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Fri 9th Sep 2016 - Tim Martin and John Hutson comment on JD Wetherspoon financial results plus key analyst concerns
Propel reports on JD Wetherspoon chairman Tim Martin and chief executive John Hutson’s comments following today’s results, plus key analyst concerns:
 
Current trading going well after tougher start to the year: Martin said: “We’ve had a solid few months after an initial eight or nine months when it was surprisingly slow and we could not understand why and we struggled for profits a bit. Since then, year-end sales have continued to be encouraging and increased by 4.1%. There is an element of caution, although we hope for a good outcome for the current financial year.” Martin acknowledged it remained a challenge to attract millennials into pubs as they increasingly bought alcohol from supermarkets. To counter this, he said promotions such as burger deals were proving an attraction to younger consumers.
 
Potential pricing scenario post-Brexit: Martin said he could not see why wine and beer prices would change. At the moment of leaving the EU, new world wines were likely to go down because New Zealand and Australia have tariffs at the moment but these would cease. In contrast, tariffs could be brought in for EU wines. He said: “European wines have had massive competition and so, if their price goes up and new world wines go down, there would be massive pressure on the wine industry to not impose tariffs. There would be a fear of other countries being tariff-free and the EU less competitive. So over the short and medium terms, I see no impact.” He added that, overall, he believes the prospects are good for wine and he expects to be able to cut some good deals.
 
Hotels continue on growth path: Seven new hotels were opened over the current financial year (in the 52 weeks to 24 July 2016) to take the total to 46 – equating to 1,000 rooms. The average cost to fit-out a room was £75,000. Martin said adding hotel facilities to a pub had a positive effect on its food and beverage operations. He expects 50 to 100 hotels to be created over the next three to ten years – sited above good pubs. “This will help us become a small national chain so people who use hotels for business will find this attractive. We won’t be creating stand-alone hotels though,” he added. Although like-for-like sales at hotels increased 9.7% compared with 24.2% last year, this was attributed to a “step change” in the use of booking websites and from the efforts of the team that had been created to run the hotels division.
 
Increased employee costs no surprise: Employment costs rose as hourly paid staff rates increased 8% – following the 5% uplift the previous year. This was in line with the company’s expectations because, before the National Living Wage (NLW) was introduced, JD Wetherspoon had brought in increased rates that had, in most cases, taken the average above the NLW rate. However, Martin said he was against the stepped arrangement that will see further increases imposed through to 2020. “It has not been done scientifically and could end up backfiring. It should be looked at to ensure it does not lead to increased unemployment.” 
 
Continued appetite for food: Sales of food continue to rise and this year reached an average of 37% of sales in each pub, compared with 31% in 2012. This highlighted how different the business had become in relation to its earlier days in 1996, when food accounted for only 16% of sales at each pub. Like-for-like sales of food over the past year increased 3.5% – a slowdown on 2015 when they grew 7.3%. This still outpaced bar sales with their 3.3% like-for-like increase. JD Wetherspoon chief executive John Hutson said the figure can be higher in certain pubs and he forecast continued gradual growth but did not have a fixed figure in mind for what the food mix could reach. Breakfast sales have helped and are estimated to account for 5% to 10% of total food sales.
 
Appetite for craft beer continues: Hutson said: “A lot of work has been put into craft beer but whether it will account for a big proportion of sales remains to be seen”. He added that, for now, it remained a minority product, although those customers who bought craft beer were willing to accept a higher price point. Martin said: “They understand it costs more as it’s from smaller producers and they will pay more for it – although not as much as in a BrewDog bar! It’s doing well but still a minority product. It’s the same as coffee was some years ago.”
 
Disposals outweigh openings as freehold portfolio breaks the 50% threshold: Investment in property, comprising freehold reversions and investment properties, increased from £22m to £36m. This pushed up the freehold mix of the company above the 50% level at 51.4%. JD Wetherspoon opened 16 pubs during the year, of which ten were freeholds. The average cost of development of each pub was £2.46m, above the £2.1m of last year, for what has typically been a pub with an average footprint of 4,264 square feet. Two of the new pubs opened this year included hotel accommodation, which contributed to the increased costs. There was also an increased cost related to escalating property prices, with the freehold average cost amounting to £907,000, compared with £843,000 last year. This represented a major increase on the average of £559,000 in 2014, although the typical pub then equated to a lesser 3,585 square feet. Closures/disposals during the year amounted to 41 pubs and, of the two packages of outlets that were put up for sale, three-quarters have been sold or are under offer, Martin said. This has resulted in a trading estate of 926 pubs at the financial year-end. The company intends to open about 15 to 20 pubs in the year ending July 2017, some of which will include hotel accommodation, about which JD Wetherspoon is taking a flexible approach.
 
Simon French – as JDW continues to offload units it is facing a number of challenges: Commenting on the results, Cenkos Securities leisure analyst Simon French said: “For the first time ’Spoons has disclosed its gross margin in many years – and a 10bps fall in repairs and maintenance spend as a percentage of revenue. The group reports sales have increased by 4.1% since the start of the year but it is unclear whether this is a like-for-like measure. The group’s expectations for the financial year have improved slightly relative to the pre-close update. Consensus forecasts for FY2017E (a 53-week year) are for £78.2m profit before tax (Cenkos £70.2m). Given the earnings trajectory and challenging trading environment and Wetherspoon’s shrinking estate – we note the group disposed of another ten pubs to Stonegate earlier this week – we think this is too rich, ‘Sell’.

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