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Sat 16th Mar 2019 - JD Wetherspoon results briefing, black hole in Patisserie Valerie's accounts as much as £94m
Propel reports on JD Wetherspoon founder Tim Martin’s comments following yesterday’s (Friday, 15 March) interim results:
 
Current trading: Like-for-like sales for the six weeks to 10 March 2019 were up 9.6 with total sales up 10.9%, although Martin acknowledged the “phenomenal” performance was compared with poor weather last year. Like-for-like bar sales for the six months ending 26 weeks to 27 January 2019 increased 5.9%, compared with 5.3% the year before. Martin said spirit sales were up about 20% year-on-year. He added: “We’ve seen good profits on real ale and coffee and from craft beer. Gin has been phenomenal. Gordon’s ‘original’ gin used to be number one but that’s been overtaken by sales of its pink gin! I think there’s always a fashion element in the pub world. First, it was bottled Budweiser and that was eclipsed by Smirnoff Ice, which hardly sells a thing now. Then there’s the one that flummoxed me – Magners. I thought that would never work and it took off like a rocket. There are other examples but there is a fashion element to what people drink.” Food like-for-like sales rose 7.1% compared with 6.9% the previous year, while fruit machine like-for-likes were up 5.7%, compared with 4.6% the year before.
 
Expansion: Martin said he believed there were “200 to 300” places in the UK left the company could still open a pub. The company is looking to open a pub in New Milton, which is seven miles from Christchurch in Dorset, where it also has no pub. Martin said: “I don’t think we’ve reached our peak yet. Central London is another area we have stayed away from so there could be an opportunity there, but I don’t think we’re going to grow at anywhere near the rate we’ve done in the past. It’s an art, not a science. We have to try not to fall into the trap of over-expansion.” The company opened two pubs in the period (one leasehold and one freehold) and closed six sites, leaving 879 pubs trading in total. Martin acknowledged the company had over-expanded in some areas and was now addressing that. He said: “It’s tempting if you’re a floated company to keep on expanding. In theory, if you have 50 pubs you make more money than if you have 25 – but that’s not always the case.” Wetherspoon has just put another 16 pubs on the market but Martin pointed out they all still continued to trade and would do so until sold. He said: “Inevitably when you go from one to 1,000 there’s going to be some reorganisation of the estate. When property prices were cheap in 2009 and 2010, we couldn’t resist opening another pub in a town where we had done quite well and we’ve gradually been sorting that out. In some places, leases have come to an end and we want to relocate. It works out at about 10% of our estate we have opened up but hopefully there won’t be many more sales.”
 
Pricing: Martin said reports Wetherspoon had just put up its prices for the fifth time in the past two years weren’t “truly reflective”. He said as well as prices on some items going up, some had come down such as Guinness and Heineken, where the price had been reduced by 10p. Martin said: “I think our price rises in reality in the past few years have been minimal.” Wetherspoon has put its coffee prices up by 5p but Martin pointed out customers could have unlimited refills and most people had at least two on average so they were paying just 65p for a cappuccino, for example, which was one “hell of an offer”. He added: “There’s more of a relationship than people realise between price and volume.” Despite Wetherspoon being known for its value, it was pointed out the company “never shouted” about its prices. Martin said: “I find talking about prices in public a disadvantage for the business. Other people may do it but I don’t think it’s a great thing to do.”
 
Average weekly total sales per pub at record £46,800: Average weekly total sales per pub are now at a record level of £46,800 including VAT, compared with £43,400 the previous year. Martin said they had grown by more than 50% since 2009 and were at £11,500 when the company floated in 1992.
 
Product swaps: Martin said the product swaps Wetherspoon had carried out to date had been “very successful” and it was leaving any more for now “to see how it goes”. He said the introduction of Strika, a herbal liqueur from Chorley, in place of Jägermeister had been “extraordinarily successful”. Martin said the change had allowed the company to cut the price by 10p. He added: “The point it makes is whatever you can buy from the EU, you can get something similar, if not better, elsewhere in the world. What you’re seeing now is there are alternatives. The buyers are in the driving seat and you see that from the anxiety of suppliers.” Asked whether Wetherspoon was stockpiling anything ahead of Brexit, Martin joked: “Only money!” He added: “We don’t really have the facilities to do so.”
 
