JD Wetherspoon, the managed pub operator, has reported a 5.8% rise in like-for-like sales in the year to 28 July, with profits before tax and exceptionals up 6.3% to £76.9m, in what it called a “year of progress”.
Revenues grew 7% to £1.28bn and operating profit was up 3.7% to £111.3m. Earnings per share (including shares held in trust) grew 12.6% to 44.8p and the full-year dividend of 12p was maintained.
Meanwhile, in the six weeks to 8 September, like-for-like sales increased by 3.6% and in the last fortnight, like-for-like sales were up 2.5%. Separately, chairman Tim Martin has suggested a series of changes to corporate governance (see below).
Wetherspoons said it planned to open c30 pubs in the current financial year. It opened 29 pubs during the last year, with three sold, resulting in a total estate of 886 pubs at the financial year end.
The average development cost for a new pub (excluding the cost of freeholds) was £1.55m, against £1.42m a year ago, “as we continue to increase expenditure on kitchens, customer areas and beer gardens”. The full-year depreciation charge was £53.1m (2012: £49.2m).
Regarding the performance across the year, Martin said: “I am pleased to report another year of progress, with record sales, profit and earnings per share, despite having paid £551.5m in taxes during the year (equivalent to £632,000 per pub) and rewarding staff with £28.6m of bonuses. Our post-tax profit* increased by £7.9m, yet our taxes paid increased by £32.2m.
“It is unsustainable to have far higher taxes for the pub industry than those for supermarkets. Already, 10,000 pubs have closed and many others are suffering, through insufficient investment. In particular, there should be VAT equality for pubs, restaurants and supermarkets. Wetherspoon, along with many other pub and restaurant groups, is supporting Jacques Borel’s VAT Club on Tax Parity Day (Wednesday 25 September) - and we will offer a one-day 7.5% reduction in our prices, to publicise this inequality.
“In the year, we successfully concluded the long-running series of legal cases, following the successful Van de Berg judgment, receiving out-of-court settlements of £1.25m from Anthony Lyons, formerly of Davis Coffer Lyons, and £400,000 from Jason Harris, formerly of First London. Both Mr Lyons and Mr Harris denied liability - and the cases were contested.
“In the six weeks to 8 September 2013, like-for-like sales increased by 3.6%. In the last fortnight, like-for-like sales were 2.5% - and this level may be an indicator for future sales growth. Overall, the company is aiming for a reasonable outcome in the current financial year.”
Corporate governance
Martin said it was a “strange paradox” that companies in the pub business that have complied least with governance guidelines “seem to have fared the best”.
“Family brewers like Fuller’s, Young’s and Shepherd Neame, which have often had a chairman who had previously been chief executive, a majority of executives on the board and non-executive directors who are either not ‘independent’ or have been on the board for more than the recommended time, have tended to do well, whereas the compliant boards of the large pub companies have struggled greatly, in many cases, in the last decade.
“One reason may be that the non-compliant boards have been more resistant to the sometimes foolish ideas which take hold of financial markets. The main misconceived fashion of the last decade and a half has been in relation to so-called ‘efficient balance sheets’. This fashion encouraged excessively high levels of debt and arrangements such as ‘opco/propco’, which also increased financial gearing.
“However, a sensible system of corporate governance, in which non-executive directors play an important role, is clearly necessary, to provide guidance and rules in areas such as levels of pay, appropriate ethical behaviour and to try to restrain egotism and excess in the boardroom.
“As Warren Buffet has pointed out, it is easier to criticise corporate governance regulations than to suggest alternatives. My own view is that companies should carefully question whether compliance with the existing guidelines is beneficial in the following areas:
i) Non-executive tenure
The discouragement of non-executives who remain at a company longer than nine years may often be counterproductive, since it usually means that directors have not seen the effects of a recession, for example, on the company which they serve. It may be desirable, in principle, for companies to have non-executive directors who have been there longer than nine years, but it is important for the board and the chairman to take a commonsense view, to reduce the dangers of ‘cronyism’ or excessive familiarity which might reduce a director’s good judgement.
ii) Remuneration guidelines
The corporate governance guidelines have a strong presumption in favour of bonuses and awards which are based on specific targets. In my opinion, this setting of targets has been a key factor in the demise of the banks and many other businesses, since it has encouraged excessive debt. Targets can also create distortions in the behaviour of executives, since they can often be achieved by, for example, reducing costs to a level which adversely affects customer service or by other types of behaviour which prejudice long-term success for the benefit of relatively short-term gains. A considerable percentage of Wetherspoon share awards is not based on targets, other than the requirement of working for the company at the time at which the shares are issued. Naturally, the future value of the shares will depend on the success of the company.
iii) Chief executive becomes chairman
Several of the family brewers, for example, have decided that a chief executive should become chairman - and this can add ballast and gravitas to the board and increase resistance to some of the more harmful ideas which have beset the financial community. This seems to have worked well where the chairman represents family interests, as well as his own shareholding, in the company.
iv) Majority of non-executives on the board
Wetherspoon complies with this advice at the current time, but I believe that it may often be disadvantageous for a board to have a majority of non-executives. This is because it encourages an unrealistically low number of executives on the board, which risks unduly increasing the power of the chief executive. Alternatively, this practice encourages excessively large boards. In the pub industry at least, I believe that companies which have had a majority of executives have fared better than those which have had a majority of non-executives.
v) Board evaluation
A recent requirement of corporate governance is a recommendation for a third party to evaluate the functioning of the board. Delegation of a key task of the chairman and of the directors of the board itself to a third party, often with little or no connection with the company’s business and with a very limited knowledge of the directors, may be a dangerous step for a board to take. It is the function of the board itself to evaluate its own performance - and the performance is most evident from the performance of the underlying business. For this reason, I believe it to be best for Wetherspoon to continue with its current system of ‘self-evaluation’.
vi) General point
A related matter concerns the huge increase in the size and incomprehensibility of annual reports and accounts; this has been exacerbated by corporate governance reports. As has been well documented, remuneration committee reports, for example, are often extremely difficult to understand. Many corporate governance reports are full of business jargon and repetition. The financial reports themselves are often the worst offenders, frequently using obscure language and definitions. The net effect of this is that annual reports, which should be read by shareholders, have become extremely difficult to digest - and many people have given up. Wetherspoon has attempted, no doubt imperfectly, to reduce jargon and repetition in its report and accounts.
