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Fri 16th Mar 2018 - JDW results briefing: Pricing, politics, suppliers and sector views

JDW results briefing: Pricing, politics, suppliers and sector views

Propel reports on JD Wetherspoon founder Tim Martin’s comments following today’s interim results:

Current trading: Like-for-like sales for the six weeks to 11 March were up 3.8% with total sales up 2.6%, although the recent snow had “of course” affected trading. Martin added the company was unlikely to sustain the 6% like-for-like sales growth the company reported for the 26 weeks to 28 January 2018. He said overall sales for the period were only up 3.6% because the company had sold “quite a few pubs”. Like-for-like bar sales increased 5.7% compared with 2.4% the year before, while food like-for-like sales rose 6.9% compared with 5.1% the previous year. Fruit machine like-for-likes returned to growth in the first half for the first time since 2013. Martin added: “Food has been strong for years and years but we are also seeing good growth in bar sales. I think the name of the game is to keep like-for-like sales 1% ahead of inflation. I think that would be very good for us. I don’t quite know why they’ve been so high. We seem to have become slightly fashionable – and we’re used to being unfashionable.”

Pricing: Martin admitted the company was about to increase prices by roughly 10p on its sugary drinks in response to the sugar tax coming into force in April. He said: “We will try to keep increases as modest as we can and history has shown that’s what we have done – but we are a commercial organisation and we have to earn a buck.”  

Average weekly total sales per pub more than £43,000: Average weekly total sales per pub are now at a record level of £43,400 including VAT, compared with £40,500 the previous year. Martin said: “It’s been quite a success for us really. There was definitely a question mark, in my mind anyway, as to how pubs would be after the smoking ban because pubs were so associated with smoking. But it turns out they have survived well overall, particularly in our case.” Before the smoking ban, Martin said average sales per pub were about £30,000.

No international plans: Martin said: “We’re not tempted to go overseas. We did have a look at the Tesco model for America, Poland and Singapore and thought it looked a bit tough so we’ve stayed in the UK except for going to the Republic of Ireland, where we are doing very well. It would be nice to think we had a brand with world potential but we have to be realistic. The conceit of some of the private equity-owned restaurant companies is they have to open a few sites overseas. But how can anyone with only 50 restaurants have the financial firepower to go overseas and make a success of it? The only ones that have done it have been the Americans – Starbucks and KFC for example – because they come from an economy five or six times bigger than the UK.” As for expansion in the UK, Martin said: “In reality, we’ve probably slowed a bit in the UK. It’s a lot easier to expand quickly when you have, say, 200 sites than when you’ve got 900. The places you can go into are fewer.” The company has five sites in Ireland with two pubs in Dublin expected to open at either the end of the year or next spring.

Supplier sagas: Martin said the company suffered relatively little impact from “steakgate”, when Wetherspoon had to take items off the menu following a Food Standards Agency investigation into supplier Russell Hume. However, he said it certainly hadn’t been a plus for the company. Martin pointed out the company had been able to use alternative suppliers and it was still unclear exactly what had happened at Russell Hume. He added: “We will find out when the legal process is gone through but a minimal amount of information has come out so far.” The company also uses Conviviality, which this week suspended trading on AIM after the discovery of an unexpected £30m tax bill. Martin said: “We’ve been using the company for more than 20 years. So far it hasn’t affected our business but we have made contingency plans. I won’t go into detail because it is still trading. All I want to say at this stage is I hope it pulls through. Martin said there were no plans to scrutinise suppliers more closely as a result. He added: “We probably have more than 2,000 suppliers. Of course we get credit ratings but we don’t look at things as closely as investors do.”

