Good morning, it's Paul here!

Thanks to Graham for another very interesting report yesterday.


Hospitality & Retail sectors

I'm getting increasingly nervous about these sectors, mainly due to cost pressures. Until recently, I had assumed that companies would be able to mitigate cost pressures (e.g. by making efficiency savings, putting up prices, trimming staff rotas, etc). However, I'm starting to think that view might be wrong.

The shock profit warning from Revolution Bars (LON:RBG) (in which I hold a long position) a couple of weeks ago came completely out of the blue. To my knowledge, nobody had predicted that costs would spiral out of control. Some people were bearish on the stock, but for other reasons. Although, with hindsight the departure of 2 CFOs in rapid succession might have been a clue - I must be more sceptical about this in future, and ignore management reassurances. Apparently some other senior finance staff also left at the same time, to join a competitor. So it seems that financial controls slipped. I remain of the view that this should be fixable. Most importantly LFL sales are fine, and margins strong - that's what really matters.

So overall, I think RBG is probably (we can never be certain) now good value at 123p per share. However, that's a huge drop from the level of around 220p where it was just weeks ago - about a 45% drop. Clearly that focuses the mind, and I don't want to be exposed to any other similar situations.

For that reason, I've ditched most of my shares in other hospitality, or retail shares. In the case of Patisserie Holdings (LON:CAKE) I've had a couple of disappointing store visits, and feel the valuation is probably now high enough. It's managed to mitigate cost increases so far, but will that continue? Customer service standards slip if staffing is reduced. The figures look great for this company, but can it maintain such a high operating profit margin? I'm not sure it should try to - because if the operating margin is too high, then customers might become disillusioned with the poor value for money, and decline to visit in future.

I still hold some Fulham Shore (LON:FUL) - but in reduced size. I am…

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