Still the place to eat: In total, 19.7 million Brits have visited Wetherspoon in the past six months. Wetherspoon is the top choice for sit-down meals, according to data from CGA Peach, with 14% of consumers voting it as their preferred place to eat out. Nando’s was second with 10%, followed by Wagamama (8%) and PizzaExpress and Mitchells & Butlers’ Toby Carvery brand (7%). Wetherspoon is now the fourth most-used eating brand in Britain, behind quick-service outlets McDonald’s, Costa Coffee and Greggs, having moved above KFC. The company has an average food hygiene rating of 4.97 out of five, while 97.6% of its pubs have achieved the maximum score. Martin said: “It shows the effort we put in. To have an average of almost five, which is above McDonald’s, who I greatly admire, is Champions League stuff for Wetherspoon!” Drinks make up the majority of the sales mix (60%), with average weekly sales of £28,300 per pub. However, Martin said the percentage of food sales had continued to rise at a rapid rate, from about 5% in 1992 to 36% today. In total, 243 of its pubs are in the 2019 CAMRA Good Beer Guide. The biggest-selling brand in Wetherspoon venues continues to be Lavazza coffee, while its biggest-selling draught drink is Pepsi. Martin said non-alcoholic beer was a growing trend but still relatively small. He added: “Personally, I don’t understand it. What’s the point of going to a pub and having a non-alcoholic beer when you can have a coffee or something? Why would you want to drink something that’s missing the main ingredient? Saying that, there are some good products coming to market.” Martin added one of the main drivers of its coffee sales was the changing demographics of people visiting pubs. He added: “The days of having just over-18s in pubs are long gone. Now they are places for families and mothers of young children, for example. We also have lots of sixth-form students using our pubs and we get lots of trade from them coming in and just drinking coffee because going to a coffee shop is too expensive.”
 
Pizza roll-out: Wetherspoon has continued the roll-out of pizza menus in its pubs. Having introduced the menu at The Windmill at Stansted airport in June 2016, pizza ovens have now been installed in about 700 pubs. The menu features margherita, ham and mushroom, and pepperoni. Extra toppings can be added and a children’s selection is also available. Martin said it was a “very expensive” project but it would continue adding pizza ovens at pubs where it could.
 
Costs keep climbing: The company has continued to see costs climb at a hefty rate. Wages have increased 13% to £33.0m, which Martin said was mainly due to the fact unemployment was at a record low of 4%, which naturally pushed wages up – “a good thing”. He said that should help sales growth in turn. Martin said the wage rise had more of an impact in areas where property prices were high but was right across the country in terms of kitchen staff, where many companies were “feeling the pressure”. During the period there were rises in utilities (9.9% to £2.5m) and depreciation (6.3% to £2.4m) and interest (24.4% to £3.3m). Wetherspoon paid tax of £375.6m in the period, up from £356.1m the previous year. That worked out at £427,000 per pub. Its tax as a percentage of sales has fallen to 42.2%, compared with 42.9% the previous year. Martin said Wetherspoon creates about £750m a year in taxes in one form or another, which is almost 1,000th of the tax paid by the whole country. He said: “It’s great for the country. The only complaint we have is we should pay the same as the supermarkets. It’s such a weird paradox. MPs are sympathetic towards tax equality, I think, but besides us I don’t think the big pub companies have been championing the campaign enough. I think we should have tax equality on business rates and VAT.” Meanwhile, operating margin fell to 7.1% compared with 8.9% the previous year.
 
Hotels: The company has 58 hotels, having opened one during the period. Martin said it continued to proceed “cautiously” with its hotel plans. He said: “We have a lot of buildings with empty space upstairs and that grates. We’ve opened quite a few hotels in those circumstances but we are slightly unsure how successful they’ll be in the long run. We could go to a national chain of hotels in a couple of years because we have the space but a lot of them would have eight, nine or ten rooms. It’s attractive to have, say, 150 hotels dotted around the country because it’s convenient for people visiting our pubs. At the other end of the scale, Travelodge and Premier Inn are opening sites and they have more than 50 rooms. We’ve only got one that size. We’re looking at it carefully because we don’t want it to end up being an expensive mistake and another Tesco in the US story.” Hotel like-for-like sales were up 0.3% in the period.
 
Pub investment and freeholds: The company reduced reinvestment in its pubs to £26.1m, compared with £35.0m the year before. This consisted of £14.9m on kitchen and bar equipment, £7.8m on refurbishments, and £3.4m on business and IT projects. The company spent £51.9m on freehold reversions and investment properties during the period, a substantial increase from £11.3m the year before. In turn, this has taken the percentage of freehold sites in the estate to 60.2% from 58.4% the year before. Martin said the company had spent about a quarter of a billion pounds buying freeholds where it was a tenant in the past seven or eight years. He added the fact the interest was generally a bit lower than the rent justified that strategy. “We are trying to buy things that make economic sense and we’ll see how that turns out in ten or 20 years,” Martin said. The average cost of development is now £2.38m, compared with £3.01m the previous year. The average size of openings during the year was 3,772 square feet, compared with 6,341 square feet the year before.
 
Sector view: Martin is willing the restaurant sector to come out of its current slump because he believes their presence benefits Wetherspoon. He said, for example, when a new restaurant complex opened in Staines in Surrey it led to a 20% increase in sales at its pub. Martin said: “For me, if you hear the words ‘roll-out’ and ‘brand’ then you had better run for the hills! That’s what has happened with restaurants, particularly those backed by private equity that have been keen to expand quickly and now they are suffering.”
 
