Analysts have highlighted “disappointing margins” in Wetherspoon’s Q1 results, which showed like-for-like sales up but slower growth in October.
Doug Jack, of Numis, said he was raising the lfl sales forecast to 4.0%, from 3.5%, but cutting margin forecast to 7.6% from 7.9% to reflect higher costs.
He said: “The net result is a 4% reduction in PBT and earnings forecasts. We still forecast a 12% earnings CAGR over the next three years.
He added: “LFL sales rose 6.3% (vs. 3.7% comp) during the 13 weeks to 26 October, ahead of our revised 4.0% full year forecast assumption and also ahead of the managed pub sector. LFL sales were “good” through August and September, but slowed in October. LFL sales comps now become tougher, increasing to 6.0% over Q2-4.
“JDW’s beer price discount to the rest of the sector has risen to 16.9% from 14.5% over the last three years. If that were reversed (adding 6.6p to the price of a pint), without any impact on volumes, we estimate PBT would receive a £10m (11%) boost, however, ‘the key focus for management is how we grow sales’.”
Simon French at Cenkos described the figures as a “weak Q1 IMS”. He said: “The group is aiming for a satisfactory outcome for the year but we think consensus will move down c7%. The statement amplifies all the concerns we flagged in our Sell initiation note yesterday.”
Mark Brumby of Langton capital said: “JDW has said consistently that margins are what happen after you’ve done your job (which is driving sales) and shareholders should have taken that on board.
“There will be some observers, however, who are of the view that margins (in some circumstances at least) are what you make them. This could be frustrating for supporters who have been told that margins are bottoming out more than once in the recent past. The group is raising barriers to entry by keeping its prices low and by paying attractive rates to its staff – but, whilst the costs are immediate, the benefits are not.
“Longer term, we are expecting to see the group open around 40 units per annum for the foreseeable future and it has shown itself willing to buy back shares.
“JDW is a superlative operator and, though hardly cheap, its shares do not look unduly expensive at c15.4 earnings with a yield of 1.5%. Having said that, the group has once again managed to disappoint on margins and the shares could come under downward pressure today. Any material weakness may present a buying opportunity.”
Warren Ruhomon, a senior market analyst at finspreads.com, said: “The first thing that catches the eye is operating margins are expected to be in the range of 7.2%-7.8% in the current financial year, compared with 8.3% same time last year.
“This is slightly disappointing and goes to the heart of major concerns about the business—it’s aim of adding as many as 50 more pubs over the next 10 years , on top of the 900 it has already, could further undermine profitability even though revenues will naturally expand.
“Gross margin looks to have contracted by about 2% over last 4 years even though like-for-like sales are up almost 20%.LFLs were +6.3% in the half year to October. These numbers, once again reveal no obvious nasties in the beer, but we think queries about the level of froth will continue to increase.”
