 properties is £332.7 million, of which £175.8 million relates to the sale of commercial properties within the Unique securitisation. These proceeds will therefore be used in the full prepayment of the Class A3 Notes, part prepayment of the Class A4 Notes and in meeting associated costs of approximately £14.0 million arising on the early prepayment of the Class A3 and Class A4 Notes. Prepayment will take place on the earliest possible date, which is expected to be 28 June 2019. Formal notice of the prepayment will be given to the noteholders in due course in accordance with the securitisation documentation. The board intends to use £35 million of the remaining net proceeds to repay and cancel the outstanding balance on the group’s £50 million term loan facility agreement and approximately £115 million to repay amounts drawn under the group’s £150 million revolving credit facility agreement, with the balance of some £7 million to be held as cash. Taking into account these disposal proceeds, current trading and the continuing good progress being made against our strategic objectives, the board has approved the return of up to an additional £35 million to Shareholders via a further share buyback programme, which will commence immediately. The 370 commercial properties comprising the portfolio contributed £26 million to group Ebitda in the financial year to 30 September 2018. We estimate that, prior to their sale, these properties will have contributed £12.2 million to group Ebitda in the current financial year. Following completion of the disposal, the portfolio will make no contribution to group Ebitda in the financial year to 30 September 2020. As the majority of the proceeds from the disposal will be used to repay borrowings, we now expect our group interest costs to be in the range of £136 million to £138 million in the current financial year and £120 million to £124 million in the financial year to 30 September 2020. Simon Townsend, chief executive Officer, said: “Today’s announcement is a significant milestone for the business and evidence of our ability to unlock value across our estate and realise attractive cash proceeds for shareholders. This disposal will allow us to focus on driving growth across our core publican partnerships, managed operations and managed investments businesses, while also reducing our debt and delivering further shareholder value. With that in mind, we are pleased to announce a further £35 million share buyback programme, in addition to the £20 million programme we completed in January.”

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