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Morning Briefing for pub, restaurant and food wervice operators

Sat 14th Sep 2019 - Tim Martin on sales, coffee, people retention, estate size, freeholds et al
Propel reports on JD Wetherspoon founder Tim Martin’s comments following yesterday’s (Friday, 13 September) full-year results:

Current trading: Like-for-like sales for the six weeks to 8 September 2019 were up 5.9% and the company has made a “reasonable” start to the financial year. Martin told Propel the company would continue to try to sustain the current level of performance by keeping “doing what we’re doing”. He said: “We don’t have anything special or new planned as such. It’s about focusing efforts on all areas of the business and continuing to listen to our staff and customers.” He added the company would need like-for-likes to grow “between 4% and 5%” over the year to mitigate the cost increases the company faces. Like-for-like sales for the year ending 28 July 2019 were up 6.8%, with total sales of £1,818.8m. Pre-tax profits were down 4.5% to £102.5m, compared with £107.2m the year before. Martin said: “We have increased sales by almost £100m in the year. When we floated on the stock market in 1992 they were £22m.” Like-for-like bar sales increased 5.8%. Food like-for-like sales rose 8.3% compared with 5.1% the previous year, while fruit machine like-for-likes were up 10.3% compared with 2.9% the year before. Martin said it was possible the latter increase was down to the clampdown on fixed-terminal machines at bookmakers.

Pub estate and expansion: Martin told Propel he believes the work the company has been carrying out to reorganise the estate during the past few years is now “largely complete”. The company has been shutting some pubs in areas where it had previously “over expanded”. He said: “There might be one or two more we need to close but it’s really going to be tweaks here or there.” Wetherspoon disposed of nine sites during the year and Martin said he believed that figure would fall in this financial year. The company opened five pubs in the period (four freehold and one leasehold), leaving 879 pubs trading in total, compared with 883 the previous year. Martin said: “We had 44 pubs in 1992 and at the turn of the millennium we were opening 100 pubs a year. In 2002-03 we decided to cut back but when the recession hit in 2008 we decided to increase the number of openings again and now we’ve covered most of the ground in the UK. There’s still room for us to grow, though. At one point we thought we might have 1,500 pubs but we accept that was a bit optimistic.” Wetherspoon expects to open between ten and 15 sites in the current financial year, which Martin told Propel reflected the fact the estate rationalisation was almost complete.

Average weekly total sales per pub at record £48,000: Average weekly total sales per pub are now at the record level of £48,000 including VAT, compared with £44,400 the previous year. Martin said the level was double that of a lot of its competitors. Sales have grown by more than 50% since 2009 and were at £11,500 per pub on average when the company floated in 1992.

Product swaps: Martin said the product swaps Wetherspoon had carried out to date had been “successful” but the company wasn’t planning any further swaps at this time. He said the introduction of Strika, a herbal liqueur from Chorley, in place of Jägermeister had gone “very well”, while it had also brought in Australian sparkling wine, which was lower in price with savings passed on to the customer. The company’s best-selling bottled cider is Kopparberg from Sweden, which is now being produced in a draught format in the UK. Wetherspoon introduced it into its pubs at the start of the summer and one million pints were sold in July. Martin added: “We have left the product swaps under review. We don’t want to be horrid to European suppliers – we genuinely don’t.”

