Fourth quarter like-for-like sales were 0.4% lower than 2019 levels. That comes as the recovery for draught ales, lagers and ciders was slower than anticipated, where sales were 8% lower than 2019. Spirits, cocktails, food and hotel rooms were higher than 2019 levels, as sites in city centres performed better than suburban locations.
The group spent £128m buying out 48 pubs that it previously leased, bringing the proportion of freehold pubs to 68.3% of the estate.
Losses for the full year are expected in the region of £30m, higher than previously thought. That comes as staff costs are 'far higher' and the group invested more in repairs and marketing. In the next financial year, costs are expected to increase less than the current rate of inflation.
The shares 6.3% following the announcement.
The budding recovery Wetherspoon was hoping for hasn't quite gone to plan. Sales were in touching distance of pre-pandemic levels, but with costs pushing higher that means profits are expected in the red at the full year mark.
Increased investment in staff, marketing and refurbishments are necessary evils if the group wants to revitalise its consumer base. But that, along with rising costs from inflation, puts a lot of pressure on an operating margin that was barely into positive territory at the half year mark.
Whilst some of those challenges aren't Spoons specific, the group's also battling with changing behaviours from its core demographic. Sales of lager and ales are a decent chunk below pre-pandemic levels as suburban locations lag their city counterparts. That's likely in part due to older, more vulnerable, patrons opting to stay at home. It's uncertain whether that's now a long-term trend, but we'd expect the ongoing cost-of-living crisis to compound the issue over the next year.
On a positive note, Wetherspoon's managed to sidestep the worst of labour shortages and supply chain issues affecting some competitors. Plus, the group's low-cost offerings could help it retain momentum at locations catering for a younger demographic, as disposable income takes a hit.
But a focus on providing good value means Spoons' margins were below competitors' in normal times. Before the pandemic, the group's operating profit margin was just 7.3% before exceptional items. Low margins aren't necessarily a bad thing, and many successful businesses have followed a ''pile 'em high, sell 'em cheap'' approach.
Nonetheless, it does mean Spoons rides slightly closer to the edge than some, and the prospect of ever-increasing costs is a worry. That's a particular point of interest as the group grapples with rising cost inflation - adding more pressure for sales volumes to pick up some pace.
Net debt stood at over £900m last we heard. If debt levels aren't addressed, the group's target of 3.5 times cash profits (0-2 longer term) is a few years away. This is an area we'd like to see focused on, especially as interest rate rises mean servicing debt is getting more expensive.
It's worth noting that two thirds of Spoons' pubs are freeholds, giving the group a substantial property portfolio. The balance sheet lists £1.1bn in freehold and long leasehold property - and since it hasn't been revalued since 1999, that's likely a severe underestimate of the portfolio's true value.
Spoons has a lot to thank its chairman and founder, Tim Martin, for. However, he's a polarising character thanks to his strong views and colourful updates for shareholders. This wouldn't matter much, except that JD Wetherspoon also doesn't conform with some elements of the UK Corporate Governance Code. The group has explained that it doesn't agree with the guidance on the length of board member tenure, board member independence, or the relative importance of shareholder engagement.
For us, it's not a deal breaker, but it does warrant extra scrutiny. Ultimately, investors will have to make up their own minds on these issues.
Longer term, we think the group has attractions. The extensive property portfolio is a bonus, and the group's scale means it has buying power with suppliers. Markets aren't getting carried away though, with the group changing hands below its long-term valuation - a reflection of some of the very real short-term challenges.
JD Wetherspoon key facts
- Forward price/earnings ratio: 13.6
- Ten year average price/earnings ratio: 19.5
- Prospective dividend yield (next 12 months): 1.4%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Third Quarter Trading Update (04 May 2022)
In the thirteen weeks to 24 April, like-for-like (LFL) sales fell 4.0% compared to pre-pandemic levels. Sales trends have slowly improved throughout the quarter and were ''slightly'' positive in the last two weeks of the period. LFL room sales in the group's hotels were up 5.0%.
JD Wetherspoon sold six pubs, a further five were given up at the end of their leases, and three leasehold pubs were closed. These actions resulted in a cash inflow of £6.3m. Net debt was £906m at the end of the quarter and is expected to be £870m at the end of the year.
Chairman, Tim Martin warned of ''considerable pressure on costs, especially in respect of labour, food and energy''. The group expects to break-even for the full year, as sales are expected to keep improving.
Half Year Results (18 March 2022)
JD Wetherspoon reported half year revenue of £807.4m, down from £933.0m compared to pre-pandemic levels. That reflects an 11.8% decline in like-for-like sales. That includes declines in bar, food and slot machine sales, which more than offset a mid-single digit rise in Hotel room sales.
In the three-week period, to 13 March 2022, sales reflected an ''improving trend'' and were 2.6% lower than the equivalent period in 2019.
Underlying operating profit came in at £0.5m (2020: £76.6m) as margins were only just in positive territory. The group's seeing cost pressure from food, drink and energy supplies and expects rising costs ''slightly less than the level of inflation''.
Like-for like (LFL) bar sales fell 12.7% compared to pre-pandemic levels, coming in at £480.5m. Food and slot/fruit machine sales also declined, 11.1% and 9.8% respectively. Hotel room sales increased by 6.6% to £10.4m.
The group opened four pubs during the period and sold or closed six, leaving the estate at 859 pubs at the half year end. 67.8% of the pubs are owned by Spoons, the remainder being leasehold.
There was a free cash outflow of £34.5m (2020: £49.0m inflow). As a result, net debt increased to £920.4m (July 2021: £845.5m).
CEO, Tim Martin, said lockdowns were "kryptonite for hospitality" but remains ''confident of a strong future if restrictions are avoided.''
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