Annual sales could hit a new high after a record Easter and tailwind from May bank holidays, but margins are wafer thin. Our head of markets assesses prospects.
Wetherspoon (J D) (LSE:JDW) has now fully recovered to pre-pandemic levels of trading, but the group is acutely aware of some of the scars which the lockdowns caused.
In typically forthright fashion, comments accompanying this update issued ahead of annual results on 6 October, question the validity of those lockdowns. They also take the opportunity to dispel some of the myths surrounding its business, such as the fact that its lower prices do not equate to lower quality.
In addition, it refutes the assumption that its customers are usually towards the lower end of the earnings spectrum, quoting research indicating that its customers are on average earning more than the typical pub customer.
Despite the clear damage wrought by the pandemic, Wetherspoons has weathered the storm and is now returning to a more robust financial position. Of particular note is net debt, which currently stands at £688 million, a significant improvement from the level of £920 million in the year previous.
Perhaps even more tellingly, this level of debt is also £114 million lower than pre-pandemic and, with access to funding of £289 million if required, the group is well-positioned to kick on from here. A return to the payment of the dividend may still be some way off as the finishing touches are made, although there have been other developments which could accelerate any such decision.
The group had previously reported that the sale of a number of interest rate swaps had raised £169 million before tax. In addition, a revision to the pub estate raised £6.5 million, with three new pubs opened in the year to date, but with 28 closed for any number of reasons, such as the expiry of the lease. The group also points out that in the majority of cases, any closures were offset by the fact that another Wetherspoons outlet was available nearby. In the meantime, 22 pubs are either on the market or under offer as the group continues its monitoring of the 827 pub trading estate.
Current levels of trading are moving at a brisk pace, with a record Easter week and a tailwind from the May bank holidays potentially leading to new highs for full-year sales. In the first 10 weeks of its final quarter, like-for-like sales rose by 11.5% and are ahead by 12.9% in the year to date. By way of comparison, the group highlights that these numbers are also 11% and 7.4% respectively above pre-pandemic levels.
While sales may have returned to something resembling normality, the pressure on margin and profit is a rather different story. Wetherspoons had previously noted “ferocious” inflationary pressures, particularly in regard to energy, food and labour, resulting in some wafer-thin operating margins. In terms of outlook, the group is maintaining its current profit forecast to be in line with market expectations, but is also confident of a better result next year, with a reduction to energy costs likely to be of immediate benefit.
From a broader perspective, the economic outlook for the UK is another potential headwind. Wetherspoons has been able to pass on some of the inflationary costs without threatening its appeal, but equally it will be mindful that this particular strategy needs to be reigned in where possible in order to maintain its no-nonsense and no-frills value offering.
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Sales may have recovered to pre-pandemic levels, but the subsequent headwinds which have battered Wetherspoons leaves the share price almost 60% below the time when lockdowns were initially announced. Some progress has been made of late, although despite an increase in the price of 49% year-to-date, the shares are ahead by just 6% over the last year, which compares to a decline of 3.8% for the wider FTSE250 index.
Similar to its margins, prospects for the group remain finely balanced, with the market consensus of the shares suggesting some caution in the nearer term, and coming in at a 'hold', albeit a strong one.
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