Demonstrating that it can stabilise margins will be key for JD Wetherspoon going forward, according to leading sector analyst Geof Collyer.
Ahead of the company’s trading update on Wednesday, Collyer, of Deutsche Bank, said: “It has been a more than usually volatile year for JDW. We started the year off requiring c.2% lfls to stand still and are now looking for around 4-5% lfls for the full year and +8.3% total sales to deliver broadly flat (+1.3%) EBITA.
“This dynamic remains the enigma of JDW. Going back to the bank refinancing in March 2010, JDW’s margins have fallen from 10.01% to our forecast of 8.43% for FY’13E, and although the total sales have risen by 30% over the past three years, EBITA has only grown by 9% despite 16% more pubs trading.
“We think the group must begin demonstrating margin stability to persuade investors to buy into the longer term growth profile. Without margin stabilisation forecast upgrades will be difficult and the market may be disappointed by potential downgrades to the consensus view.”
He added: “We have +2% lfls in Q4 vs. +6.1% in Q4’12, which was the start of the group’s extraordinary run of strong lfls and little profit growth. Given the final arrival of the British summer, this could to be a little conservative. For the year, we have +4% lfls but margins -58bps, leaving EBITA barely ahead despite 8% top line growth. Our EBITA for FY’13E is £2m below consensus (or 2%). Our EBITA margin is c.25 bps below consensus.
“Maybe the best news this year would be a return to lfl profits growth - something not seen since 2007.”
Collyer said discussions about Wetherspoons stepping up its rollout “is important for cash flow in a business that benefits from negative working capital”. “We estimate that there is a positive cash inflow of c.£100k for each new pub opened.”
