It’s only relatively recently that the word headwinds has become a thing, but given what businesses have been through in the past two or three years that is hardly surprising. Think Brexit, Covid-19 and inflation.
Just as the world’s climate is becoming more extreme, more unpredictable, more often, so economic headwinds have buffeted the hospitality industry in an increasingly unpredictable way. Pubs and restaurants have faced unprecedented geopolitical challenges.
While the industry has quite rightly turned to government for assistance in surviving the headwinds, what has amazed me is how remarkably well most businesses have staved off these existential threats. It is not hard to find examples of businesses that have gone bust since early 2020, but the volume of business failures has not (so far) turned into the predicted tsunami.
So why is it that the harbingers of doom have been proved overly pessimistic? Well, one reason is that, in a bid to extract urgent help from the government, the various trade organisations may have pounced on the most pessimistic prognoses. Quite understandably, of course. After all, what’s the point of underplaying things? May as well go for it!
Another factor could be that operators are becoming more used to dealing with these headwinds. Having been through things like the financial crisis and the smoking ban and come out the other side, dealing with the odd pandemic and bout of hyperinflation becomes that bit easier – especially when the government has also got the hang of taking these things seriously and provides proper support rather than just words.
Profit warnings on the way?
It is barely 11 months since Hostmore, the company that owns the Fridays chain in the UK, demerged from Electra Private Equity, but the positivity that characterised that process already seems like a long time ago. As recently as January, the company delivered a positive start to life as a standalone entity, forecasting that full-year earnings would be “well ahead” of market forecasts.
Even then, the backdrop was a tricky one, with those bloody headwinds rearing their head. But it takes more than economic uncertainty, rising inflation and utility costs to stop a Scotsman on a mission. In that same trading update in January, CEO Robert Cook insisted he remained positive about the group’s prospects and was pressing ahead with its planned opening programme.
Since then it has all gone pear-shaped, of course. In May, the optimism of January had long since dissipated as Cook warned investors that Fridays was being buffeted by “extreme economic headwinds” after a significant weakening of consumer confidence. He cited the impact of the invasion of Ukraine on the cost-of-living crisis, adding wearily: “We are not where we expected to be.”
The day before its interim results, it occurred to me that they might contain another profit warning. The headline suggested I was being way too pessimistic, however. “Stable performance despite macro-economic headwinds,” it said. I should have realised when I saw the mention of headwinds – especially macro-economic ones.
While most of the big numbers – revenue, like-for-likes, EBITDA, earnings per share – showed big improvements, that was compared to 2021 rather than 2019, providing a flattering comparison.
Current trading looks rather less flattering. Like-for-like sales in the past 10 weeks are down 14% on 2019 levels, reflecting weaker consumer demand, train strikes and heatwaves (now there’s an unusual trio of headwinds).
On top of that, the group warned that unhedged current utilities prices were expected to have an impact on next year’s EBITDA, while the dreaded inflationary pressures and higher utilities added to the negative picture.
Sinking share prices
Sensibly, Cook has put new openings on the backburner until there are signs of recovery in the market, but is maintaining his medium-term target of delivering 100 Fridays and 25 63rd+1st outlets.
One thing that comes across as clear is day is the effort Cook and his team have been putting in. They have clearly been working like Trojans to mitigate the impact of the headwinds. Meanwhile, as I was putting the finishing touches to this column, the government confirmed a number of key support measures for businesses, which should provide a boost for at least the next six months.
Hostmore started trading at 147p at its demerger from Electra Private Equity in November, but has had a torrid time since then. In recent days, the shares have sunk to a low of 16p, which means the share price has lost a shade under 90% of its value in the 11 months since it was spun off as a separate listed company.
Gavin Manson, the Hostmore chairman, and chief financial officer Alan Clark have bravely put their hands in their pockets in a bid to stem the flow. Clark snapped up 100,000 shares at 20.51p for an outlay of £20,500, while Manson scooped up 199,264 shares at 20.8p – totalling almost £42,000.
On the face of it, the price they’ve paid is a bargain, but just because the shares have fallen off a cliff doesn’t mean they can’t sink further. The problem is, there doesn’t appear to be an obvious catalyst to inject a bit of oomph into the shares.
As things stand, Hostmore is in danger of becoming Hostless.