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 12 years and one month and kitchen managers eight years and eight months. A total of £21m was paid in bonuses and free shares in the period – about 53% of net profits. The company had about 40,000 employees at the end of the period, of which 12,000 were shareholders. The company has invested in various academies, including catering, which Martin said was “working really well” and was helping with chef recruitment. Staff spend three weeks off-site as part of their training. Martin added: “Being financially disciplined sometimes involves spending money.”
 
Brexit: Martin said parliament had a duty to undertake the “decision of the people” and leave the EU. He added: “There is the possibility it will accept Theresa May’s deal but that is not Brexit. The only way of achieving that with what’s currently on the table is leaving without a deal. We don’t know how it will pan out in the next few weeks but what I do know is if we don’t end up leaving the EU, it will be a constitutional crisis.”
 
Analyst’s view: Goodbody leisure analyst Paul Ruddy said: “JD Wetherspoon has reported first half Ebit of £64m, behind our forecast of £71.5m. Like-for-like sales growth was 6.3%, in line with the second-quarter trading statement. Within this, food was up 7.1%, drinks 5.9%, accommodation 0.3% and gaming machines 5.7%. Ebit margins declined by 180 basis points to 7.1% (Goodbody forecast 8%) owing to the timing of pay increases (more first half weighted than we anticipated) and the cost headwinds impacting the sector. The second half has started strongly with like-for-like growth of 9.6% (we forecast 3.6% in the second half). Management notes the strong start to the year has been helped by excellent weather this year and snow last year. It reiterates that costs in the second half of the year will be higher than those of the same period last year. The company anticipates an unchanged trading outcome for the current financial year. We currently forecast FY19 profit before tax of £102m, which suggests a recovery in the second half. Given we were already aware of the revenue growth trends in the first half, all the focus was on the margin outcome. Management had clearly flagged first-half profit before tax would be down year-on-year and this is worse than we anticipated. However, the second half has started strongly and management commentary would suggest it anticipates this trend to continue for the full year. We recently downgraded to ‘Hold’ as we felt short-term profit momentum wasn’t sufficient to justify a premium valuation. Trading on 9.5 times EV/Ebitda, we retain our ‘Hold’ recommendation and 1,280p target price.”


Black hole in Patisserie Valerie's accounts as much as £94m: The black hole in the accounts of Patisserie Valerie was as much as £94m, more than twice previous estimates, according to forensic accountants. The company plunged into administration in January after it was unable to secure new bank finance following the discovery of “potentially fraudulent” accounting irregularities. The progress report by its administrators, KPMG, said analysis by a team of forensic accountants had concluded the accounts had been overstated by about £94m. Previous estimates had put the figure at £40m, but a breakdown of the new sum suggests Patisserie Valerie’s cash position had been overstated by £54m. The company’s debts had also been understated and the amount it was owed overstated, to a combined value of £17m. There was also a £23m discrepancy in the way it had valued its assets. The company was valued at £450m before it flagged up the potential fraud, and the administration wiped out shareholders, including sector investor Luke Johnson, who had a 37% stake. KPMG expects to raise about £17m – last month it sold the Baker & Spice cafe business for £2.5m – by dismantling the parent group’s seven companies that are currently in administration. It is not clear how much money creditors will recoup. Some of the companies, such as Philpotts, will pay out healthy dividends, but for others, such as the plc, there will be zero. Johnson made a £10m unsecured loan to Patisserie Valerie at the height of the crisis and is a creditor of the plc. Patisserie Valerie’s finance director, Chris Marsh, was arrested and bailed following the accounting scandal, which surfaced in October. The Serious Fraud Office has confirmed it has opened a criminal investigation into an individual but has not commented further. In addition to the Serious Fraud Office, the case has attracted the attention of a multitude of regulators, with the Financial Reporting Council, the Insolvency Service, the AIM market regulator and the HMRC fraud investigation service also combing through company documents and servers. Given the level of interest, KPMG said the company would have to establish whether there were sufficient grounds for legal claims against a number of parties, a group that could include Patisserie Valerie’s auditor, Grant Thornton. To that end, KPMG is advising creditors to sanction the hiring of a second administrator to review all potential legal claims. This is due to potential conflict of interest, as Grant Thornton is KPMG’s auditor. About 900 staff lost their jobs when Patisserie Valerie stores and concessions were shut by the administrators in January, before the chain was sold to the Irish private equity firm Causeway Capital Partners. The Philpotts sandwich chain was sold to the Spar store operator AF Blakemore & Son. The two deals raised £13m and saved about 2,000 jobs. The company, which was founded in 1926 by Esther van Gyseghem, who became known as Madame Valerie, expanded rapidly after being bought by Johnson’s Risk Capital Partners in 2006. It floated on the stock exchange in 2014.

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