Leading analyst Douglas Jack, of Numis, has said he is cutting his price target for JD Wetherspoon as there are still no signs of margins stabilising in the current financial year.
Wetherspoon’s interim results are due next Friday (13 March) and Jack forecast profit before tax to rise 2% to £38.4m, with the benefit of a 4.8% increase in like-for-like sales being outweighed by 90bps decline in EBIT margins (to 7.3%), resulting in average EBIT per pub falling 6%.
He said: “With management claiming that gross margins are under pressure from increased price competition from supermarkets, it appears unlikely that the downward margin trend is likely to stop.
Like-for-like sales growth slowed to 4.6% in H1 (Q1 6.3%; Q2 2.8%), which Jack said partly reflected comparisons becoming tougher (Q1 3.7%; Q2 6.7%; Q3 6.2%; and Q4 5.2%), largely due to the extension of food trading hours in autumn 2013. He said like-for-like sales growth should have been mostly volume-driven as JDW’s average drinks rose by only 1% according to CGA.
Margins fell 90bps in H1, to 7.3%, with Q2 down 100bps at 6.9%. Jack said: “This largely reflects the company not fully passing on higher increases in labour, utility and supplier costs. Management cited “gross margins being under pressure as a result, we believe, of increased price competition from supermarkets”, even though the LFL volume increases imply that prices could be increased.
He added: “Management strategy is built around growing cash profits/pub, rather than preserving margins. The outcome is an increasing drinks price discount to the industry (now at 17.6%, based on CGA data), an estimated 6% decline in H1 EBIT/pub and consensus forecasts falling by 4% since 1 January 2015, versus a very slight overall increase for the peer group. Given this and an improving consumer backdrop, there could be a case for JDW testing slight price increases.”
He concluded: “Our 2015E forecast (PBT £81.2m; consensus £79.1m) assumes LFL sales rise by 4.0%, EBIT margins fall 80bps and that 35 new pubs open. We are cutting our price target to 850p from 900p: the 16x P/E (8.6x EV/EBITDA) rating is full, in our view, given that our/consensus assumption that margins stabilise in 2016E has started to appear optimistic.
