On the back of JD Wetherspoon’s Q1 updates this morning, leading analyst Anna Barnfather at Panmure Gordon has said that the company faces stiff competition from the surge in supply of casual dining chains and its business model (location, size, sales mix, volume) and value proposition leave if significantly exposed to labour inflation.
She said: “While top line trading was broadly in line with expectations margin decline was much more severe than we expected making further reductions to forecasts inevitable (c-3%). Operating margin was 6.2% in the quarter (we expected 7.0%) versus 7.7% last year due to the increase in starting rates for hourly staff put through October and August. We believe that this is also due to an increase in staff numbers (average staff per pub has increased from 11 to 19 over the last 5 years) as the business shifts its food sales mix in larger sites. With the New Living Wage still to be absorbed, we see further downside risk and continue recommend selling the shares.
“Q1 Trading update covering August to October showed a pick up towards the end of the period helped by the Rugby World Cup. LFL sales were +2.1% and total sales growth of +6.2% - broadly in line with our expectations. However margins are still under pressure from hourly wage increases put through last August and October (+13%) resulting in Operating margin decline from 7.7% to 6.2%. The company now expects profits for the current financial year to be lower than in the last.
“The shares currently trade on 8.9x EV/EBITDA and 15.4x PE compared to the sector on 11.1x and 17.6x. Although not comparatively expensive, we continue to see downward pressure on earnings and maintain our target price of 650p (20% downside). Additionally we expect FCF Yield to fall from 12.4% to 8.6% in 2016E.”
