M&C Report takes a closer look at JD Wetherspoon’s full year results, including financial trends, taxation, expansion, operational restructure, food, calorie counting and margins. Financial trends The group laid out the financial trends it has seen across its estate over the last 10 years. Comparing 2003 to 2012, sales per pub had grown from £1.1m to £1.4m, however EBITDA had fallen from £201,900 to £194,900. Average sales per pub week stood at £24,700 and had grown to £32,300. The group now operates 860 pubs against 635 in 2003m with freeholds now accounting for 44% of its estate, up from 42% 10 years ago. Average size of its openings stood at 3,721sq ft in 2003 and now stands at 3,325sq ft as the group enters smaller towns and city suburbs. The number of openings stood at 45 in 2003 and 40 in 2012, it is expected to be 25 in its current financial year. The cost of an average freehold in 2003 stood at £511k in 2003 and now stands at £639k, down from £825k in 2011. Average development cost in 2003 was £1.3m and now stands at £1.42m. Average cost per sq ft in 2003 was £354 this year it was £427. Population within two miles of a Wetherspoon pub stood at 73,000 in 2003 and now stands at 39,000, down from 54,000 in 2011. Performance The group reported a 3.2% increase in like-for-like sales for the year but a 2.2% decline in like-for-like profits (+7% in 2007). operating margin slipped from 9.5% to 9%. It said that pressure on like-for-like pub profits had come from increased costs and taxes. The group took a £7.8m writedown on its estate during the year and a £2.2m hit on onerous leases. It also wrote off £1.74m on IT related assets. Tax Tim Martin, chairman, said: “As we have previously indicated, the pub trade has lost 50% of its beer sales, for example, in the last 30 years, to supermarkets. We believe that supermarkets have been increasingly able to undercut pubs' prices, as a result of the tax disparity between these types of business. In particular, pubs pay 20% VAT in respect of food sales, while supermarkets pay virtually nothing. This enables supermarkets to cross-subsidise their alcoholic drinks' prices, resulting in large numbers of pub closures and also applying enormous pressure to those pubs, which remain open. “We believe that the government has accepted that banks, manufacturers and many other businesses need to remain competitive, both domestically and internationally. The tax régime has often been cited as an important factor, by the prime minister and the chancellor of the exchequer, for example, in gaining a competitive advantage for the nation. In this regard, pubs need a level tax playing field with supermarkets, in order to be able to compete effectively in the long run. Unless there is tax equality, pubs will continue to lose trade to supermarkets - and this will be detrimental to the government, since pubs pay far more tax per meal or per pint, and employ more people, than do supermarkets. “In addition, the government continues to impose stealth taxes on the pub industry. Changes to fruit/slot machine duty, recently announced, will cost Wetherspoon an extra £2m per annum, while the so-called late-night levy, which applies to pubs, but not supermarkets, will result in Wetherspoon paying an extra £2m in tax, in order to be able to open between midnight and 1am, once or twice per week, at the majority of our pubs. “All pubs and pub companies are, or should be, happy to pay their share of tax, but the pub industry has been fleeced by the government, in the last decade and a half in particular - resulting in fewer jobs and lower taxes, but more supermarkets, in the UK.” Operational restructure The group incurred an exceptional item of £600k during the year due to an operational restructuring which saw it streamline its management structure. It reduced its number of general managers from 12 to six as t looked to make its systems more efficient and transparent. Food Wetherspoon will add full calorie counts to its new menu in pubs from 17 October. Calories were listed for its healthier dishes in the spring/summer menu. “We have been working hard to reduce calories and add more healthy options since earlier this year and this was the natural next step,” said senior food development manager Jameson Robinson. “There are a few additions to the menu and several improvements to existing dishes, along with two new curries for the curry club.” During the year, it introduced a catering academy, “so that kitchen managers benefit from several days' off-site training”. The group said it was selling record numbers of breakfasts, teas and coffees, with virtually all of its pubs now open from 8am, seven days a week, and a significant number opening even earlier. Analyst reaction Douglas Jack at Numis said: “Full year PBT, up 8% to £72.4m, is ahead (we forecast £69.4m; consensus £69.2m). LFL sales are up 8.4% in early 2013E, but management believes the underlying rate is 2-3% excluding the summer’s one-off events. “With expansion being cut to 25 new sites, we forecast cash flow to be neutral in 2013E. We are increasing our forecasts by 4% which assume that LFL sales rise 2.5% and that margins are stable despite increasing costs and promotional activity. 2013E could be the first year in six years that LFL profits do not fall. “Subject to which metric, JDW’s valuation and gearing are broadly in line with its 10-year historic average. Compared to 2012, which was a 53-week year, growth guidance is lacklustre despite the recent surge in LFL trading. Strong recent LFL sales should drive the shares higher; but we would not buy aggressively into strength: margin pressure should resume when normal trading conditions resume.”