M&C Report takes a closer look at the H1 results to 26 January for JD Wetherspoon and reports from a press briefing with chief executive John Hutson and finance director Kirk Davis.
Hutson said the company hopes to have opened two sites in Ireland by the end of the financial year. “They are the only two sites we’re exchanged and completed on. There are a few other sites we are looking at. If they go well then we’ll probably have another three or four during the course of next year.”
In the longer term, Wetherspoons wants to open a similar number in Northern Ireland and the Republic combined as that in Scotland, due to their similar population numbers. Currently 64 are open in Scotland, with a further six to start trading by July.
He added: “We have no short term targets. It’s like anywhere else. If we find a good property we’ll go after it but we’re not going to go chasing them because we’ll go talking up the property market otherwise.”
Like-for-likes and sales per pub
Average sales per pub grew from £33,400, up from £35,300 in H1 2013. Davis said the 9.5% decline in machine like-for-likes was in part due to the introduction of Machine Games Duty in February 2013. Like-for-like pub profit was up 4.3% on the back of strong like-for-like sales growth, he said. However, it was up against +9.4% in the first half of last year, “which we believe will be tough to trade over this year”.
Overall pub profit (pre-repairs) was £136.2m, up from £123.2m in H1 2013. Profit as a percentage of sales improved from 19.6 to 19.9. “This was really off the back of strong like-for-like sales at 5.2% at strong food growth him particular at 10.5,” said Davis
Hutson said Wetherspoons’ pub on the M40 services in Beaconsfield has “been going pretty well”. “It’s had a huge amount of publicity, but since then it’s got on as we thought.
“It’s much like an airport pub where the vast majority - about two thirds of our sales - have come from food.” This is roughly twice the Wetherspoons average, he pointed out. Only between 10% to 20% of drink sales are alcohol.
Regarding the opening, Hutson said: “We didn’t see it as some kind of new initiative. Sometimes these things take on their own momentum. It was presented to us as a new site.
“Obviously we’re got a long experience of working in airports. This is a similar environment. People aren’t going there to eat and drink but there are a lot of people there who want to eat and drink.
“There will be for sure other opportunities [on motorways], but we’re not chasing them. Nobody has come to us and said, ‘do you want to open at a motorway service station?’ If they do we’ll look at them site by site.”
In addition to rising taxes, bar and food supply costs increased by c3%, which Davis said was “driven by either inflation-related contracts at the bar, or commodity pricing on food”. Wetherspoons also saw an increase in head office costs (from £19.6m to £22.2m) and repairs (from £22.8m to £26.1m) against the same period last year.
Hutson said Wetherspoons does not pay any members of staff the minimum wage but said that minimum wage increases “raise the base up”, effectively leading to higher wage costs. Wage increases last year were around two and a half percent, slightly higher than the minimum wage rise.
Wetherspoons continues to invest in its estate, and Davis highlighted that the reinvestment figure for the first half of 2014 was £24.7m, against £17.2m in H1 2013. The figure for the full year is expected to be c£55m, “as we continue our significant investment in the core estate”. In the period £58m was spent in acquisition and development costs, with between around £80m and £100m expected for the full year as the company adds 40 to 50 pubs.
The company has opened 20 pubs in the year so far, as of 14 March, with another 20 on site. The average development cost is £1.5m, in line with last year. Wetherspoons expects to open between 30 and 40 pubs in FY2015.
Hutson said: “Ten or 15 years ago you could not buy pubs from other companies; they were acquiring as well, and what they were selling was fairly expensive, we thought. Hence Wetherspoon was opening in a lot of unlicensed premises because that’s where we were getting better property deals. In recent years we’ve been able to buy from everyone: Greene King, Marston’s, Spirit, Enterprise.” He said the company would “start from scratch” with these pubs. “We’re putting extensions on quite often. They are not cheaper to fit out, but they are good sites. Often they’ve got a beer garden, sometimes they’ve got a car park as well.”
Freehold versus leasehold
Hutson said the estate’s split between freehold and leasehold “remains constant, although there’s an increasing bias towards freeholds in our new openings”. “Partly as a result of where we are opening, we can get the freeholds in the first place.” Around two third of openings in the year to date are freehold; the split was roughly 50/50 in H1 2013.
Hutson said the company is not noticing big changes in property prices in the areas it’s looking at, primarily outside major cities, and “good deals are available”. He said the leasehold market is “fairly benign”, with “not a lot of rent increases going through”. There’s “a lot of competition in pockets of the UK”, particularly London and surrounding areas, but the capital accounts for a “small proportion” of the estate.
“We are finding in general that rent reviews are pretty good for us,” said Hutson. “We are getting quite a lot for zero increases, for example.”
Wetherspoons pointed out that it has created more than 11,000 jobs since the start of the credit crunch, and now employs c32,000 people. It said more than 380 kitchen managers are going through its catering academy and a further 100 have already graduated. In addition, 310 employees have completed a Professional Diploma in Leisure Retail Management, and 70 managers have completed a degree. Staff retention is at its highest level ever, at over 10 years.
Changing sales mix
Wetherspoons has produced a chart showing that its food sales as a proportion of the sales mix have risen from 23.2% in 2003 to 29.4% in 2008 to 34.5% now. Over that same period, bar sales fell from 71.6% to 65.6% then 61.6%. Hutson said: ”Ten years ago, average gross weekly food sales were £6,000 per pub. they’re now over 12,000.” He pointed out that despite the fall in drinks as a proportion of sales, bar sales have risen from c£19,500 to £22,000 over the past 10 years.
