Following its trading update yesterday, leading analyst Mark Brumby at Langton Capital reports on the subsequent JD Wetherspoon conference call, where the group painted a picture for the remainder of the year, in which margins and like-for-like sales growth will decline from current levels and costs (rates, labour, commodities) will increase.
Yesterday, JDW reported on trading for the 13 weeks to 23 October, in which total sales grew 2.3%. Like-for-like sales grew 3.5% during the period, reducing to 2.3% in the final five weeks.
Brumby said: “JD Wetherspoon says that it does not expect LfL sales to remain at current levels. Group ‘had a strong summer’. This has slowed. The slowdown has been ‘general’. Group sees 1-2% LfLs for the year as a whole as likely.
“Regional variations? No variation in the slowdown. Xmas bookings? No Xmas dinner this year. Menu goes out next week. Group won’t split LfLs between wet and food. Won’t split between price & volume. Impact of 53rd week on margins? No real impact.”
Operating margin, excluding property gains, during the period grew 8.6%, compared with 5.8% in the same period last year. Operating margin of around 7% is expected for the current financial year.
Brumby said: “The higher margin is driven by higher-than-expected LfL sales. Seasonality of margin? Q1 is always stronger. It is a bit more exaggerated this year than last due to higher costs (pay) last year. More pay-rises will occur in April this financial year (April 17) compared with October last year. Business rates? These changes occur in April 2017. Could be around 16%. That’s ‘quite hefty’. Around £7m p.a.. Group has no currency hedges. But it does have a number of long-term contracts & JDW has not yet seen costs rise. It may be able to switch products if the price of some rise & others don’t. Drink can be 3-10yrs & food is a little shorter. Tax rate should be ‘slightly lower’ than last year. Interest costs? Around £30m (down slightly from last year’s £31.5m).”
In terms of outlook, Brumby said: “JDW is ‘going into this year with a degree of optimism’. It should benefit from prior capex. It will have ‘more cash to put into its existing estate’. Repairs & maintenance capex spend should be 7-8%. It will move to the top of that range. It was as low as 5.5% last year. Do you expect any return on this capex? Yes, but it may be difficult to pinpoint. Particularly loos, carpets, staff facilities etc. If you sell 9 pubs this year, how many do you have left to sell? It put 80 on the market & ¾ have gone or are going. Group may grow at about a net 15 units per annum over the near term
“When do you aim to get below 2x debt to EBITDA? No target date given – but this could be 5-10yrs. Debt this year will be ‘similar to or a little higher than last year’. Does this mean buy-backs are now on hold? These are ‘always opportunistic’. The group doesn’t forecast when these will take place. Could still spend £0-60m on shares. Might, obviously, be near the £0m. Group will still go through with the Whitewash proposal (to allow further purchases if Tim Martin goes through 30% as a result of buy-backs). How much spent on buy-backs this year to date? Around £18m.
“Why change your leverage levels? Says ‘as the company matures, it will not need to add debt to the same levels – or possibly at all’. Group says Tim is a ‘young-61’ but when management changes, group may run on lower leverage.
“JD Wetherspoon has painted a picture for the remainder of the year. Margins & LfL sales growth will decline from current levels and costs (rates, labour, commodities) will increase. Much of this is an industry rather than a stock issue but it is, arguably, not entirely consistent with a PER of nearly 20x earnings. Great company though it is, JDW’s shares may at present be fully-valued.”