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J D Wetherspoon - costs weigh on margins

JD Wetherspoon reported full year revenue of £807.4m, down from £933.0m compared to pre-pandemic levels.

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JD Wetherspoon reported full 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''.

The board has not recommended the payment of an interim dividend.

The shares were broadly flat in early trading.

View the latest JD Wetherspoon share price and how to deal

Our view

The first half of the new financial year for Wetherspoons came with a host of challenges that're becoming all too familiar. The spread of Omicron toward the back end of 2021 and the restrictions that followed kept a lid on sales recovery. Plus, rising costs due to inflation meant operating margins were barely into positive territory.

Whilst those challenges aren't Spoons specific, the group is also battling with changing behaviours from its core demographic. Older, more vulnerable patrons are opting to drink at home which is weighing on sales - though that's likely a short-term headwind.

On a positive note, Wetherspoon's managed to sidestep the labour shortages and supply chain issues affecting some competitors. Plus, the group's low-cost offerings could give it a leg up as disposable income takes a hit due to inflation.

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, which was behind many peers. 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.

The group turned to investors to shore up the balance sheet following the disruption and, after raising the extra cash, net debt stood at £845.5m last we heard. If debt levels aren't addressed, the groups target of 3.5 times cash profits (0-2 longer term) is a few years away. Based on expected cash profits, at the current levels of debt, it'll be a couple of years before that ratio starts to creep under 3.5. 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's well placed. The extensive property portfolio is attractive, and the group's scale means it has buying power with suppliers. Markets aren't getting carried away though, with the group changing hands marginally above its long-term forward p/e ratio. That's likely a reflection of some of the short-term challenges the group's facing.

JD Wetherspoon key facts

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.

Half Year Results (compared to H1 2020)

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: £845.5).

CEO, Tim Martin, said lockdowns were "kryptonite for hospitality" but remains "confident of a strong future if restrictions are avoided."

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 18th March 2022