- Wetherspoons yet to fully recover from Covid
- Rail strikes and bad weather crimped recent sales
- Chairman Tim Martin remains ‘cautiously optimistic’
Shares in iconic pubs chain JD Wetherspoon (JDW) weakened 2.3% to 468p despite the hard-pressed company serving up the news first half like-for-like sales were strongly ahead of last year’s Omicron-marred festive period.
Unfortunately, Wetherspoon’s sales continue to languish below pre-Covid levels as the cost-of-living crisis continues to bite, while inflationary pressures continue to build for the Tim Martin-chaired pubs group.
RAIL STRIKES AND BAD WEATHER DAMPEN SALES
In the 25 weeks to 22 January 2023, JD Wetherspoon’s like-for-like sales were 13.1% above the same period a year ago, but on a three-year view, sales were 0.7% below the same period immediately before the pandemic.
The FTSE 250 constituent said like-for-likes in the last 12 weeks were 17.8% higher than 2021’s Omicron-impacted Christmas period, yet still 2% below pre-pandemic levels, which disappointed investors.
Rail strikes and recent bad weather have hurt sales at JD Wetherspoon, which also has exposure to metropolitan centres and has yet to see sales fully recover from the pandemic.
By way of contrast, rivals Marston’s (MARS) and Mitchells & Butlers (MAB) recently reported revenues ahead on a three-year view.
Wetherspoons also tends to attract middle to lower income earners because of its value proposition. They are being harder hit by the rising cost of living and so cutting back on a pie and pint might be necessary to keep paying the bills.
COSTS EATING INTO MARGINS
‘As has been widely reported, costs in the hospitality industry are far higher than the pre-pandemic period, especially in respect of labour, food, energy and maintenance,’ bemoaned JD Wetherspoon.
Following the £170 million cash benefit from the sale of interest rate SWAPS, the company said first half free cash flow is expected to be substantially ahead of profits however.
TIM MARTIN FLAGS SUPERMARKET THREAT
Chairman Tim Martin said he is ‘cautiously optimistic’ about JD Wetherspoon’s prospects for the financial year, but also warned ‘the biggest threat to the hospitality industry is the vast disparity in tax treatment between pubs and restaurants and supermarkets.’
The latter pay zero VAT in respect of food sales, whereas pubs and restaurants pay 20%. ‘This tax benefit allows supermarkets to subsidise the selling price of beer,’ complained Martin.
‘We estimate that supermarkets have taken about half of the pub industry’s beer volumes since Wetherspoon started trading in 1979, a process that has likely accelerated following the pandemic. Pub industry directors have, in general, failed to campaign for tax equality, which is an important principle of taxation.’
He warned that ‘unless the industry campaigns strongly for equality, it will inevitably shrink relative to supermarkets, which will not help high streets, tourism, the economy overall, or the ancient institution of the pub.’
EXPERT VIEWS
Shore Capital’s Greg Johnson has a ‘hold’ rating on JD Wetherspoon, seeing ‘downside risk’ to full year forecasts after the disappointing first half performance, given his concerns over its ‘proposition, estate location and customer demographics. We see better value elsewhere across the sector.’
AJ Bell investment director Russ Mould commented: ‘What is damaging for Wetherspoons is that trading is still behind where it was pre-pandemic. Wetherspoons has always had a model of prizing volume over margins, so when you consider how fast costs are rising it is not surprising profitability is under pressure.
‘Outspoken chair Tim Martin points to the threat posed by supermarkets, with people buying booze in stores and drinking at home - a situation he notes is exacerbated by the disparity in tax treatment.
‘Barring some kind of concession by the government, all Wetherspoons can do is redouble its efforts to make its venues appealing places for people to visit, rather than just somewhere to buy relatively inexpensive drinks.
‘A pub’s role goes beyond just a venue for drinking - after all there’s not much company to be found sat on your living room sofa.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Martin Gamble) own shares in AJ Bell.
