J D Wetherspoon’s like-for-like (LfL) sales grew by 5.1% in the first 25 weeks of the current financial year. Bar, food and slot machine revenues were in positive territory, more than offsetting a 6.5% decline in hotel room sales.
LfL sales growth slowed in the second quarter to 4.6%, despite a 6.1% increase over the festive period.
Pub numbers have reduced slightly since the year end to 796 units. 9 openings are planned this year as well as four new franchised pubs at Haven Holiday parks.
Net debt before lease liabilities is anticipated to rise from £660mn to between £680-700mn.
Annual labour cost increases are expected to increase by £60mn from 1 April this year, which the group said made forecasting more challenging. However, it remains confident of a ‘reasonable’ outcome for the year. Consensus forecasts suggest a 5% increase in underlying operating profit to £146.5mn.
The shares were flat in early trading.
Our view
J D Wetherspoon’s sales are moving in the right direction, but the rate of growth is slowing. That’s not too surprising given the easing of inflationary pressures in the wider economy.
The strong brand perception holds it in good stead, helping it build out its position as the most visited licenced chain in the country, where its value proposition is helping it to increasingly steal custom from casual dining operators. That’s been driven by an ongoing pivot towards a younger and more family-orientated demographic, which explains the growing importance of food in Wetherspoon’s sales mix.
We’re also impressed by the strong uplift in profitability, but margins have not fully recovered to pre-pandemic levels. And while lower inflation could make it harder to push through price increases, any potential benefits from cost efficiencies are largely expected to be eroded by government-mandated increases to labour costs, which are expected to total around £60mn per year.
Consensus forecasts now expect just a marginal increase in operating margin to around 7%. We think that’s achievable, but if consumer sentiment takes a downturn there’s less of a cushion than there was before the UK government’s budget.
Cash flow has been a little disappointing of late but is forecast to improve significantly. Meanwhile the balance sheet is the strongest it’s looked for quite some time. That’s given management the confidence to bring back the dividend and buy back shares in the company.
Of course, no dividends can be guaranteed, particularly if the group accelerates its estate investment, or trading conditions deteriorate.
After a period of reducing the estate by selling underperforming units there are signs that the group is ready to build out its footprint again. Site launches appear to be focussed on high-footfall locations such as airports and travel-hubs. Plans to add four franchise sites at Haven Holiday parks would seem a low-risk capital-light route to growth. It’s a small roll-out for now but has the potential to grow or be replicated with other partners.
With real wages on the up, the outlook for the eating out market feels relatively robust. And over the long term, we remain positive that the group can gain further market share, and weather ups and downs in the cycle.
The valuation doesn’t look too demanding compared to the peer group meaning investors should be rewarded if the group continues on its current trajectory. But consumer sentiment can turn quickly and the forthcoming pressure on the cost base means that profits will be more sensitive to dips in demand.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
The Company's overall management of material ESG issues is average according to Sustainalytics. Significant issues regarding the Board's quality and integrity have been identified, including worries about the length of service and independence of non-executive directors. ESG reporting practices are not aligned with leading reporting standards, and the Company's environmental policy is assessed as weak. Moreover, sustainability performance targets are not incorporated in the executive compensation plan. In terms of responsible drinking, there is a strong code of conduct in place with evidence to suggest this is an area the chain takes very seriously.
J D Wetherspoon key facts
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