J D Wetherspoon (LON:) has been dealt some difficult hands over the years, which, for the most part, it has been dogged in turning into profit and the group has managed this feat once more with a decent set of numbers. In terms of the outlook, however, there is limited reason for cheer.
The Wetherspoon Chairman has never been backward in coming forward on the issues which the group feels are both crimping growth while also giving others an unfair advantage. The different tax treatment of alcohol sales in supermarkets is a case in point, alongside wrongly applied business rates and even the question of whether the lockdown was necessary in the UK at all, compared to the experience of other countries.
Indeed, that lockdown continues to leave a stain, and the share price remains 60% below pre-pandemic levels. While revenues have finally recovered to stand 17% higher than that period, the group has 85 fewer pubs. This results in sales per pub, which have increased by 29%, but in terms of profit, that progress has been largely obliterated by growth of 57.8% and 34.5% in energy and wage costs respectively.
More broadly, the continuing closure of many pubs across the country opens opportunities for Wetherspoon, although the group is understandably cautious of opening any new pubs which may not meet its financial hurdles. The estate currently stands at 794, with plans to open a further 15 this financial year, en route to its longer-term target of 1000 pubs.
At the same time, the economic backdrop in the UK provides little scope for optimism. The group previously noted the challenge of the measures announced in the Budget, where the group reiterated that increases in labour rates and National Insurance will add some £60 million per year to its costs, which the company somewhat morosely points out is equivalent to £1500 per pub, per week. In addition, there is now an additional charge of £7 million per year relating to non-commodity energy costs, let alone any additional taxes which may accompany the November Budget.
These costs contribute to the higher costs of the course and, in turn, keep up inflationary pressure, where the group is keen not to raise prices for consumers where possible. Even so, the group will be mindful that prospects for the UK economy are currently tepid at best, which could yet result in the consumer choosing to stay at home rather than venture out as the more challenging financial times bite.
Despite these cumulative challenges, trading remained brisk and continues to do so after the end of this reporting period, where like-for-like sales have grown by 3.2% over the last nine weeks, comfortably outperforming the market. For the full year in question, LFL sales grew by 5.1%, while revenues were slightly above expectations at £2.13 billion, which represented 4.5% growth. Pre-tax profit of £81.4 million represented a healthy increase of 10.1% on the previous year, which was achieved against numerous headwinds, while the operating margin of 6.88% reflects limited room for manoeuvre on achieving further growth.
Another balancing act comes in the form of the balance sheet, where, after investment, net debt has risen from £660 million to £724.3 million. Access to liquidity and a largely freehold estate valued at £1.4 billion lessen any immediate concerns, and indeed led Wetherspoons to reintroduce a dividend payment after an absence of five years. While the current yield is a pedestrian 2.4%, management confidence was then complemented by a £40 million share buyback programme, which is now all but complete.
Wetherspoon’s dogged determination to fight its corner has won the brand many friends, but from an investment perspective, the jury remains out on prospects. The shares have had a decent run over the last six months with a bounce of 17%, but this has merely reduced the decline over the last year to 7%, which compares with a gain of 6.3% for the wider .
The overarching headwinds that the group still faces simply cannot be ignored, and the further slump of the shares at the open reflects this caution, with the market consensus of the shares as a hold also vulnerable to a downgrade.