Reasons to be cheerful
Consumers have taken a battering in recent years, first from Covid-19 and more recently from the rising cost of living, but since then UK leisure and hospitality spending has bounced back from pandemic lows. For investors in Henderson Smaller Companies Investment Trust, it’s a reason to raise a glass.
6 minute read
- The recovery in demand for leisure and hospitality post-pandemic has held up despite the rising cost of living over the last year.
- The managers of Henderson Smaller Companies built their positions in several hospitality names as the UK emerged from the pandemic and have since been rewarded with healthy revenue growth and sensible reinvestment from these companies.
- The sector has also been subject to some merger and acquisition activity, with low valuations leaving the door open for further such transactions.
Back in the days of the global pandemic there was much debate about whether consumers’ appetite for ‘going out’ might be irreversibly damaged by the lockdown experience. Those fears have proven to be unfounded.
The cost-of-living crisis is putting pressure on many households, but demand for an evening out or a weekend treat for the family has been trending upward despite this. According to Barclay’s UK Consumer Spending Report, spending on food and drink at pubs and restaurants was up 6.4% in September compared to the same month last year.1
The mild autumn doubtless played a role in this robust performance, but the economic climate is also looking more benign. Inflation may not be defeated but it has been steadily easing, while earnings are at last beginning to catch up with prices. The most recent official figures on average earnings from the Office for National Statistics show wages growing in real terms, albeit modestly.2
Lower inflation is also a boon to leisure and hospitality providers, reducing their costs and helping improve profit margins.
Of course, not all leisure and hospitality groups are equally well placed, but those with strong brands and an attractive offer for the public are doing well. We are pleased to say that quite a few such businesses are in the Henderson Smaller Companies Portfolio.
The glass is (at least) half full
Pub and brewing group Mitchells & Butler is one of our top ten holdings and delivered a positive update on its trading at the end of September. The group cited the easing of cost pressures as a key reason for optimism as it reported like-for-like sales (which exclude the effect of new pubs added to the estate) were up 9.1% on the previous year. Add in the extra pubs it has acquired and sales were up 10.5%.
Another pub and brewing business in the HSL portfolio that is weathering well is Young & Co’s. In the summer it reported a good start to its financial year with like-for-like revenue up 6.8% in the first 13 weeks of 2023 and total revenue up 8.3%.3
But it is more than just our pub investments that are showing promise. Our stake in Hollywood Bowl Group also provided some very positive trading news. The group operates bowling alleys, minigolf sites and amusements as well as accompanying food and drink services. It operates mainly in the UK but has also expanded into Canada and has reported that total sales were up by 11% in the year to September 2023.4
Hollywood Bowl also has an ambitious expansion strategy in place and plans to open 15 new bowling centres by the end of 2026. It is worth noting that both M&B and Young & Co’s also see opportunities for further investment over the coming year.
The UK spending in the leisure and hospitality sector may not have returned to its pre-pandemic levels in real terms, but fears that the British would become a nation of stay-at-homers after Covid-19 proved wide of the mark.
Life’s simple pleasures
The stock market value of most of these hospitality businesses has now risen close to their level before the pandemic, which indicates just how wrong the prophets of doom were for the hospitality industry. At the same time, there are signs that value-hunters may have an eye on the sector.
The number of mergers and acquisitions in the UK declined in 2022 and has remained low in 2023, but with valuations at historic lows there are early signs of an upturn. This month, US buy-out firm Apollo agreed a deal to take over The Restaurant Group, another of our investments, which owns Wagamama and Frankie & Benny’s. The deal valued the business at £506 million, which is 34% higher than its stock market valuation the day before the offer was announced.5
Our strategy is anchored in the fundamentals of value and no one should count on takeovers to generate higher prices for listed investments, but The Restaurant Group deal suggests that some market watchers see parts of the hospitality sector as undervalued.
Adding to positions in fundamentally strong leisure investments during the difficult years in the pandemic has been a successful strategy for HSL and its investors. Whether it’s a pint of beer, a glass of wine, a meal out at the pub or an afternoon bowling with the family – it pays to recognise the real value in life’s simple pleasures.
1UK Consumer Spending Report | Barclays Corporate
2 Average weekly earnings in Great Britain – Office for National Statistics (ons.gov.uk)
4 Trading Statement – Year Ended 30 September 2023 – 07:00:06 19 Oct 2023 – BOWL News article | London Stock Exchange
5 Rule 2.7 Recommended Cash Acquisition of TRG – 07:00:12 12 Oct 2023 – RTN News article | London Stock Exchange
The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.
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