M&C Report takes a closer look at the full-year results for JD Wetherspoon and reports from a results presentation featuring chairman Tim Martin, chief executive John Hutson and finance director Kirk Davies.
Results
Following this morning’s annual results announcement, Davies described the company’s like for like sales performance of +5.8% in the year to 28 July as “reasonably good”.
Like for like food sales were up 10.9%. bar sales up 3.8%, and machines take up 0.4%, stabilising two years of 3%-4% declines.
Martin said: “Our like for like sales are up 17% since the smoking ban in 2007, but our like for like profits have been flat over that time. It shows what you have to do just to stay where you are in the pub business. You’ve got to run very fast indeed to stay where you are.
“We’ve done pretty well, we think, considering the industry itself is under threat from an unsustainable tax regime.
He added: “We’ve increased sales, but we haven’t always increased margins. It’s hard to move up like for like profits unless you have tax parity.”
The company announced record earnings per share pre-exceptionals (46.8p), which Martin said is “up 60-odd per cent since 2007”, adding: “Look at this figure for other pubcos and they would be down. Wetherspoons has done better than most.”
But while earnings were up operating profit margin has dropped from a peak of 10.7% in 2007 to 8.7% this year (down from 9.0% last year). Davies noted that this is “driven by increase taxation pressures, business rates increased significantly and machine gaming tax. And increase bonus payments - £28.1m in the year.”
Food and drink price inflation also eroded margins - drinks up 3% linked to CPI and food up 4% linked to commodity price increases.
There were property impairment charges of £15.5m across 30 of the company’s 886 sites, and a decrease in capital expenditure year on year (£102m vs £121m) as the company reduced its pub opening programme from 40 last year to 29 this year.
A new deal with its banking syndicate provides Wetherspoons with facilities “upsized from £555m to £670m”.
The dividend was “held flat” at 12p to allow for capex opportunities. Wetherspoons has £65m allocated for 30 new openings this year, and £50m for improvements including toilet refurbishments, additional kitchen equipment and improvements to beer gardens and hotel rooms across its 26 pubs with rooms.
Expansion and growth
Martin said: “There are lots of towns we’re not in yet and still good opportunities for us in the future. We’ll create more jobs and more places people can have breakfast and a cup of coffee where they currently can’t.”
Size isn’t everything for Wetherspoons, and chief executive John Hutson professed himself happy with the performance of the pub with the smallest local population - just 3,000 people in Perranporth, Cornwall - before adding that the town does have a beach and tourist trade.
Hutson confirmed that Wetherspoons’ first motorway pub will open in January, on the M40 at Beaconsfield, but he revealed that the company is not yet rushing into more. “We’ll do that first and then see about doing others.”
And Davies added that pubs with rooms remain attractive. “It makes sense when you get a knock-out site in a market town or when you have unused space above a pub.”
Following Wetherspoons’ planned move into the Republic of Ireland, where it is aiming for “three or four quickly if we can get the sites”, Martin is considering whether the company could open in other countries with more attractive tax regimes. “We could try one country, like France, but it would be a huge effort and the risk is that you get distracted. History is against us opening abroad.”
He added: “We had a close look at France 10 or 12 years ago and identified sites in Lille, Calais and Dunkirk. When people asked: ‘Why Dunkirk?’ I said: ‘Because we can f*ck off quick if it all goes wrong!’ But we decided Northern Ireland was challenging enough across the sea.”
Tax
Martin’s favourite subject got a good airing at the journalists’ briefing. He said: “When Warren Buffett was asked: ‘When will you retire?’ he said: ‘Five years after I die.’ It might be the same for me on VAT.”
Tax now costs Wetherspoons £632k per pub, and Martin joked: “It can only be a matter of time before the three of us [himself, Hutson and Davies] are knighted for our magnificent efforts on behalf of the country. But don’t hold your breath!
“We like to pay taxes, we love it in fact. It’s a good thing to do. We actually aspire to pay £1bn. But we think we should pay the same VAT as supermarkets.”
He said the Government gets about a pound in taxes and a pound spent on salaries for every pint sold in a Wetherspoons pub, adding that beer sold in supermarkets accrues no such benefits.
Martin said: “Eventually it will be a decision for the country.
“Fifteen per cent of pubs have closed and pubs are selling 50% less beer. It’s a real shame when you get villages with no pubs. Spend any time in a Swedish town with no pub and you’ll know how dull it can be if you can’t escape the missus.
“It’s not happening quickly enough for people to panic - not like a car factory shutting down, but the impact is just as great.”
