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.
The shares fell 2.1% following the announcement.
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Our view
JD Wetherspoon is edging towards positive territory, but Spoons isn't home and dry. The spread of new Covid variants has kept a lid on sales recovery. Plus, rising costs due to inflation meant operating margins were barely into positive territory at the half year mark.
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 worst of 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. 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'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 below its long-term forward p/e ratio. That's likely a reflection of some of the short-term challenges.
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 (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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