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Sometimes you wonder if you live in the same world as City analysts.
Here’s a good example. Restaurant chain Clapham House (CPH), which owns the Gourmet Burger Kitchen and Tootsies chains, has been tipped all over the place in recent months, even since the credit crunch struck.
There can be few businesses more exposed to falling consumer spending than the restaurant business. It simply doesn’t matter how good your restaurant is – if people start running out of money, the meals out are swapped for takeaways, which are eventually swapped for home cooking.
And yet every time a slowdown threatens, it’s as though the laws of gravity have been repealed. Oh no need to worry, say the analysts, this group’ll be fine. They’ve got a good management team. It’s a premium brand. Their expansion plans are ambitious but realistic.
And then you get a profit warning…
Clapham House restaurant group warned yesterday that sales are falling, while the costs of food and property rental are rising. The group plans to scale back new openings to offset the decline. Its shares fell by 98.5p to 150p.
When “long-term buy” means “sell now”
Chairman David Page said: “Despite the uncertain economic outlook, we remain positive about the medium-term demand trends for the UK eating out market.”
We seem to be hearing that a lot recently. Commercial property groups, who can no longer deny that prices are falling, are mumbling a great deal recently about how commercial property is a great “long-term investment”. Buy-to-let snake-oil salesmen are saying pretty much the same thing.
But as we all know, a ‘solid’ long-term investment is just a short-term investment that’s gone wrong.
Clapham is far from the only company feeling the consumer squeeze. Regent Inns (REG) (which owns the Walkabout bars and Jongleurs comedy club chains) also warned that it was cautious on the outlook for the consumer, and was “no longer confident” of seeing profit growth this year.
Meanwhile, on the non-edibles side of things, SCS Upholstery (SUY) warned that it’s facing “challenging trading conditions”. Like-for-like sales are down 16% in the 17 weeks since 28th July.
The predictable collapse in consumer spending
None of this should be a huge surprise. The cost of living has been creeping up for most consumers, with fuel prices, mortgage costs and the cost of unsecured debt rising – even before the credit crunch began to take full effect. When the amount of money in your pocket starts to fall, you start to cut back on the little luxuries.
We won’t eat out tonight. I won’t have that butterscotch cream latte on the way into work this morning. The old sofa will do us for another year.
And the truth is, life isn’t going to get any easier for these chains any time soon. The discomfort has only just begun. Rather than curtailed expansion, we could soon be hearing about closures. You have to wonder just how hard companies like Clapham House will find it when their competing chains start to cannibalise each other for business.
It’s just an anecdotal observation, but anytime I’ve seen a Gourmet Burger Kitchen, there’s a Tootsies somewhere near by. On Chiswick High Road in west London for example, the two chains are across the road from one another.
Now two fancy burger restaurants might be more than sustainable in the middle of an affluent area like Chiswick during the good times. But when people start tightening the purse strings, owning two restaurants serving practically the same thing on the same road just looks like profligacy.
Our resident share tipper Paul Hill warned back in June that Clapham House shareholders should take profits – the share price was sitting at around 402p at the time, pretty close to its high for this year. Paul also runs his own email investment service, Precision Guided Investments.
Paul was also rather sceptical about upmarket Italian café chain Carluccio’s (CARL), suggesting shareholders take profits back at the start of October, when the share price was around 194p. The group has issued its final results this morning, and everything seems to be just fine, compared with Clapham House.
But as I said, unless the laws of gravity have been repealed, it’ll be tough for even the hardiest of restaurant chains to stand up to the coming downturn. I reckon Paul’s still called this one right – just give it a bit more time.
All in all, it looks as if trimming your spending this Christmas might be a good idea – so it’s a good thing we’ve got the perfect inexpensive, yet elegant gift solution. MoneyWeek’s compilation of financial facts, fiddles and follies, “How Much?!” is out now. Money Morning readers can buy it for the special price of £6.99. Just click on the link and enter the promotional code MoneyW on the order page: How Much?!
Turning to the wider markets…
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Hang Seng stands out amidst market weakness
In London, the FTSE 100 ended yesterday with heavy losses as banks and miners weighed heavily. The index lost 45 points to end the day at 6,386, as Northern Rock slipped on news that Deutsche Bank may not back Virgin’s proposed takeover after all. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 closed down 41 points. In Frankfurt, the DAX-30 fell 33 points to end the day at 7,837.
Across the Atlantic, stocks fell for the first time in five sessions as weak manufacturing data rattled investors. The Dow Jones was 57 points lower, at 13,314. The tech-rich Nasdaq fell 28 points to end the day at 2,637. And the broader S&P 500 was 8 points lower, at 1,472.
Wall Street’s losses spread to Asia overnight, where the Japanese Nikkei fell 148 points to close at 15,480. However, China Resources Land led the Hong Kong Hang Seng up to 28,879, a 221-point gain.
Little change for gold or sterling
Crude oil had slipped back to $89.19 this morning, whilst Brent spot fell back to $89.92.
Spot gold had edged up to $791.10 this morning, having climbed over $6 to $790.10 in New York last night. And silver was unchanged at $14.09.
In the currency markets, the pound remained steady 2.0628 against the dollar and 1.4082 against the euro. And the dollar was at 0.6825 against the euro and 110.1 against the Japanese yen.
And in London this morning, the UK’s largest retailer, Tesco, announced a 12% rise in third-quarter revenue. Tesco attributed the gains to rising sales of premium and organic food, plus new supermarkets abroad. Ahead of the key Christmas period, FD Andy Higginson said ‘consumers are being careful, but where they see value, they are prepared to spend.’ Tesco shares were down 1% in early trade today.
Finally, our recommended article for today…
Buy a farm – or agricultural stocks
– Farmers have been glum of late, and for good reason. But soaring prices could change all that. As the cycle turns for agricultural commodities, Merryn Somerset Webb looks at the best ways to cash in on crops in this MoneyWeek article, just available to non-subscribers: Buy a farm – or agricultural stocks