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Mon 15th Oct 2018 - Update: Patisserie Holdings, D&D London and Cake Box trading, UberEats, Wetherspoon, Domino's
Patisserie Holdings could sue auditor over £40m black hole: Patisserie Holdings is considering taking legal action against its auditors Grant Thornton for its alleged failure to spot a £40m black hole in the cafe and cake operator’s finances. Grant Thornton, which has been auditor to Patisserie Holdings since 2006, has faced questions over how it remained ignorant of what the operator described as “significant, potentially fraudulent, accounting irregularities” discovered last week. Its actions are likely to be scrutinised by the accountancy watchdog the Financial Reporting Council, reports The Times. It emerged yesterday (Sunday, 14 October) the Patisserie Holdings board, with forensic accountants from PricewaterhouseCoopers, had found overdrafts of £10m were run up on two secret facilities with Barclays and HSBC. The company revealed on Friday (12 October) that, far from having the £28.8m of cash declared in May, it had net debt of £9.8m, a deficit of £38.6m. Speculation over the potential legal action, which could be backed by investors, came as Luke Johnson, the executive chairman and 37% shareholder, promised to scale back his other commitments to focus on restoring Patisserie Holdings. Johnson, who on Friday led a last-ditch rescue, has reportedly been criticised for spreading himself too thinly, contributing to his “ignorance” of the black hole that precipitated the arrest of chief financial officer Chris Marsh and the launch of an investigation into his activities by the Serious Fraud Office. In addition to Patisserie Holdings, Johnson is on the board of two other quoted companies – Elegant Hotels Group, the Caribbean luxury hotel operator, and Brighton Pier Group, where he is executive chairman. He is also chairman of Bread Holdings, owner of Gail’s bakeries, and chairs the board of trustees of the Institute of Cancer Research. In yesterday’s Sunday Times he said: “There was criticism that I was stretched too thin – fair criticism. We have to dramatically improve systems and controls at Patisserie Valerie, we have to make new appointments in the leadership team and things can’t carry on as they have, obviously. I’m going to get much more involved.” Patisserie Holdings traces its origins to the opening of the first Patisserie Valerie in Soho in 1926. Johnson acquired it in 2006, floating it in 2014, and today it operates 206 outlets. Johnson, who called the fraud “a betrayal”, did not refer to suing Grant Thornton, which declined to comment, but said “a number of things” would come out when accounts for the year to September were published and they would “not be a pretty sight”. On Friday, Patisserie Holdings announced a financial rescue package led by Johnson. He provided a £10m interest-free loan plus a £10m bridging facility to be repaid on completion of a £15.7m share placing with institutional shareholders, including Hargreave Hale, Schroders and Invesco Perpetual. The placing, in which Johnson is expected to buy about £5m of shares, will be priced at 50p compared with the 429½p at which the shares were suspended last week, slashing its market value from £446m to £68m. Describing last week as “rather surreal”, he said the first he had known of the problems was when he sat down at 11am last Tuesday (9 October) with Patisserie Holdings chief executive Paul May for what he thought would be a routine update. Instead, May told Johnson the group’s bank accounts had been frozen and it was close to being insolvent. He said that while putting in money reflected his belief in “the business as an economic entity”, he also felt “a moral obligation”. He said: “There were 2,800 jobs at stake – and the board were determined not to allow the business to go into administration.” Meanwhile, May has stepped down as a non-executive director of The Restaurant Group with immediate effect. The Restaurant Group chairman Debbie Hewitt said: “On behalf of the board, I would like to thank Paul for the very valuable contribution that he has made since joining the business. We understand and accept his decision to step down and wish him all the best for the future.” The Restaurant Group said the search for a new non-executive director had begun.
