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Fri 10th Mar 2017 - JDW chief executive briefing: food sales, buying-in freeholds, disposals, Deliveroo

Propel reports on JD Wetherspoon chief executive John Hutson and finance director Ben Whitley’s comments following today’s first-half results:

Current trading: Like-for-like sales for the six weeks to 5 March were up 2.7%, although Hutson said that despite a good start to the year the company expected lower like-for-like sales in the next six months. He added: “This is because our like-for-like sales were 1% higher than in the first half of last year. We expect like-for-likes to increase broadly in line with inflation, so between 1% and 2%. However, we anticipate a slightly improved trading outcome compared with expectations at the last update.” Hutson added: “It’s always been a very competitive environment and will continue to be so. To grow like-for-likes takes a combination of increases in volume and price and I certainly think we will end up with more volume than price increases in the next 12 months. Our prices have not moved that much over a long period of time and whether we get the opportunity to move them much in the next year or two, only time will tell.” Whitley said the company had managed to increase gross margins because of lower utility costs and only a small increase in staff costs as the company had already mitigated increases in the National Living Wage. The company’s motorway service site on the M40 at Beaconsfield was not making a loss but Hutson admitted it had not been a particularly profitable venture and footfall had been lower than expected. He added there were no plans to open further sites at service stations.

Average weekly total sales per pub now at highest level: Average weekly total sales per pub are now at their highest level at £40,500 including VAT, compared with £38,400 in the first half of 2016. This has increased by about 20% in the past five years. In 2009, the average weekly total sales per pub was £31,300. Hutson said: “This is a record for us and it is testament to the hard work of our staff.”

Food share continues to rise: Like-for-like food sales in the first half of the year were up 5.1% and made up 35% of sales in its pubs, with average weekly sales of £13,600 per pub. The company has an average food hygiene rating score of 4.9 out of 5, while 92% of its pubs have achieved the maximum score. Breakfast sales have helped and Wetherspoon is now the fourth most-visited brand for breakfast, according to data from CGA Peach, with 15% of consumers eating out at breakfast for the past six months at Wetherspoon. Bar sales in the period increased 2.4% on a like-for-like basis and drink still makes up the majority of the sales mix at 61%. Hutson said real ale would continue to be a major focus for the company, with 262 of its pubs in the 2017 CAMRA Good Beer Guide.

Costs to rise further: The company has only seen “modest” increases in bar and food costs so far this year but repairs have risen 12% and share plans 27.5% because of increased participation in the scheme – about 10,000 employees are shareholders in the company. However, Wetherspoon faces a number of upcoming cost increases – a 4% increase in the National Living Wage, £7m in business rates, £4m in the energy market reform levy, £2m for the Apprenticeship Levy, and excise duty of £7m. Wetherspoon paid tax of £331.6m in the first half of its latest financial year, which works out at £363,000 per pub. Its tax as a percentage of sales is 41.4%. Hutson said: “We think the playing field for pubs needs to be levelled off, particularly when it comes to supermarkets.” He added that the £1,000 business rates relief announced by the chancellor at the Budget this week would have “virtually no benefit” for the company. He said: “Because we already receive state aid from the EU, there is a cap on how much relief the government can give to individual companies. Because of the existing relief we have had, we are already near to our cap so the £1,000 will not apply to us and other chain pubs.”

Wetherspoon is Britain’s favourite big brand: Wetherspoon is Britain’s favourite big brand, according to data from CGA Peach. When consumers were asked where they would choose to eat if all brands were in the same location, 13% chose Wetherspoon, with PizzaExpress and Nando’s joint second on 7%. The gap is even wider when it comes to branded drinking-out occasions. Wetherspoon topped the list with 42% of people having drunk there in the past six months. A total of 16.6 million British consumers have been for a drink at Wetherspoon in the past six months with 19.1 million having eaten at one of its pubs in that time.

The freehold ‘opportunity’: JD Wetherspoon has spent £50m on buying pub freeholds, taking the percentage of freehold sites in the estate to 54.4%. Hutson said low interest rates had made it easier for the company to buy freeholds. He added: “The bank interest is lower than the rent you are paying and on top of that you get to own your own building, which means you are not at the mercy of potential rent increases. We don’t have a pipeline as such or a total of freeholds in mind – we’re going to be opportunistic and we’re not going to pay over the odds. Being in control of our own destiny is the motivation of buying freeholds.” The freehold average cost in the period was £1.8m.

Hotels performing well: The company has 48 hotels having opened two more during the period. Hutson said it would continue to look at adding rooms to some of its pubs where it has the space. Whiteley said: “Although hotels are only a small part of our business, we have seen a 14.8% increase in like-for-like sales.” Hutson said the company was seeing occupancy levels similar to that of Whitbread-owned Premier Inn. He added: “We do advertise on third-party sites but we find the best advertising is word of mouth.”

No further disposals planned as company increases investment in existing pubs: Wetherspoon opened two pubs in the first half of the year (one freehold and one leasehold) and closed 22 sites. Hutson said there were no further disposals planned and the company currently had ten pubs it still owned that were closed. He added: “The pubs we have sold are mostly still being run as pubs and the majority of them are in towns where we already exist.” The company plans to open ten to 15 pubs this year and the average cost of development is now £2.4m, with the average size of new openings being 5,929 square feet. Hutson said the openings would be in towns where the company did not have a presence. He added: “The thing we are not going to do in the future is open in a small or middle-sized town where we already have a pub.” It has reinvested £28.4m in its existing pub estate, up from £17.4m last year. Net debt/Ebitda is 3.46 times, which is within banking covenants, Hutson said, and was particularly low compared with other pub companies.

No plans to enter delivery market: Hutson said the company had no plans to enter the delivery market and would continue to seek to create an atmosphere in its pubs that kept people there. He added: “It’s about having people in our buildings rather than looking at creating incremental sales. We obviously offer takeaway coffee and people can buy bottles of craft beer to take home but we have no plans to go down the Deliveroo route.”

Happy staff: Hutson said the company had record levels of staff retention, with the average length of service for pub managers now more than 11 years and two months and kitchen managers seven years and ten months. A total of £18.8m was paid in bonuses and free shares, of which 79% was paid to staff working in its pubs. The company had more than 35,000 employees at the end of the period.

Share buybacks: The company has repurchased and cancelled £25m of shares in the first half of this financial year. Hutson said there was now a whitewash in place that allowed up to 35% of the company’s shares to be purchased and chairman Tim Martin currently owns 31%. Hutson added the company would continue to buy back and cancel shares while it was believed the company was undervalued.

Outlook: The company now has 906 pubs and Hutson said the biggest growth opportunity was organic growth by adding new pubs, ideally with some aspect of hotel accommodation. He added: “We believe the company is in great shape and we will continue to invest in our current estate as well as look at new opportunities, particularly within our existing pubs.” 

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