Wetherspoon not a political platform: Martin dismissed claims the Brexit issue might be overshadowing the performance of his business. He said: “There are two things we have campaigned for – to stay out of the euro and, I think, a similar thing about Brexit – they are both important issues. Procter & Gamble bosses apparently wrote to all their employees to vote ‘remain’ – we have not done that. I think it’s fair enough to say: ‘This is what I think’ and the public are capable of accepting a view if it’s expressed in the right way when it comes to explaining something that might affect their lives.” Martin pointed out articles had been published in the company’s magazine both for and against Brexit. He also admitted fellow boardroom members didn’t share his view on Brexit. He added: “I’ve never asked them how they voted. Some have told me – and it wasn’t the same as me.”

Sector market views: Martin said he believed the top-performing companies would continue to thrive and survive despite current reported woes in the sector. He said: “The top brands are doing very well and it’s only probably less than a third of the sector that have reported problems. It’s mostly the London-based companies that have been paying the highest rents. It’s probably the fact the huge surge in trade in London and the economic activity has worn off. It was 13 years before we opened in central London and we only opened two and then went to suburban London, where the rents were cheaper. People are still going out but they’ve got more choice. Maybe too many things have opened in the same place, such as retail parks, and they are now suffering a reduction in trade. There’s certainly a market there but I would say, broadly speaking, some of the companies are too cloned and don’t have enough individuality.” Martin said the company hadn’t felt the impact too much from restaurant chain discounts and it was usually a plus if a restaurant was in the vicinity.

The place to eat and drink: Wetherspoon is the most-used brand for sit-down meals, according to data from CGA Peach, with more than one-third (36%) of consumers eating out at one of its pubs in the past six months. Pizza Hut was second (22%) and Nando’s third (21%). Wetherspoon is also the top choice for drinking out occasions, with 42% of consumers having drunk at one of its pubs in the past six months. Mitchells & Butlers’ All Bar One and Greene King were joint second with 13%. Wetherspoon is the fifth most-used eating brand in Britain, behind quick-service outlets McDonald’s, Costa Coffee, Greggs and KFC. The company has an average food hygiene rating of 4.9 out of five, while 92% of its pubs have achieved the maximum score. Martin said: “I think one of the major things that has helped us with food sales has been the Scores On The Doors scheme – in 2015 we were rated right at the top along with Pret.” Drinks still make up the majority of the sales mix (61%), with average weekly sales of £26,500 per pub. A total of 225 of its pubs are in the 2018 CAMRA Good Beer Guide. The biggest-selling brand in Wetherspoon venues is Lavazza coffee, while its biggest-selling draught drink is Pepsi.

Costs keep climbing, sugar tax ‘not the answer’: The company has seen “modest” increases in bar and food costs so far this year but continues to face a number of other cost increases. Martin said only a “tiny” amount was due to Brexit and the majority were “home-grown”, such as business rates and the Apprenticeship Levy. Wages have increased 4.2%, while during the period there had been rises in utility taxes (£3m) and depreciation (6%). The company also faces additional costs in the form of the National Living Wage (4.4% from April), sugar tax (£3m) NEST pension contribution (from April) and additional utility taxes. Martin said: “I think you need to control costs but it’s not easy to do so in the pub and restaurant industry. Too much cost control can effect service and we try to provide the best service and best product we can.” Wetherspoon paid tax of £356.1m in the period, up from £331.6m the previous year. This worked out at £402,000 per pub. Its tax as a percentage of sales has increased to 42.9%, compared with 41.4% the previous year. Martin questioned the need for a sugar tax and said it was “just another tax”. He added: “I do believe about 50 years ago people were eating more calories than we do today. What people aren’t doing today is enough exercise so you don’t need to be Albert Einstein to work out how to address the problem. I think it was a combination of Jamie Oliver, and David Cameron and George Osborne who wanted to be at one with him. I don’t think a sugar tax is the answer. I don’t blame Jamie – I just wish we didn’t have to pay another £4m.” Meanwhile, operating margin rose to 8.9% compared with 8.1% the previous year. Martin added: “It’s unfair pubs are taxed more heavily on food than supermarkets and there has to be an equaliser in the long run if pubs are to survive in small towns and less-fashionable high streets.”  