D&D London reports like-for-likes up 4% in current financial year but pays penalty for England success: D&D London has reported like-for-like sales are up 4% in its current financial year but said England’s run to the Fifa World Cup semi finals cost the company £250,000 each time the team played. The company, which owns restaurants including Bluebird Chelsea and the recently opened 20 Stories in Manchester, reported strong trading over the summer, but admitted its upmarket dining rooms had remained empty during big matches as supporters flocked to pubs and bars. Chief executive Des Gunewardena told The Times: “The summer heat was positive overall for us, as we have a lot of restaurants with terraces, but every time England played, we lost a quarter of a million of revenue.” He said the upturn in sales over the summer had continued since, notably in its City eateries. Gunewardena said Coq d’Argent and Madison, in particular, had “shrugged off Brexit worries and are trading significantly ahead of last year”, with the former heading for a record year on the back of like-for-like sales growth of 17%. D&D London was launched in 2006 via a buyout of Conran Restaurants led by Gunewardena and in 2013 it secured backing from LDC, the private equity division of Lloyds Banking Group. Today it has 40 restaurants. As well as London restaurants, it has a presence in Manchester, Leeds, Paris, New York and Tokyo, plus the 80-room South Place Hotel in London. Gunewardena said trading this year had been “a different story” to last year, with like-for-like sales up 4% for the present financial year to date. In the year to 31 March 2018, D&D lifted turnover by 6% to £132.2m, but like-for-like sales excluding openings grew by only 1%. Underlying earnings last year fell 11% to £11.6m on the back of soaring business rates, labour and food and wine costs, while Gunewardena said earnings also had been hit by initial losses of new outlets, which had been “a bit slower to kick in”. He said the company continued to seek new sites, however, and had committed to a new rooftop restaurant in the City, at 120 Fenchurch Street, and in the Hudson Yards development in Manhattan. He said he was looking at potential sites in Shanghai and Beijing and had been “inundated with offers on sites in New York and on the west coast of America”. “After the Brexit referendum we took the view that we would continue to expand,” he said. “I still remain of view the UK will remain a good place to invest, but we’re also expanding overseas to make sure all our eggs are not in one basket.”
Cake Box reports first-half turnover expected to £8.3m with profits ‘ahead of expectations’: Cake Box, the specialist retailer of fresh cream cakes, has reported revenue for the six months ended 30 September 2018 is expected to be up 40% to £8.3m with profits “ahead of expectations”. The company, which floated on AIM in June, stated: “The group traded strongly during the period with average sales per store continuing to grow and a record number of new store openings. The group expects to report revenue for the period up circa 40% to circa £8.3m compared with the same period last year. Following the strong first half of the year, the board now expects profits for the full year to be ahead of current market expectations. A total of 15 franchise stores were added during the period, bringing the total number of stores to 102. Recent store openings included Bletchley, Northampton and Derby. The group will report its half-year results for the six months ended 30 September 2018 on 26 November 2018.” Chief executive Sukh Chamdal said: “We have delivered a strong trading performance for the period, during which we successfully completed our initial public offering in June. We continue to build momentum with a record number of new franchise store openings, and an increase in the average sales per store. We look forward to the second half of the financial year with confidence, with a strong pipeline of new franchise stores putting us on track to match the number of stores opened during the first half.”
UberEats planning to launch 400 UK ‘virtual restaurants’ by end of year: UberEats is planning to launch 400 “virtual restaurants” in the UK by the end of this year in an effort to boost growth and market share in the space. The virtual restaurants make use of the existing space, identifying gaps in the market and doubling up a takeaway’s existing resources. The new restaurant only appears on the delivery app, often exclusive to one app. This means extra takeaway menus that only exist on Uber’s fast food platform can spring up in towns and cities where there were only a few bricks and mortar options. UberEats UK manager Toussaint Wattinne told The Telegraph: “We heard there was an appetite from restaurants to grow their business. Starting with our experience in the US, we have showed how you can build up menus using existing infrastructure.” Wattinne also said there was an opportunity fir seasonal kitchens, adding new menus online for the summer or Christmas.
