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Morning Briefing Strap Line
Fri 22nd Apr 2016 - Update: Starbucks, M&B, Revolution, Chapel Down
Starbucks reports like-for-likes up 6% in Quarter Two: Coffee company Starbucks has reported global like-for-likes up 6%, comprised of a 4% increase in ticket and 2% increase in traffic, for its 13-week second quarter ended March 27, 2016 – the US saw a 7% rise in like-for-likes. Consolidated net revenues grew 9% to a Q2 record $5 billion. The company opened 350 net new stores globally, bringing total stores to 23,921 worldwide at the end of Quarter Two. Starbucks served nearly 16 million more customer occasions from its global comp store base – and over 12 million more customer occasions in the US – in Q2 FY16 compared to Q2 FY15. Membership in the company’s Starbucks Rewards loyalty program increased 16% year-over-year and 8% in Q2 versus Q1 FY16; company now has 12 million active loyalty members in the US. Mobile Order and Pay usage doubled year-over-year; company is now processing eight million mobile order and pay transactions per month. Chief executive Howard Schultz said: “Starbucks record Q2 financial and operating performance – including a stunning 18% increase in revenues and a 5% increase in transactions in China – underscores the strength of the Starbucks brand and the resiliency of our global retail and CPG businesses. Loyalty, technology and innovation are continuing to fuel our digital flywheel and propel our business forward all around the world.” Chief financial officer Scott Maw added: “Starbucks Q2 represented another quarter of solid growth, with the highest revenues of any non-holiday quarter in our history and excellent financial, operating and profit performance. The record-setting performance we delivered in the first half of fiscal 2016 ideally positions us to benefit from the investments we are making in our partners, in our stores and in groundbreaking innovation, and to continue delivering world class returns to our shareholders into the future.”

Morgan Stanley reduces M&B price target by 20% amid tough trading: Morgan Stanley leisure analyst Jamie Rollo has reduced his price target for Mitchells & Butlers (M&B) shares by 20% to 340p amid tough trading. Rollo stated: “Tough industry trading leads us to cut earnings per share forecasts 6-10% and our price target to 340p. However, we remain Overweight as the relatively new CEO is focused on improving performance, and if this fails we see plenty of other options to unlock value in this asset-rich business. What’s changed? Cutting EPS forecasts 6-10%. Two consecutive months of weak pub industry trading lead us to take a more cautious view of M&B’s like-for-like sales trajectory. The Coffer Peach tracker recorded +0.6% industry like-for-like sales in March, despite this including Easter this year and having easy comparisons, and this followed a flat performance in February. The two-year growth rate deteriorated sharply (+3.3% in H2 15 to +0.3% in March), and the LTM rolling average slowed to +1.2%. M&B has been underperforming the market (-1.0% 17 weeks to Jan), and we now assume like-for-likes of -1.0% FY16e and 0% in FY17, noting easier comps in its H2 (H2 15 0% versus H1 15 +1.7%). FY15 operating margins should be flattish, reflecting Orchid synergies offsetting the National Living Wage, and we assume 20-30bps declines from FY17 on, as ongoing wage pressure bites. This leads to a 6-10% EPS forecast reduction. Implications? We reduce our price target 20% to 340p. We incorporate the significant de-rating the subsector has experienced this year, led largely by The Restaurant Group, and roll forward multiples to 2017e (which works against M&B given we forecast lower EPS growth). Our new 340p price target implies a FY17e P/E of 9.2x, 7.2x EV/Ebitda (8.2x including pension deficit), and a 7% FCF yield, all cheaper than peers. Given M&B’s significant property backing (410p NAV per share) and the potential levers at the company’s disposal, we think this is a conservative valuation. What’s next? CEO review and H1 results. The company will report H1 results on 19 May (MSe Ebit £154m, +0.4%), in which the relatively new CEO will give an update on the initial strategy he laid out in November. The CEO’s three themes then were (1) building a more balanced business, (2) instilling a more commercial culture, and (3) increasing the pace of execution and innovation. There are some indications of the latter. For example, the last few months have seen a new look, O’Neill’s, Miller & Carter’s “Steak Table” experience, a Toby Carvery app, the roll-out of contactless payments and Apple Pay, a new craft keg festival, a trial of its own coffee blend, and plans to add 500 digital gaming machines. However, these examples are hard to quantify, and we would look for clarity on: (1) group targets (eg like-for-like sales, operating margins, ROIC), (2) how the company aims to drive like-for-like sales (eg premiumisation, digital / CRM capabilities, improved food offer, more NPD /innovation, better incentivisation), and (3) plans to mitigate costs, particularly on the introduction of the National Living Wage but perhaps also a review of overheads (noting it has already restructured its senior operations teams). What if this doesn’t work? A deeper review could be required. We believe that M&B has attractive real estate, solid concepts, significant scale, and a good central infrastructure. However, it has had five CEOs in as many years, has lost much senior operational talent, has been slow to innovate (on its own admission), and like-for-like sales have averaged just +1% over the last five years (and seem to be on a deteriorating trend). If the new CEO is unable to improve performance, we think the Board could consider some more radical options, such as those we discussed in this report. Of these, we think the “Defensively retrench” option is interesting: opting to switch from an investment-led growth strategy to a defensive strategy focused on maintaining cash profits could lead to a lower risk / higher dividend outcome, essentially emulating a real estate company. This seems to be working for JD Wetherspoon, which is shrinking its pub estate, returning cash to shareholders, and trades on double the P/E multiple. What to do with the shares? On balance we remain positive. Our Overweight recommendation has been poor, but the stock’s favourable risk-reward ratio, very low valuation, and significant optionality mean we maintain our positive stance. Admittedly we see few short-term catalysts, so we see M&B as a stock for long-term deep value investors. Having said that, expectations are very low, so it may not take much to get the share price moving.”

