ii view: Wetherspoon forced to swallow bigger costs

First-half results to 26 January

• Revenue up 3.9% to £1.03 billion
• Adjusted pre-tax profit up 58.2% to £41.3 million
• Pre-tax profit down 8.6% to £32.9 million
• Net debt of £703.5 million, up from £664.8 million
• Interim dividend of 4p per share, compared to no payment a year ago

Chairman Tim Martin said:

"Increases in national insurance and labour rates will result in company cost increases of approximately £60 million per annum, which amount to approximately £1,500 per pub, per week.

"Since labour costs are around 35% of the pub industry's sales, compared to around 11% for supermarkets, increases of this nature inevitably have a disproportionate impact on pubs, exacerbating the already-wide price differential for customers between the on and off-trade.

"The combination of much higher VAT rates for pubs than supermarkets, combined with increased labour costs will weigh heavily on the pub industry.

"The company currently anticipates a reasonable outcome for the financial year, subject to our future sales performance."

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ii round-up:

Began in 1979, Wetherspoon (J D) (LSE:JDW) today operates 796 pubs across the UK and Ireland with some also offering hotel accommodation.

Headquartered in Watford, Hertfordshire, it employs over 40,000 people.

For a round-up of these latest results announced on 21 March, please click here. 

ii view:

Coming to the stock market in 1992, Wetherspoons is known for converting unconventional premises such as former cinemas and banks into pubs. The FTSE 250 company competes against rivals such as All Bar One owner Mitchells & Butlers (LSE:MAB), Fuller Smith & Turner Class A (LSE:FSTA), Marston's (LSE:MARS) and Young & Co's Brewery Class A (LSE:YNGA). 

Headed by founder Tim Martin, the pub operator’s estate peaked at 955 in December 2015. Management, relatively recently, hinted at a possible return to 1,000 pubs. Bar sales over the 2024 financial year accounted for its biggest slug of revenues at 57%, followed by food at 38%, slot and fruit machines 3% and hotel accommodation most of the 2% balance. 

For investors, increased staff related taxes following the government’s 2024 Budget now see the pub operator facing around £60 million of additional costs. The operating profit margin before exceptional items fell to 6.30% from 2024’s 6.83%, largely due to higher labour and utility costs. Group net debt rose, while corporation tax has increased from 19% in 2019 to a current 25%.

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More favourably, management outlook comments continue to point towards a ‘reasonable’ outcome for the financial year, subject to its future sales performance. The dividend was previously resumed, leaving the shares on a forecast dividend yield of around 2%. Investment in areas such as beer gardens and improved beer dispense systems is being made, while competition has eased since the pandemic given the failure of some smaller players. 

In all, a highly uncertain economic outlook and increased cost headwinds provide clear grounds for caution. That said, Wetherspoon’s focus on consumer value should work in its favour, especially in difficult economic times. 

Positives: 

• Value customer offering
• Majority freehold properties

Negatives:

• Tough economic backdrop
• Rising taxes

The average rating of stock market analysts:

Strong hold