Still the place to eat: 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 still the fourth most-used eating brand in Britain, behind quick-service outlets McDonald’s, Costa Coffee and Greggs. The company has an average food hygiene rating of 4.97 out of five, while 97.4% of its pubs have achieved the maximum score. Martin said the introduction of the Scores On The Doors scheme had been one of the biggest benefits to Wetherspoon in the past ten years because before then the company’s quality was perceived to be “not so good” due to its low prices. He added: “It is an amazing achievement by the staff in our kitchens and pubs. It’s not just hard graft – a lot of knowledge is also required.” Drinks continue to make up 60% of the sales mix, with average weekly sales of £28,800 per pub. However, Martin said the percentage of food sales had continued to rapidly rise, from about 5% in 1992 to 36% today. He added the company had tried to keep up with trends in recent years by introducing more vegan dishes, for example. In total, 248 of its pubs are in the 2019 CAMRA Good Beer Guide. The best-selling brand in Wetherspoon venues continues to be Lavazza coffee, while its biggest-selling draught drink is Pepsi, although coffee and tea out-sell it when combined. He said: “That’s where the big non-alcoholic market is to me – coffee and tea – but non-alcoholic beer is catching on. We’ve introduced three or four of them in the past couple of months and they are selling well.” Martin said there had also been a massive movement towards gin. He added if the UK leaves without a deal and tariffs are reduced in a “meaningful” way, the company would look to expand the range of products where it lowered prices. Martin said the company was still making a profit on Ruddles after cutting the cost of a pint by 20p, with the company citing it as an example of how leaving the EU customs union could reduce prices. He said the company was still paying Greene King the same price for the product.

Costs keep climbing: The company has continued to see costs climb at a “hefty rate”. Wages have increased 12.9% to £71.4m, which Martin said was mainly due to the fact unemployment was at a record low, which naturally pushed wages up. He said this trend should help sales growth in turn. During the period there were rises in utilities (10.6% to £5.5m) and depreciation (3.2% to £2.5m) and interest rate hedges (25.5% to £7.1m). Martin said the latter was down to the fact the company thought interest rates would be quite high by now so made the decision to fix them – “I guess we were wrong”! Wetherspoon paid tax of £764.4m in the period, up from £728.8m the previous year. That worked out at £871,000 per pub. Its tax as a percentage of sales has fallen to 42.0% compared with 43.0% the previous year. Martin said the level of tax paid by Wetherspoon in one form or another was almost 1,000th of the tax paid by the whole country. He said: “Pubs are an important contributor to the country in many ways, particularly when it comes to pure finances. If a pub closes, it’s bad news for the economy.” Meanwhile, operating margin fell to 7.3% compared with 7.8% the previous year.

Pub investment and freeholds: The company reduced reinvestment in its pubs to £54.3m compared with £68.9m the year before. This consisted of £28.7m on kitchen and bar equipment, £18.7m on refurbishments, and £6.9m on business and IT projects. The company spent £77.2m on freehold reversions and investment properties during the period, a substantial increase from £16.3m the year before. In turn, this has taken the percentage of freehold sites in the estate to 61.4% from 58.7% the year before. Martin said the company had spent about a third of a billion pounds buying freeholds where it was a tenant in the past six or seven years. He added: “It is probably opportunistic to a degree – we got offered quite a lot of properties and just decided to buy them. There’s no science to it – it’s slightly instinctive.” Wetherspoon continued to spend about 4% of sales on repairs, with spend rising to £76.9m compared with £71.3m the previous year. Martin told Propel it was spending about £70,000 per pub and didn’t think that figure would “ever go down”. He said: “We believe it’s an important thing to maintain the quality of our pubs.” The average cost of development is now £2.64m, compared with £2.77m the previous year. The average size of openings during the year was 4,851 square feet, compared with 5,201 square feet the year before.

It’s a people thing: The company enjoyed record levels of staff retention, with the average length of service for pub managers now more than 12 years and two months and kitchen managers eight years and one month. The manager of the Crosse Keys in London, where Martin held his presentation, has been there for 23 years while the kitchen manager has been there for 18. Martin told Propel the company had reduced the working week for pub managers to 40 hours a week from 42.5. A total of £46m was paid in bonuses and free shares in the period, of which 86% was to people in its pubs. The figure paid is about 50% of net profits. The company had about 42,000 employees at the end of the period, of which almost 13,000 were shareholders. Martin said: “At the end of the day, pubs are about people. I think the pub companies that retain people for longer will be more successful. At Wetherspoon we believe the people who work in the pubs know best.”

Hotels: The company has 58 hotels having opened one during the period. Martin said the company continued to proceed “cautiously” with its hotel plans, although it will open its largest one to date – a 90-bedroom hotel in the middle of Dublin – in June 2020. Its current largest hotel has circa 50 bedrooms. He said: “It is a relatively small part of the business. We’ve opened quite a few in the past three or four years so we’re just seeing how it goes. I don’t think we’ll end up being the Hilton hotels of the pub world.” Hotel like-for-like sales were up 6.8% in the period.

