JD Wetherspoon sales slow in second half after short-measure of interim profits

13th Mar 2015 07:07

As it announced cheaper breakfasts and free-refill coffee campaign to capture a fuller slice of the morning trade, JD Wetherspoon served up a slightly short measure of first-half profits and revealed sales began to slow in the second half.The FTSE 250-listed pubs group said profit before tax and exceptional items fell 0.9% to £37.5m as cost pressures outweighed a 9% rise in revenues to £744.4m for the 26 weeks ended 25 January, towards the lower end of expectations.Increased competition and increased pay and bonuses for staff saw the operating margin of 7.4% fall versus the 8.1% in the same period last year but slightly ahead of prior guidance of 7.3%.Diluted earnings per share were ahead by 2.3% to 22.6p, reflecting the share buyback programme and a lower tax rate, while the interim dividend was only kept flat at 4.0p.On a like-for-like basis sales frothed up 4.5% in the first half but in the six weeks since this slowed to just 1.6% growth, with total sales increasing by a lesser 5.6% in the same period.Chairman and founder Tim Martin explained that the second half of the prior year last financial year was strong, "which will make it difficult to improve on that performance in the current year, although we expect a reasonable outcome for the full financial year, even so".Martin plans to open 30 sites this year, which is at the lower end of prior guidance of 30-40, which could result in the City downgrading its full year forecasts.Margins are likely to be squeezed further in the second half, he implied, as marketing and labour costs "may be higher than anticipated" as a result of new coffee and breakfast campaigns."The company has successfully established a strong coffee and breakfast trade in recent years, selling approximately 50m Lavazza coffees and teas per annum and about 24m breakfasts - more breakfasts (according to research by CGA Peach) than are sold by Caffè Nero or Pret a Manger," he explained, as part of a plan to triple coffee and breakfast sales over the next 18 months.More competitive prices to be introduced from Wednesday 18 March, include more competitive prices for breakfasts and offering Lavazza filter coffee, with free refills, at 99p or under until 2pm daily at almost 900 pubs.Broker N+1 Singer downgraded the shares from 'hold' to 'sell', as the outcome was towards the lower end of profit and earnings expectations and "tellingly" dividend is held flat.With sales momentum having further slowed and on the other negatives in second-half prospects, it sees mid single-digit downside risk to full year consensus profit before tax (PBT) "and no evidence of margin/profit stability".Broker Shore Capital lowered its full year PBT forecast by £1m and also sees further downward pressure on profit and earnings forecasts as management continues to espouse a market share gain strategy over and above maintaining margins."We continue to believe that JD Wetherspoon will be one of the eventual winners in the sector. However, with little confidence over forecasts we retain our 'hold' stance on the stock and see better value elsewhere."