JD Wetherspoon launches poster campaign calling for prime minister to get rid of tariffs post-Brexit: JD Wetherspoon has launched a poster campaign in its pubs calling on the prime minister to get rid of tariffs post-Brexit. The poster is headlined What don’t you like about free trade, Mrs May?, and states free trade means getting rid of tariffs. It is being displayed in 880 Wetherspoon pubs across England, Scotland, Wales and Northern Ireland. Wetherspoon founder and chairman Tim Martin said: “There will be a huge gain for business and consumers if the UK copies the free trade approach of countries such as Singapore, Switzerland, New Zealand, Australia, Canada and Israel, by slashing protectionist EU import taxes (tariffs) on leaving the EU in March next year. It is not often the government can enrich the electorate without losing tax income, however, this is a rare example. These invisible tariffs are charged on more than 12,000 non-EU products, including rice, oranges, coffee, wine and children’s clothes. The proceeds are collected by the UK taxman and sent to Brussels. Ending tariffs will reduce shop and pub prices, improve living standards and will help non-EU suppliers, currently discouraged by tariffs, quotas and the extensive paraphernalia of EU protectionism. If parliament votes to end tariffs and rejects the ‘Chequers Deal’, consumers and business will benefit additionally by avoiding a cost of £39bn, or £60m per UK constituency, in respect of the EU ‘divorce payment’ – for which there is no legal obligation. Parliament can also regain control of UK fishing waters, where 60% of the catch is currently taken by EU boats. Unfortunately, some individuals, businesses and business organisations have mistakenly, or misleadingly, repeated the myth that food prices will rise without a ‘deal’ with the EU. In fact, the only way prices can rise post Brexit is if parliament votes to impose tariffs. The EU will have no say in the matter, provided that the government does not sign away the UK’s rights in a ‘deal’ in the meantime.”
Douglas Jack – Domino’s Pizza to return £950m to shareholders in next seven years: Peel Hunt leisure analyst Douglas Jack has said he expects Domino’s Pizza to return £800m to £950m to shareholders over the next seven years. Issuing a ‘Buy’ note on the shares with a target price of 350p, Jack said: “Store split economics are key to the company’s prospects. So too are new and smaller franchisees, which, importantly, are very keen to expand. The largest franchisees operate within fixed territories, within which they have undertaken a significant number of store splits. To expand, they have bought out neighbouring franchisees (there were 112 franchisees in 2013; but only 67 as at August 2018), typically paying 65 times average weekly unit sales (£1.4m-plus per store), and then suffered short-term cannibalisation from store splits. Expansion opportunities are arguably greater in other territories, where expansion has been less rapid and where franchisees have fewer stores. Overall, franchisee incentives are being held, but with a greater bias to helping new/smaller franchisees. Franchisees have a significant economic incentive to support the brand based on the amount of wealth they have tied up in Domino’s and the fact their operational gearing is four times that of the company. UK/Republic of Ireland supply chain centre Ebit margins fell by 200 basis points in 2017 and 130 basis points in the first half of 2018 despite franchisee food cost inflation exceeding volume growth by 5% and 2%, respectively. This can be explained mostly by higher cheese costs (30% of cost of goods) and inefficiencies in logistics and distribution ahead of the Warrington supply chain centre opening in April. We now forecast £40m of share buybacks in 2019E and 2020E, taking net debt/Ebitda to 1.75 times. We estimate 1.75 to 2.5 times net debt/Ebitda in 2024E would enable £800m to £950m to be returned to shareholders over the next seven years, before possibly £100 to £150m of German disposal proceeds. Softer like-for-like sales in the second half should limit forecast upside until the final results. However, this is also a period when the company should make good progress on cost efficiency, cash flow and overseas profitability. Our ‘Buy’ stance reflects scope for cash, equivalent to more than 60% of the current market capitalisation, to be returned to shareholders over the next seven years.”

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