Simon French of Panmure Gordon looks back at Whitbread’s full-year results and ahead to next week’s JD Wetherspoons’ trading update: “Yesterday’s full-year results from Whitbread generated some relatively hostile questioning from analysts regarding the returns from, and the amount of capital invested in, its underperforming Restaurants business. This naturally led to probing around whether the division’s brand portfolio is strong enough to capitalise on what remains an enviable freehold estate with the added benefit of guaranteed footfall from the adjacent Premier Inns. “Managing director Paul Flaum indicated that work needs to be done to refine the individual brand propositions for Beefeater, Brewers Fayre and Table Table so that the consumer offer becomes more compelling. The fragmented nature of the market means customers are not short of branded offers. Indeed a recent trip to Spirit Pub Company’s HQ revealed a Beefeater, a Flaming Grill, a Harvester and a Toby Carvery all within a few minutes walk of each other. “Ironically probably the clearest brand proposition to emerge from Whitbread Restaurants in recent years, Taybarns, has been quietly moved to one side. Taybarns, like Brewsters before it, suffers from the fact that the needs of the Premier Inn guests will always come first and not many of the loyal business customers want to dine in a Taybarns after a hard day on the road. Whitbread has incorporated some of the learnings from Taybarns into Brewers Fayre with the introduction of Buffet Place into 95 of the 129 Brewers Fayre sites. However the 6% sales uplift is somewhat disappointing in our view.” “The UK’s largest pub brand, Wetherspoons, will update the market on recent trading on Wednesday. It too has been grappling with the issue of disappointing returns with a decline from 13.0% in 2003 to 10.3% in 2012. More recently the first six weeks of Q3 (February-April) saw LFL sales decline 0.7% but this included one week of heavy snow and we believe the underlying trend was broadly flat which we expect to have continued over the quarter. We think margins will have declined 50bps YOY to 9.1% in Q3 compared to 9.3% in H1. “We expect trading to improve from here on-in (Diamond Jubilee, Euro 2012 and the Olympics) and there is potential for margins to be rebuilt as new sites mature and the pub opening programme is scaled back. We note that LFL pub profit increased 1.2% in H1 yet group margins declined 10bps implying that the opening programme is having a significant drag on group profitability. “Scaling back the pub opening programme will release c£35m per annum and the group has spent c£17m on share buybacks since the half-year. “We estimate the group could buy a further 14.6m shares (c£60m at the current share price) on share buybacks before Tim Martin’s shareholding (currently 25.7%) gets over 29% and uncomfortably close to the mandatory takeover threshold of 30%. Consequently we think over the medium-term a rebasing upwards of the dividend (current cash cost of c£15m per annum) is likely.”