Leading analyst Jamie Rollo at Morgan Stanley says he expects Q3 LfL sales growth of 1.5-2.5% from JD Wetherspoon, in line with trading in the first six weeks of the quarter, and will be looking for an update on its plans to triple breakfast and coffee sales over the coming 18 months.
Rollo said: “JD Wetherspoon will announce its Q3 trading update on 6th May. We expect the company to report LfL sales growth of 1.5-2.5%, a little slower than the 2.7% seen in Q2 and similar to the first 6 weeks of the quarter (1.6%). EBIT margins remain depressed and, with weak LfL sales growth, we do not see any significant turnaround in margins in the near term.
The recent Coffer Peach tracker (to which JDW does not contribute) also shows a weak trading environment, with UK Pub & Restaurant LfL sales down 0.3% in March, despite strong UK economic data; please see our note for more details.
“We continue to see Wetherspoon as a well run operator, benefiting from strong trading trends and a rollout of new pubs. If the shares drop significantly, or management demonstrates that it can manage a flat or rising EBIT margin, we would become more positive on the investment case.
“However, trading on 13.8x calendarised 2015e P/E, the valuation is at the higher end of its range in recent years as well as at the top end of the peer group, and we remain Underweight.
“H1 LfL sales growth declined to 4.5%, with a deterioration to 2.7% in Q2. Current trading reported at its interim results declined further, with only 1.6% LfL sales growth in the first 6 weeks of the quarter. The company said this was due to the tax disparity between supermarkets and pubs and is looking to roll out several drink and breakfast campaigns to combat pricing pressure from supermarkets.
“It plans to triple breakfast and coffee sales over the coming 18 months, which could drive material LfL growth, but would also lead to additional marketing and labour costs. We will be looking for an update here at the results. We expect weak trends to continue in Q3 and forecast LfL sales of 1.5%-2.5%.
“Comps remain tough in Q3, with 6.2% in the same quarter last year, but ease in Q4. For the full year, we expect 3.5% LFL sales, meaning that the company needs to achieve 2.5% LfL sales in H2 to hit our forecasts.
“H1 saw a decline in EBIT margins of 75bps to 7.4%, with Q2 margins down 90bps to 7.1%, below FY guidance of 7.2-7.8%. The company gave no guidance on current margins in its interim statement, but we expect similar trends to continue in Q3 with operating margins remaining under pressure.
Management previously said that it might revise its margin guidance downwards if there were no improvement in sales growth, as it continues its strategy to focus on sales rather than margin. We estimate a 7.3% margin in the year, and every 10bps is worth £1.5m to EBIT or 2% to PBT.
“Wetherspoon opened 12 new pubs in H1 (2 in Q1 and 10 in Q2), and at its interim statement reduced its full-year guidance to 30 pubs, the low end of its initial 30-40 guidance. We assume 30 new pubs this year, accelerating to around 35 per year from 2016.
“For the full year, we forecast £111m EBIT and £78m PBT, broadly in line with consensus at £112m and £77m. We assume +3.5% LfL sales and a 7.3% EBIT margin for the full year, so the company would need 2.5% and 7.3% in H2, respectively, in order to hit our forecasts (or –7% YoY EBIT in H2 vs -1% in H1). We recently reduced our price target to 740p to reflect the accelerated margin pressure and weak sales growth (note).”
