Analyst Mark Brumby at Langton Capital looks at the Q1 update from JD Wetherspoon and says that supporters of the company may feel a little let down despite their underlying support for business model.
What’s happened?
· JDW Q1 trading, LfLs +6.3% (total sales +11.3%), margins down to 7.7% v 8.3% in 2013
· Aug + Sept good, Oct LfLs less so; no breakdown
· Group expects FY margins 7.2% to 7.8% (down from 8.2% last year + hopes of increase)
· Raises barriers to entry but shares down c7%
What does it mean?
· You may be able to drive sales or margins – but not often both
· JDW says most of increase in cost is of its own choosing, repairs, training, wages etc.
· It views this as a necessary investment; raises barriers, should help group attract, retain customers, staff etc.
· In the short term, it clearly depresses profits, hacks investors off, confirms prejudices re quasi-private company etc.
Implications, conclusion etc.:
· Supporters may feel a little let down despite their underlying support for business model
· Company says it’s ‘early days’ to comment on FY margins – but has done so nonetheless
· Cements view that, with JDW, you pays your money + takes your choice
· Low margin increases risk of profit shocks – but non-cash (depreciation) + discretionary (bonuses, training, repairs) costs provide security
· Read across? Weather helpful but consumer purse strings still tight. JDW shares attractive – but pick your moment.