Hotels – still early days: The company has 55 hotels, having opened two more during the period, and now has about 1,100 rooms in total. Martin said it would continue to look at adding rooms to pubs where it had unused space on upper floors and in car parks that were underutilised. He said: “There are a lot of people building hotels and we’re relatively new to the game. Most of the hotels we have opened have had 50 rooms but a lot of them are smaller than that. We’ve more in the pipeline – in Dublin and Glasgow for example – but we will just see how it goes and try to avoid making a mistake. Hopefully it will work out well. It’s very expensive and we have to put a tremendous amount of capital into it and have to try to make sure we don’t waste any money. It’s about making sure the combination of pub and hotel makes a good return on capital. In Barrow-in-Furness, we added 50 rooms above the pub and it’s doing better than before.” Hotel like-for-like sales were up 3.1% in the period.

Pub investment and freeholds: The company increased reinvestment in its existing pubs to £35.0m, compared with £28.4m the year before. This included £25.6m on kitchen and bar equipment, £6.9m on refurbishments, and £2.5m on business and IT projects. The company also spent £32.2m on repairs compared with £29.2m the previous year. Martin said: “The temptation is to keep boosting profits but we try to spend fully on repairs. I think we spend 4% of sales on repairs, whereas some companies are only spending 1% to 2%. There was only a “modest” amount of freehold reversions compared with previous years, taking the percentage of freehold sites in the estate to 58.4% from 54.4% the year before. The company spent £11.3m on freehold reversions and investment properties during the period, down from £49.6m the year before. The company opened three pubs in the period (all freehold) and closed 12 sites. The company plans to open a “handful” of pubs in the second half of the year. The average cost of development is now £3.01m, compared with £2.45m the previous year. The average size of new openings during the year was 6,341 square feet, compared with 5,929 square feet the year before.

It’s a people thing: The company had record levels of staff retention, with the average length of service for pub managers now more than 11 years and eight months and kitchen managers eight years and two months. A total of £21.2m was paid in bonuses and free shares, of which 84% was paid to staff working in its pubs. The company had more than 36,000 employees at the end of the period – more than 10,000 of them shareholders in the company. Martin said about 40% of the company’s profits were paid in share incentive plans and 5% in bonuses to staff. He added: “That’s 5% more than most people in companies of our type are getting. Sainsbury’s, for example, put up the rate of pay but reduced other incentives and took away paid breaks. We are trying not to do that. We have the phrase: ‘It’s a people thing’. I used to think it was a bit corny but they were right. Pubs are a people thing. People have made a mistake by saying it’s a brand thing. When you say it’s a brand thing it creates a sort of arrogance in the company. I think only companies such as McDonald’s and Starbucks might be able to say that.”   

Analysts view: Goodbody leisure analyst Brian Devitt said: “The statement noted the second half has started well, with like-for-like sales in the six weeks to March 11 up 3.8% year-on-year. This compares with our forecast of +3.5% year-on-year. On the outlook, management notes it anticipates higher costs and slower like-for-likes in the second half of the financial year and hence remains cautious. However, it goes on to say that given the better-than-expected trading, it anticipates an unchanged trading outcome for the current financial year. Overall, this represents a very strong performance from JD Wetherspoon in the first half. While top-line trends were already known coming into this, the margin expansion of 80 basis points year-on-year is very impressive given the sector’s cost headwinds. Some may draw concerns from the increase in net debt and slower like-for-likes in the second half so far. The higher debt appears to be driven by significant capex (excluding freehold reversions) in the period. The slower like-for-likes in the second half should have been expected given tougher comparables and it is worth pointing out this continues to be well ahead of the market (Coffer Peach +0.2% year-on-year). At first glance, we anticipate a mid-single-digit increase to our Ebit forecasts. We would note that medium-term bias to numbers remains to the upside and this remains our top pick in the sector.”

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