Revolution lines up three openings: Revolution Bars Group, the operator of 60 premium bars under the Revolution and Revolución de Cuba brands, has three new sites lined up. The first two of the new openings are already on site in Albert Dock in Liverpool, a designated World Heritage site, with the second opening planned in Stafford. A third site has been secured in central Reading. The Liverpool and Reading sites will both be Revolución de Cuba bars, further expanding the geographic footprint of the Group’s second trading brand, and the Stafford location will be a Revolution. The two new Revolución de Cuba sites, which will be food-oriented, are large format versions with customer square footage of over 6,000 sq ft in each site. In addition, all three of these new bars will have outdoor trading areas. These openings follow the successful opening of three new Revolución de Cuba bars in Leeds, Nottingham and Milton Keynes over the last six months, all of which continue to trade well. The Liverpool and Stafford bars are due to open prior to the Group’s year end, bringing the total number of new bars opened to five in the year ended 30 June 2016. Reading will open in Autumn 2016. Chief executive Mark McQuater said: “I am delighted to report our expansion plans are progressing. We are encouraged with the performance of the three new Revolución de Cuba bars opened in the first half in Milton Keynes, Leeds and Nottingham. With two more bars scheduled to open prior to the year end and the first of our 2017 financial year new sites secured in Reading for later in 2016, our new site pipeline is strong and we remain confident of meeting our strategic growth targets.”

Wok&Go opens first London site: UK noodle bar brand Wok&Go has opened first site in London, locate in Finchley Road. Earlier this year the company announced it will double the number of existing UK stores (currently 20) in 2016 and it would expand its international footprint with a further opening in Dubai. Founder Des Pheby said: “We started out in the north and gradually working our way down South. We have further London sites in the pipeline for this year, as well as multiple openings in Kent and Essex”. The Finchley Road store will feature a variety or noodle and rice dishes and offer eat in, take away and delivery options. The store will feature its trademark “wok theatre” with dishes made to order in an open plan kitchen. Added Pheby: “We are confident about our versatile model which has allowed us to operate in busy urban contexts, shopping malls and retail parks across the UK”. Business developer Seeds Consulting is responsible for Wok&Go national and international development and it has engineered the London opening. Director Matteo Frigeri said: “Wok&Go strength lies in the quality of the food. Old style noodle bars still feature pre-made noodle dishes in hot cabinets. Wok&Go dishes are all made to order and the added value is the show around the wok station. We predict noodle bars will become a constant presence on the high street alongside coffee shops, pizzerias and burger joints. They fit the consumer’s demand for convenience and healthy food perfectly and they have the cool factor”.

Chapel Down reports 34% sales growth: Wine and beer maker Chapel Down ha reported 34% sales growth to £8.18m (2014: £6.11m) in the year to 31 December 2015. 36% growth in gross profits to £3.02m (2014: £2.22m). It saw £507,000 of adjusted Ebitda – a 6% increase (2014: £478,000). The company stated: “2015 was another good year for your company. We continue to drive our top line without sacrificing margins and we are building strong brands. In our wine business, we enjoyed our second best ever harvest and invested £1.32m in planting 90 acres of new vineyards and in the purchase of further equipment to enhance our viticulture and winemaking. We are growing our supply whilst also investing in marketing, systems and people to stimulate sustainable long term demand. In recognition of the quality of our wines, we won gold medals in three prestigious global competitions – The International Wine Challenge 2015, The Decanter World Wine Awards 2015 and the Sommelier World Wine Awards 2015. In our beer business, Curious Drinks, we made the decision to raise further funds for its development via a crowdfunding. We were once again delighted by the response raising £1.71m that will be used to build a new brewery site and further develop our brand. We have continued to invest not only in our equipment, brands and land but also in our people. With the appointment of Mark Harvey as Managing Director of Wines, Frazer Thompson, as CEO, now leads a team of experienced and talented people which makes me ever more confident of an exciting and rewarding future for the Group.”

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