Wetherspoon's trading reverse prompts another rant

9th Mar 2012 07:06

Interim results from JD Wetherspoon left a bitter taste in shareholders' mouths as the fast growing pubs group revealed a surprise reverse in like-for-like (LFL) sales for the current year.Total sales in the six weeks to March 4th were up 6.1% on the corresponding period of 2011, but that number is boosted by contributions from pubs recently added to the group's estate. LFL sales over the same period were down 0.6% year-on-year, a sharp turnaround from the preceding six-month period, when LFL sales grew 2.1%. Peel Hunt has forecast LFL sales growth for the six-month period of around 2.5%, while Panmure Gordon had expected current trading to be flat on a LFL basis.Tim Martin, the straight-talking Chairman of JD Wetherspoon was unusually restrained in his description of current trading as "disappointing".The group has previously flagged that operating profit margin before exceptional items is expected to decline in the second half of the group's financial year but the bad news is that the group is now "slightly more cautious about the potential outcome for the current financial year" as the outfit struggles with continuing cost increases.While the view through the front window is looking less rosy, the picture in the rear-view mirror was better (in places) than some market observers had expected. Revenue in the 26 weeks to January 22nd rose to £569.4m from £525.4m the year before. The group is clearly struggling to maintain its previously breakneck growth in food sales. LFL bar sales in the six-month period rose 3.4% year-on-year, having risen 0.6% in the corresponding period 12-months earlier, but LFL food sales were up just 0.1% (+7.4% a year earlier), while revenue from gaming machines fell by 3.8%, the same as the year before. Profit before tax but after exceptional items edged up to £33.2m from £32.2m a year earlier. With exceptional items (relating to an information technology-related asset write-down) stripped out, profit before tax increased by 11.1% to £35.8m from £32.2m the year before, topping forecasts from Panmure Gordon (£33.9m) and Peel Hunt (£34.7m).Earnings per share (EPS) were also above some brokers' expectations at 20.2p, up 22.4% from 16.5p at the interim stage last year. Panmure Gordon had predicted EPS of 18.1p, Peel Hunt 18.7p and Charles Stanley 17.9p.The interim dividend has been maintained at 4p, but here there is likely to be disappointment; Panmure Gordon had pencilled in a figure of 4.2p.Margins have been a major concerns of the brokers following the stock, given the aforementioned cost increases. The operating margin before exceptional items was slightly lower at 9.3% (2011: 9.4%). Costs increased in several areas, especially in taxation, but also in labour, utilities and bar and food supplies. The operating margin after exceptional items was 8.9% (2011: 9.4%).Martin seems reasonably stoic about most of those cost increases but what gets his dander up is what he sees as the unfavourable tax treatment pubs get versus supermarkets.Just as it is usually unwise to interrupt a ranting pub customer when he or she is in full flow, the company's latest missive on the subject is reprinted verbatim, below:"The company is concerned by the absolute level of taxes and by their continuing increases, especially since supermarkets pay virtually no VAT [value added tax], in respect of food purchases, while pubs pay 20%, in effect creating an enormous tax boost for supermarkets, enabling them to cross-subsidise drinks prices. Since VAT was increased from 8% to 15% over 30 years ago, and following further more recent increases to 20%, the pub industry has increasingly struggled to compete. Over that period, pubs have lost approximately half of their beer sales to supermarkets," the statement noted."This tax, and hence price, disparity has been felt more acutely in less-well-off areas of Britain, where price disparities matter more - and the number of closed pubs in these locations is clearly evident. This, undoubtedly, has a knock-on effect for other businesses in small towns and secondary shopping centres, contributing to closed shops and reduced economic activity," the statement continued."As well as generating large amounts of tax, pubs create large numbers of jobs, far more per pint or meal than supermarkets do, so the current tax subsidy makes no economic sense."The situation is exacerbated for pubs by the recent huge increases in excise duty (the tax paid on alcoholic drinks) in recent years, meaning that excise duty in this country is far higher than that in France, for example, with adverse consequences for tourism and the economy generally."Punitive excise duty increases are often justified by the erroneous argument that they discourage binge drinking by raising consumer prices. In fact, the opposite has occurred: as pub prices go up, following duty increases, customers turn to supermarkets, decreasing the average price which consumers pay for drinks."It is now widely perceived that the previous and current governments' attempts to control binge drinking by a 'crackdown' on pubs have been misconceived and counter-productive. Pubs are not perfect, but generally try to create a supervised and civilised environment for drinking, usually preferable to streets, parks, parties and homes. The government needs to end the supermarket tax subsidy and to aim for excise duties to match the European average," the group said.There ends the party political broadcast on behalf of the Pubs Party, ahead of the Budget on March 21st ...Switching back to the numbers in the results, there have also been misgivings in broking circles about the group's ability to finance its expansion plans, but the debt situation is holding reasonably steady. As at 22nd January 2012, the company's net bank borrowings (including finance leases) were £456.6m, an increase of £18.9m, compared with the previous year end (24th July 2011: £437.7m). The debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) ratio was 2.99 times at the period end, compared with 2.98 times at the previous financial year end.Just in case the Chancellor of the Exchequer does not get the message, however, the group said it is reducing the number of new pubs it plans to open this year to around 40, down from previous guidance of 50, and said it would review its plans for pub openings in future financial years, "taking account of our concerns for the tax régime." The Chancellor, George Osborne, heir to the Osborne baronetcy, probably does not spend a lot of time in Wetherspoon outlets but he probably does not spend a lot of time in Tesco supermarkets either, so he may well take Martin's hint. Trading in the company's shares was volatile in the first half-hour of the morning session, with the shares slumping to 371p at one point from 403.6p overnight, before recovering to 398p at 8:30am.jh