Hutson pointed to CGA Peach figures that show Wetherspoons is the most visited pub and casual dining brand in the UK, on 43%, ahead of Pizza Hut in second on 31%. Hutson cited the “broad appeal of Wetherspoon as a casual dining destination these days”. It also claims to be Britain’s favourite big brand in the sector. A separate survey asked people which brand would be their first choice if they were all in the same location, and Wetherspoons came top on 12%, ahead of Nando’s and Harvester on 8% and PizzaExpress, Pizza Hut and Frankie & Benny’s on 7%. Meanwhile, 283 Wetherspoon pubs are in the Good Beer Guide and the company estimates that one in three of its pubs that are eligible are now listed in the publication.
Scores on the Doors
Nine out of 10 Wetherspoon pubs now have the maximum 5 rating under the Scoors on the Doors hygiene scheme. The average score across the estate is 4.88.
The group saw like-for-likes in the six weeks to 9 March grow 6.7%. “The last six weeks started off fairly strong, although they are flattered to a small extent by some poor weather at the same time last year,” said Hutson. “Bearing that in mind, and also the strong like-for-like sales last year, we think at this stage predicting 4% like-for-like sales for there year is more realistic, although we’d like to do a lot more than that if we can.” He pointed to the continuing investments and “very good profit performance” in the second half of last year. “Weighing all these factors up, we’re pretty satisfied about where we’ve got to this financial year, and we continue to expect a reasonable outcome for the financial year as a whole.”
Asked if consumers are finding things easier at present, Hutson said: “They are not getting better off, is the sense we get from our managers. Pub managers are bursting to put prices up if they can and they are not asking for prices to go up. It’s been pretty stable but it’s not an environment where people feel better off, from our perspective.”
Hutson said chairman Tim Martin has held meetings with ministers about the campaign to reduce VAT for the sector to 5%. Of that campaign, Hutson said: “No one is saying, ‘we think your basic argument is wrong’. What they are saying is we can’t afford to change it. But it’s not our job to work out for the Government how to fix a financial problem it may or may not create. It is our job, though, to point out that this tax rise is simply unfair.”
He added: “We’re not anticipating something in the Budget this month. But we think that the Government are starting to get used to the arguments that we’re making.”
Asked to identify Wetherspoons’ biggest challenge for the coming years, Hutson said: “We’ve always said in Wetherspoons that the biggest challenge is going out of fashion. It’s why we try very hard to confidently evolve the offer.” He gave the example of new craft beer lines being introduced, such as beers from Six Point Brewery in Brooklyn. “We’re doing other craft beers as well. Although it won’t be a sizeable part of what we do in the short term, it might be in the long term. that’s our job as good retailers to find things people want and present them to them at a price they can afford.”
Hutson said Wetherspoons will show the football World Cup this year; it has shown the tournament and every European Championship since 2004. It tends to have a “broadly neutral” impact on overall like-for-likes, but delivers a “much better performance” than having no TVs at all.
Lloyds Number One
Hutson said Wetherspoons is still opening Lloyds bars but “there aren’t many opening up”. It’s currently on-site with a Lloyds in Preston, Lancashire. He said: “Internally we don’t differentiate as such between Lloyds and Wetherspoons. If we see an opportunity for a site where we think it would do better with a bit of music then it trades as a Lloyds, but there’s not many of those.”
Simon French at Panmure Gordon reiterated his Buy recommendation and 875p Target Price. “Wetherspoons has announced H1 results slightly ahead of market expectations reporting £37.8m PBT (22.1p EPS) compared to consensus estimates of £37.3m PBT and our forecast of £37.2m PBT (22.1p EPS). The dividend has been held flat at 4.0p compared to our forecast of 4.0p.
”Current trading is robust with LFL sales up 6.7% over the last six weeks despite the tough comparative of 7.3%. The group continues to aim for a reasonable outcome for the year and we expect no material change to FY 2014E consensus forecasts of £78.6m PBT.
“The stock trades on a CY 2014E adjusted EV/EBITDAR of 8.7x and yields 1.6%.”
Douglas Jack at Numis also held his forecast, issuing an Add recommendation at a Target Price of 925p.
“H1 PBT is up 8.5% to £37.8m (we forecast £37.0m; no consensus), with LFL sales up 5.2%, EBIT margins down 16bps and earnings up 11%. With recent LFL sales up 6.7%, we are holding our full year forecast (PBT £77.4; consensus £78.5m) and Add recommendation, which reflects earnings growth and assumes no further re-rating.
He said the company’s full-year like-for-like assumption of 4% “appears conservative against LFL comps of 6.3% in Q3 and 3.1% in Q4”.
“Our 8.2% full year margin forecast is in line with guidance. Net cost inflation is running at 3%, but investment in IT, repairs and labour has increased ahead of a step up in expansion, hence full year margin guidance (8.1-8.3%) is c.50bps down on last year (8.7%). Management focus remains on sales, profits and earnings, rather than margins.
“The introduction of free coffee refills and extended food trading hours in Q2 has added to the short-term drag on margins through higher labour costs. Management told us in January that if the National Minimum Wage rises by “inflation and a bit” (which it will), the additional cost can be absorbed.
“Twenty new pubs have opened during the first 32 weeks, with 40-50 expected to open over the full year. Of these, 65% of sites should be freehold (vs a 44% company average). As a consequence of this, faster expansion and a negative working capital movement, net debt should increase by c.£70m this year. Despite this, interest costs should fall from next year due to maturing swaps (2015E benefit: £5m).
“The shares are on a 16% EV/EBITDA premium relative to their historic average, vs a 14% premium for the sector. Our 925p target price, equivalent to 16x P/E on 2015E’s earnings, assumes a slight de-rating over the next year. In our view, this is cautious given that growth prospects are improving due to benign cost pressure, improving consumer confidence, faster expansion and falling swap costs.”