J D Wetherspoon reported first half revenue of £1.0bn reflecting like-for-like (LfL) growth of 4.8%.
Underlying operating profit fell by 4.3% to £64.8mn, mainly due to increased labour and utility costs.
Free cash outflows improved from £6.1mn to £0.5mn, with improved cash generation in the business more than offsetting an increase in capital expenditure. Net debt after lease liabilities was stable at £1.1bn.
J D Wetherspoon reiterated its labour cost concerns, which amount to a forthcoming additional annual cost of £60mn, or approximately £1,500 per pub, per week.
Like-for-like sales growth in the first seven weeks of the second half was 5.0%.
The company declared a dividend of 4.0p. No interim dividend was paid last year. It also repurchased £11.5mn of shares during the period.
The shares fell 10.7% following the announcement.
Our view
J D Wetherspoon’s sales were resilient in the first half of this financial year and that’s also proved to be the case early into the second half. But it’s likely the dip in profits that has caught investors off guard and that’s before further wage and national insurance increases come into play in April. Heading into the results, consensus forecasts were still looking for a small uplift in operating profits over the full year, but we now think that looks unlikely.
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 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 think Wetherspoon remains well placed to outperform the market in terms of topline growth but that won’t fully offset the anticipated impact of £60mn of cost increases. And with consumer sentiment looking fragile, profits could be disproportionately impacted if sales start to slow or go into reverse.
Cash flow has been a little disappointing of late, and with profits under pressure, there’s work to be done if cash generation is to improve. Earlier steps to strengthen the balance sheet now look to have been prudent moves. The recently re-instated dividend remains on the table and share buybacks have been continuing. But no further payouts 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 but progress is slow. 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 route to growth. It’s a small roll-out for now but has the potential to grow.
The valuation doesn’t look too demanding compared to the peer group, and we think in the long term, there’s an opportunity to significantly grow market share. But the combination of economic uncertainty and pressures on the cost-base means it may be some time before investor sentiment improves.
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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