Brexit and tariffs: Martin said he firmly believes eliminating tariffs and adopting a free-trade approach through a no-deal Brexit would lead to prices going down and the country having a stronger economy. Martin said the points raised in the government’s Operation Yellowhammer document, which he dubbed “Operation Yellowspanner”, about rising prices and damage to the economy in the event of a no-deal Brexit were a “worst-case scenario prediction rather than fact”. He added: “If I was planning a business it’s perfectly legitimate to plan for the downside so I think it’s a sensible approach to say what might happen if all these things go wrong. If you remember the debate about the euro, people said if we don’t join it would expose businesses in this country to currency risk and they would relocate to the continent and the UK would be in terrible trouble, and that proved not to be true.” Martin said he was not a “lobbyist” but would continue to make the case in the way he does over Brexit. He said: “I don’t knock on the door of a minister or take them out for a pint.” He said while immigration was needed in the UK, it needed to be “controlled by our own government and not by people we haven’t elected”. He added: “I think the EU has given immigration a bad name. I would be a strong advocate of a reasonable level of immigration.” Martin said he had received no complaints about including his views on Brexit within the company’s trading statements. With regards to the beer mats on Brexit that were put out in pubs, the decision whether to do so was the manager’s. He joked: “If we leave on 31 October we’re planning a party that will make the 1997 Queen’s Jubilee appear like a vicar’s tea party – there will be dancing in the streets and break-dancing in our pubs.”

Corporate governance: Martin maintained the company’s stance over its corporate governance policy despite one unnamed shareholder being unhappy about Martin remaining as chairman beyond the nine-year tenure. Martin said: “A company like ours depends on experience. What corporate governance has done is to institutionalise inexperience. I think it is a very damaging system and should be called ‘guaranteed eventual destruction’. The system has been brought in to try to stop the Robert Maxwell-type scandals but they are a minority of the problems that face businesses and what it’s doing is creating very unstable boards. We love competing against businesses that comply with the corporate governance rules because they are generally inexperienced because of the personnel chopping and changing and have relatively short-term objectives. To have an incentive to get it right, you must have a longer-term perspective. People buy shares in us not because they like me but because an established bunch of people run the business.”

Social media: Martin said the company had seen no adverse impact from its decision to remove its presence on social media last year. He said: “I think it was a good move for us. In pubs it pays to concentrate on front of house and the customer.”

Analyst’s view: Goodbody leisure analyst Paul Ruddy said: “Wetherspoon reported full-year revenue growth of 7.4% year-on-year to £1,818m as expected. Like-for-like growth was 6.8% for the full year, broadly in line with the picture at the 49-week pre-close statement. This concludes another stellar year of like-for-like growth relative to peers. Ebit was flat year-on-year at £132m and profit before tax was down 4.5% to £102.5m, in line with our £102.4m forecast. Net debt at year end was £737m and net debt/Ebitda was 3.36 times, slightly better than it had guided at the third quarter. Trading for the first six weeks to 8 September has continued strongly, with like-for-like sales growth of 5.9%. This is a strong outcome given like-for-likes were up 5.5% in the early part of FY19. With regard to outlook, the group noted it currently anticipates a ‘reasonable outcome’ to the current financial year. We currently forecast circa 3.4% growth in profit before tax to £106m (higher end of consensus range). Wetherspoon continues to attract a premium valuation to both its peer group and history and has outperformed the wider UK market by more than 20% in share price terms year to date. We believe this is partly owing to its defensive attributes, but its differentiated value-based model remains an area of competitive advantage. This has helped drive like-for-like growth at a multiple of peers in the past 24 months. We moved Wetherspoon to ‘Hold’ in February as valuation was high relative to forecast earnings growth. FY20 has commenced strongly. Trading on 20 times price-to-earnings ratio and 10.3 times EV/Ebitda, we maintain our ‘Hold’ recommendation.” 

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