Despite Wetherspoon’s (LON:) best efforts, there is little cause for cheer in these numbers.
A rising tide of costs leaves the group increasingly struggling to keep its head above water. Spoons had previously advised that profits were likely to be lower this year, and that unfortunate prediction is playing out. Additional annual costs of £60 million for the likes of wages and National Insurance contributions, £7 million for non-commodity energy and £2.4 million on a packaging levy are heavy headwinds.
As such, an already wafer-thin operating margin of 6.3% has fallen to 4.86% and, despite a 5.7% increase in revenues to £1.09 billion, pre-tax profit is down by 31.9% to £22.4 million for the period. There are not many levers within the group’s control, although there may be some solace in that like-for-like sales for the half rose by 4.8% (bar 7%, food 1.3%, slot machines 8.9%) and in the last seven weeks of trading have grown by 2.6%, a reduction but nonetheless above the industry average.
Spoons has been dealt some difficult hands over the years which, for the most part, it has been dogged in turning into profit. However, despite a strong festive period the year is not off to a good start. The Wetherspoon Chairman has never been backwards in coming forward on the issues which the group feel are both crimping growth while also giving others an unfair advantage. The different tax treatment of alcohol sales in supermarkets is a case in point, alongside wrongly applied business rates and even the question of whether the lockdown was necessary in the UK at all, compared to the experience of other countries.
Indeed, that lockdown continues to leave a stain and the share price remains 63% below pre-pandemic levels. While revenues have finally recovered to stand 22% higher than that period, the group has 85 fewer pubs. This results in sales per pub which have increased by 35.4%, but in terms of profit that progress has been largely obliterated by growth of 80% and 61% in energy and wage costs respectively. More broadly, the continuing closure of many pubs across the county opens opportunities for Wetherspoon, although the group is understandably cautious of opening any new pubs which may not meet its financial hurdles. The estate currently stands at 794, with plans to open a further 15 this financial year, en route to its longer-term target of 1000 pubs.
These costs contribute to higher costs of course and in turn keep up inflationary pressure, where the group is keen not to raise prices for consumers where possible. Even so, the group will be mindful that prospects for the UK economy are currently tepid at best, which could yet result in the consumer choosing to stay at home rather than venture out as the more challenging financial times bite.
Another difficult act comes in the form of the balance sheet, where net debt has risen to £772.9 million, compared to £724 million last year and £660 million the year before. The group has nonetheless seen sufficient cash flow to enable the dividend to be maintained, although a 1.9% yield is somewhat pedestrian given the current interest rate backdrop.
Access to liquidity and a largely freehold estate valued at £1.4 billion lessen any immediate concerns and Wetherspoon’s dogged determination to fight its corner has won the brand many friends, but from an investment perspective the jury remains out on prospects. Of course, if visitors continue to rise and with food becoming more important to revenues, there could be some glimmers of light yet to come. However, the overarching headwinds are difficult to ignore and the shares have fallen by 16% over the last three months, although managing to eke out a gain of 2% over the last year, as compared to a rise of 7.3% for the wider . A further heavy slump for the shares at the open reflects the caution, with the market consensus of the shares as a hold increasingly vulnerable to a downgrade.