Analysts’ verdict: Goodbody on the leisure shutdown

With the pubs and restaurants now closed the remainder of the leisure sector saw further restrictions last night with collection and delivery now also being impacted.

Domino’s has announced that it is halting collections and moving to delivery only and is offering a contact free delivery service. Wagamama’s on the other hand has closed all sites across the UK including delivery and takeout until further notice. For Domino’s, collection accounted for c. 20% of system sales and c.30% of orders last year. Although this is a negative for Domino’s it is still significantly better placed than peers. Restaurant Group issued guidance predicated on the assumption of a 10-week shut down across its leisure estate last week. This assumed a 92% decline in its concessions business in Q2 and a 10 week lock down in Q2 for the leisure, pubs and Wagamama businesses. So this closure is in line with that guidance.

The hotels will also close unless they are in use as primary abodes or for essential staff. This is a negative for WTB and Dalata but occupancy had already plummeted and we would expect announcements from both firms shortly confirming the percentage of hotels they intend to close. It was also largely expected at some point.

One important update is that the UK government has extended its moratorium on lease forfeiture and debt enforcement to commercial tenants. Essentially it delays the right of forfeiture by three months, but the landlord will still have a right of claim at the end of the period. Jonathan Downey of London Union says: “This will make an enormous difference to so many business owners, saving countless jobs and livelihoods. It gives us all breathing space to negotiate a way forward with our landlords. It’s a cease fire to agree the peace. It gives tenants leverage to secure better deals. It’s great news and it may yet be extended”. With rent deadlines at the end of this month and revenue essentially halted, we had concerns about working capital outflows for the sector. This provides some respite.

The news over the weekend that the government would underwrite 80% of the wages of hospitality workers up to £2,500 a month is also a big help for the sector. We believe large amounts of zero contract hours workers have been and will be sent home but it allows the operators to keep a higher proportion of their fixed staff base which will potentially help to keep sites ticking over, but importantly will also facilitate quicker re-ramp of the sites if and when we return to some normality.

The rates holiday also helps with rates typically accounting for 3% of sales.

Although an almost full lock down of the UK sector is a cataclysmic shock to the UK sector, wage underwriting, rates relief, rent pauses and debt forbearance will help with cash flows. This provides a vital lifeline to the sector. All cost lines excluding interest and fixed rents will now have to be very variable. The key question now for the sector and indeed the economy becomes duration.