Martin revealed the impact of higher taxes on Wetherspoons’ customer demographic. “We’ve lost quite a lot of pensioners and students. A lot of students now bypass the pub. The tax regime is forcing a change in habits and that’s a problem for the country. People haven’t changed, it’s the price differential [between pubs and supermarkets] that’s stopping them going to pubs, and it will be hard to win them back.”
The changing sales mix at Wetherspoons
Martin revealed: “Coffee and tea together are now bigger than any other line, and Pepsi is our second biggest draught product.”
He added: “In 1992 we had average sales of £11.5k per pub and food was 10% of that, so around £1k per week. Now it’s one third of £34k, or £11k per week per pub. So that’s a huge increase in food sales.”
Hutson admitted: “We’ve never had a debate about where food should be [in terms of percentage of sales].” But he revealed that in some pubs it’s more than 50%. In Fort William it’s 75%, in Louth (Lincolnshire) it’s 70%, and it’s 50% across north Wales.”
Martin referenced recent Peach Brand Track consumer research that showed Wetherspoons was the most popular brand (versus Nandos, Harvester, Frankie & Bennies, Pizza Express and Pizza Hut). “That was a surprise to many people - including some of us at Wetherspoons!” he said.
“But we’ve been upgrading all the items on our menu under our EIBIC initiative: ‘Every Item Best in Class.’ Coining that phrase has really resonated in the company.” Though he insisted: “We still look out for better deals if the quality is the same,” citing the company’s decision to stock Monster Energy drinks instead of Red Bull, “who sponsor too many F1 teams”.
Martin added that other “independent and objective analysis” pointed to Wetherspoons’ appeal, including loo of the year awards, the Good Beer Guide and hygiene certification. “Scores on the doors is a good proxy for standards. We’re by far the top pub company for hygiene [averaging 4.86 out of 5, with 87% of pubs achieving 5 out of 5].”
Staff, training and development
Despite the recent controversies around its use of zero-hours contracts, Wetherspoons claims it is enjoying record high levels of staff retention and record low levels of staff turnover. Average length of service among managers is now nearly 10 years.
The company paid out £28.1m in bonuses in the financial year, with 83% of this amount going to pub staff - half to salaried staff (managers) and half to staff on “flexible contracts”. Martin said this - paid monthly - is worth around 10% of salary to managers and around 5% of earnings to hourly-paid staff.
And he claimed that this scale of reward is “up there with John Lewis”.
Wetherspoons launched a new catering academy in 2013, and already 185 employees have graduated. Some 1,250 Wetherspoons employees are on apprenticeship programmes, 310 employees have completed Leeds Metropolitan University’s Professional Diploma in Leisure Retail Management, and a further 70 managers have completed its degree programme.
Analysts
Simon French at Panmure Gordon reiterated his Buy recommendation and 806p Target Price.
He said: “Wetherspoons has announced FY 2013A results in line with expectations reporting £76.9m PBT (44.8p EPS) compared to consensus expectations of £76.2m PBT (45.5p EPS) and our forecast of £75.8m PBT (45.4p EPS). Current trading is stronger than expected with LFL sales growth of 3.6% in the six weeks to 8 September compared to our estimate of 2% and a very tough comp of 8.4%.
“The group says it is aiming for a reasonable outcome for the year. Therefore we expect no change to FY 2014E consensus forecasts are for £80.7m PBT (49.7p EPS). The stock trades on a CY 2014E adjusted EV/EBITDAR of 8.0x compared to the sector on 9.3x including MAB on 8.2x and RTN on 9.5x.”
Douglas Jack at Numis increased his Target Price to 815p and reiterated his Add recommendation. “Excluding 2012’s 53rd week, PBT is up 8.8% to £76.9m (we forecast £76.5m; consensus £75.3m), with LFL sales up 5.8% and EBIT margins down 28bps to 8.7%.
“The 3.6% increase in early 2014E LFL sales is slightly better than expected; we are holding our forecasts, which we believe are based on reasonably cautious assumptions, and raising our target price to 815p to reflect greater upgrade potential.
“We are holding our consensus-in-line 2014E forecast which assumes LFL sales rise by only 1.5% and margins fall 25bps, both below management’s guidance. We believe there is upside to our and consensus forecasts as margins should benefit from a boost to machine income (70% margin; accounting for c.27% of EBIT) after maximum prizes rise to £100, from £70, in November.”
James Hollins at Investec reiterated his Buy recommendation and 750p Target Price.
“In our view, Wetherspoon remains the standout quality pub operator in the sector, with attractive assets, dependable returns and a sensible roll-out programme that is forecast to drive a double-digit mediumterm CAGR in earnings.
“Our forecasts and PT go under review post-results, although we do not expect material changes given the outlook statement and retained guidance of 30 new pub openings in FY14.”
