Pubs group JD Wetherspoon (JDW) reported a rise in like-for-like sales of 7.6% for the 13 weeks to 28 April. That might strike some investors as pretty decent given the sustained pressure on consumer spending in the UK.
But investor concerns are growing over intense competition and operating costs pressures. This was illustrated by today's 4% decline of Wetherspoon shares to £12.90, its biggest one day slump for five months.
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Brexit-backing chairman Tim Martin remains confident of a ‘trading outcome for the financial year in line with our previous expectations,’ but not everyone seems so sure.
COUNTING THE COST
Analysts appear concerned with anticipated single-digit declines in pre-tax profit and the end of share buybacks, which have provided a useful prop for earnings and the share price in the past.
Yet it is long-standing cost headwinds that arguably present the biggest challenge to Wetherspoon's business model, particularly minimum wage increases. The company appears to have few practical cost mitigation levers to pull and limited scope to raise prices.
Pub development costs are also rising fast, Wetherspoon highlighting in its last annual report a 22% rise to £2.8m to get a new pub (excluding freeholds) into the estate versus the previous year.
Since the start of the year the company has opened three new outlets and closed seven. It expects to open two more pubs in the current financial year.
BUYING OVER RENTING
Wetherspoons has already invested £70.9m this year (to end July 2019) in buying the freeholds of properties where it was previously a tenant. That provides asset backing but pushes borrowings higher. Net debt stood at £746m as of 28 April, although the company expects this to decline to around £740m by the year end.
Consensus data from Reuters calls for Wetherspoon to post a £102.3m pre-tax profit this year on roughly £1.8bn revenue.
