Rents Rent inflation at JD Wetherspoon is running at around 1% to 1.5% on a per annum basis. The company has moved away from open market rent reviews in recent years in favour of a five year reviews that adds an increase, negotiated at the start of the lease of between 1% and 1.5% a year, but kicking in cumulatively at the five year review. It means flat rents for five years followed by an increase of between five and seven per cent. New finance director Kirk Davis said “many” of the company’s rent reviews are being set at nil increase. “We are seeing still a relatively benign property market. Rental increases overall are lower than inflation.” Property Wetherspoon said that the cost of properties are “low on historic averages” for both freeholds and leaseholds. Chief executive John Hutson said the company has 80 pubs that have been exchanged, completed or opened in the period. Wetherspoon is “on track” with its target of opening 250 sites within five years, he added. The company closed two sites in the trading period. The Matchmaker in Bow, east London, a marginal site, was sold to a retailer after it approached the company. A second site, at Gatwick’s south terminal, was closed due to redevelopment at the airport. Pointing to a new opening, the Foley Arms in Great Malvern, a former Great Western, which includes letting accommodation, Hutson said there’s a “great opportunity” to buy sites from hoteliers who struggle to compete with major hotel operators such as Premier Inns and Travelodge. “We’re buying this sort of site for the pub opportunity but when they come with 15 to 30 bedrooms, this doesn’t add any complexity to the business.” Cost of openings in the year averaged £1.12m up from £849,000 in the same half year last year. Hutson also referred to the Green Parrot, Perranporth, Devon, as an example of the sort of opening where Wetherspoon was doing well. It’s a small town with a population of 4,000, with no competition from other managed companies, but with a “large pull” from villages in the vicinity. He said that Devon and Cornwall, Wales and Scotland had many of these types of towns. “The performance of the Green Parrot is about the company average,” said Hutson. “This is not a big shift for us - we’ve been evolving this sort of opening over the years.” He also cited the example of a new opening in Sheffield, the Sheaf Island, as an area of expansion. It’s the seventh pub in the city but, like other major cities, was able to support more Wetherspoon pubs - Hutson said he thought there was room for 14 Wetherspoon in Sheffield. Prices Hutson said the company had added an increase last October to reflect inflation, and in January after the VAT hike, and he flagged up concerns about a 2%-above-inflation rise in excise duty in this month’s Budget “We’re not saying we are definitely putting prices up but if cost increases keep going at that pace then eventually selling prices do need to reflect those cost increases.” Breakfast Hutson said more than one million breakfast items were sold per week across the period. But he stressed that breakfast sales are from a “low base” and he insisted the 7.4% life-for-like increase in food sales on progress of the menu generally - breakfast sales account for just one per cent of the increases. Machines The 3.8% decline in like-for-like machine sales was relative to a strong performance in the same period last year, after machine operators improved their service and customers were attracted to the bigger jackpots on offer. He said, though, that generally machine income tended to track wet sales - drink sale were up by just 0.6% in the period, suggesting volume declines. Staff Hutson claimed the Wetherspoon has the best staff retention record among managed pub operators with the average tenure for a pub manager of eight years and five months. He linked this the bonuses on offer, with the “vast majority” of the £12.3m paid in bonuses over the six months paid out at pub level. Tax JD Wetherspoon chairman Tim Martin said: “Wetherspoon made profit after tax of £22.1m, but total taxes paid to the government were over £220m, including VAT of £95.1m, excise duty of £57.5m, PAYE and National Insurance of £32.9m, property taxes of £20.6m and corporation tax of £11.1m. "This and the previous government have zealously increased taxes and regulation for pubs to levels which are, we believe, unsustainable. This has greatly increased the price of drinks in pubs and has widened the price gap between pubs and supermarkets, with a predictably huge increase in sales volumes for supermarkets, combined with a decrease in sales for pubs. The situation in Britain is in marked contrast to the approach in France, for example, where excise duties are far lower and where VAT, in respect of food in bars and restaurants, has been reduced to 5.5%. This has produced an increase in taxes and jobs for the French economy, through a reduction in the black economy and greater PAYE and corporation tax receipts. In contrast to previous decades, Britain has now become a high tax and regulation environment for business, with the effects of this being seen in many thousands of closed pubs and other small businesses across Britain, as well as a marked increase in unemployment.” Analyst reaction Simon French of Panmure Gordon said: “We have made minor amendments to our forecasts reflecting latest tax rate guidance. For FY 2011E we forecast £71.8m PBT (EPS 35.5p), compared to consensus expectations of £68.7m PBT (EPS 34.0p). We don’t expect any material change to consensus forecasts on the back of this statement. We assume 48 net new openings, 3.0% LFL sales growth and a 10bp decrease in operating margin. “We repeat our Buy recommendation and 525p price target on the belief that the valuation remains undemanding on a CY 2011E P/E of 11.4x and an EV/EBITDA of 6.1x.” Douglas Jack at Numis said: “We are holding our forecasts, having cut them slightly last week. The shares offer good value on a 13.7% equity FCF yield, but it is difficult to justify a re-rating until LFL profits stabilise. The investment attraction centres on a 13.7% equity FCF yield, which is being used to pay a dividend (yielding 2.6%), open 50 new sites per annum and reduce debt. Our Hold stance reflects a belief that falling LFL profits should cap the upside and an ability/desire to buy back shares should cap the downside.” Shares in JDW climbed 7.1p this morning to 438p.

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