On the back of this morning’s half-year trading update, MCA speaks to Fuller’s chief executive Simon Emeny about the group’s investment in accommodation; retention levels for head chefs; the need for an Hospitality Minister; being in position to take advantage of any opportunities that arise during a downturn; trading well against its casual dining rivals and how the company’s investment in digital marketing is paying off. We also look at the reaction from analysts to the company’s update.

On the next 12 months

Emeny said: “It is going to be challenging, only the best operators will be successful going forward. We will continue to invest in our pubs and people, and invest in improving the business so we can be one of those operators. When you do go into a downturn, only the strongest survive. We are going to continue to make sure we get things right in our pubs, to ensure that even if it does get tough out there, we are going to perform better than other people.

“I think it is going to get tougher for the casual dining sector. I think the positioning of pubs like ours, around fresh food and a wonderful atmosphere and environment, is going to make things for businesses that have over-leveraged and have too much operational gearing really difficult. From a competitive position we should trade really well against casual dining. What we saw in the last downturn is that opportunities will get thrown up and we may well see that occur. Irrespective of that happening, we will continue to invest in our existing portfolio and look for new sites as well. We are not going to sit there and wait for other businesses to fail.

“We have always made sure we don’t over stretch our balance sheet. During prosperous times we have never borrowed too much, so that means that whatever the point of the cycle we are in, we are financially in a good position to move when the right opportunity appears. First and foremost the best returns we are going to get is investing in our existing business.”


Emeny said: “We strongly believe that accommodation provides a great opportunity to build our business and have identified over 100 further bedrooms that can be added to our estate over the next two years. These will come from existing sites through extensions or new builds.

“Our accommodation offer continues to develop and take advantage of the opportunities provided through staycations and inbound tourism. We have launched an overarching marketing programme for our hotels and pubs with bedrooms under the banner Beautiful Bedrooms by Fuller’s and added four bedrooms to the estate during the half year at The Swan in Staines. Since the period end, we have acquired The Manor, an outstanding freehold site just outside Christchurch on the edge of the New Forest, with 10 bedrooms, and added four more bedrooms to The White Buck in Burley.”


Emeny said: “We continue to focus on becoming the best employer in our sector and to developing our people with structured and rewarding career paths. During the first half of the year, 50 recruits joined our commis chef apprentice programme - this is a combination of existing team members and new joiners. This programme is the first rung on the Fuller’s Chefs’ Guild ladder, which continues to go from strength to strength.

“Our food business has also benefited from the arrival of our new stock system, FnB Manager. This project gives far greater transparency of popular dishes, food wastage and provides a recipe bank that includes all required allergen information in an easy to access format. Although in its early stages, we are already seeing the business benefits of this investment.

“Retention levels amongst head chefs are the highest they have ever been for us, but there is no that recruitment is going to play an interesting role going forward, especially with March 2019 looming. We have done a couple of things that I believe will put us in a stronger position – we funded permanent residency applications for 200 of our staff and are taking on 100 kitchen apprenticeships over the next year, that will really help us at a time when we are not getting much certainty from Government that will at least give us a development pipeline of skilled kitchen staff coming through.

“In a competitive labour market you have to standout for something special and we think we are doing that. We want to be the employer of choice in what will be a more competitive labour market.”


Emeny said: “We do need more certainty from Government and hospitality needs a clearer voice around the Cabinet table. The Budget was a start and it was good to see the Chancellor recognise the issues the industry has, but we still need reform on business rates and I would like to see a Hospitality minister appointed. The hospitality industry employees nearly a million people in this country, we need better representation at ministerial level.”

Digital marketing

Emeny said: “Today’s consumer is looking for an experience that goes beyond just food and drink, and the customer journey no longer starts at the door of the pub. Both in Fuller’s Managed Pubs and at The Stable, digital marketing plays a crucial role in attracting new customers and ensuring repeat visits from existing ones. Targeted emails and a database with a single customer view are at the heart of our CRM strategy and, combined with great social media, have helped our business grow. Meanwhile, marketing activities such as Shakespeare in the Garden keeps customers engaged and superfast wifi, which is now installed in all locations where it is accessible, ensures they can easily share their great experiences with the wider world.

“The investment we have made into digital marketing means that we can managing people’s complete journey with us, before, during and after and that is coming through with our Xmas bookings, which are up 50%, mainly through function bookings. We are optimistic in terms of trading levels going into the festive season.”

Analyst notes

Tim Barrett at Numis said that the results were in line and featured “encouraging recent trading”.

He said: “The first 16 weeks had seen a 6.6% increase, reflecting favourable early-summer weather. The converse was true in Q2 and we estimate lfls fell by c.1% in the last 10 wks of the period. On average, for the 6m, Fullers has continued to perform materially ahead of the industry benchmark (Peach Tracker +1.3% over this period).

“Managed margins fell by 20bp to 13.6% as the impact of business rate and wage increases was broadly offset by Fuller’s strategy of growing premium sales. However, we see similar margin downside in 2H before cost growth starts to normalise in FY19 (particularly rates).

“Tenanted division: lfl profits rose by 2%, as expected, recovering from a softer 2017 and reflecting a renewed focus on repositioning the estate. The group has sold 15 of the 20 non core pubs idenitifed for sale (and one post H1 end), helping to improve average quality we believe.

“Brewing volumes rose by 1% and turnover by 5% as demand for craft products and cider remains strong. However, an increase in marketing spend and site repairs led to a £0.5m (13%) fall in EBIT. We do not expect margin pressures in this division to persist.

“Net debt reduced by £4.6m to £201.5m compared to our Mar’18 forecast of £197m. Strong FCF funded £16.2m of capex and a freehold purchase. Leverage remains comfortable at 2.8x EBITDA, leaving good headroom.

“Current trading is as expected - for the first 33 weeks lfl sales were +3.7%, showing encouraging consistency with H1 in a seven week period with more normal weather patterns. We remain comfortable with our +4% assumption for FY17, trim our forecast for brewing marginally but also reduce our interest expense forecast. Overall, this amounts to a slight (1%) increase in our FY18 EPS forecast to 62.1p. Fuller’s trades on a FY18 P/E of 15.5x, EV/EBITDA of 10.5x and stable FCF yield of 6%. This represents a premium to the wider pub peer group but Fuller’s is differentiated by its premium positioning, high quality estate and strong balance sheet. We also note the discount to Young’s, its closest peer, on a P/E of 18.7x and we reiterate our Buy recommendation.”

Douglas Jack at Peel Hunt said that he would use current share price weakness as an attractive long-term buying opportunity.

He said: “We continue to expect 2018E to be a year of consolidation, due to one less week (52 vs 53 weeks), higher business rates and a pause in Stable Pizza’s expansion. We would use current weakness as a buying opportunity, expecting cost pressures to slow and earnings growth to pick up next year.

H1 PBT rose by 4% to £23.8m (we forecast £23.5m; no consensus), with positive LFL trading positive in all divisions, albeit with Q1 much stronger than Q2, largely due to weather. Proving the relative importance of weather (and consumer resilience), managed LFL sales have bounced back in early H2. We are holding our forecasts and would use current share price weakness as an attractive long-term buying opportunity.”