Pubs operator JD Wetherspoon has been having a tough time of it for a while - prompting us to progressively downgrade our assessment of its shares. A year ago we still thought they were worth buying. By the time the company reported its latest results in September, that recommendation had slipped to 'high enough'. However, the latest data underlining just how tough times could get for consumers mean that we think Wetherspoon's shares are now best sold.
- Expansion programme
- Quality pubs operator
- Competition from supermarkets
- Rising costs
- Food side comparatively weak
- Dire outlook for consumer spending
True, Wetherspoon has mostly been an impressive operator with a clear plan for expansion. But the current environment looks particularly punishing. Results for 2010-11 demonstrated what the group is up against, with chairman Tim Martin warning of the huge competitive threat posed by supermarkets, which can sell booze at far cheaper prices than pub companies. And at times like these, supermarkets are of particular concern to pubs at the value end of the market, such as Wetherspoon.
Wetherspoon also appears to be missing out on one of the big trends in the pubs industry - selling food. Recently broker Investec trawled data from the Office of National Statistics to show that income spent on eating and drinking out had changed little over the past 40 years; however, there had been a clear shift away from drinking and towards eating. Yet, according to Investec, Wetherspoon had a lower proportion of food sales in its pubs than Mitchells & Butlers, Marstons and Greene King. In addition, as of August, of the four, it had seen the smallest swing towards food sales in the past five years at just 2.5 per cent, compared with 9.6 per cent, 7.2 per cent and 11 per cent respectively for the other three.
| JD Wetherspoon (JDW) | ||||
|---|---|---|---|---|
| ORD PRICE: | 412p | MARKET VALUE: | £542m | |
| TOUCH: | 412-413p | 12-MONTH HIGH/LOW: | 473p | 371p |
| DIVIDEND YIELD: | 3.2% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 130p | NET DEBT: | 256% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 0.91 | 54.2 | 25.2 | 12.0 |
| 2009 | 0.96 | 45.0 | 18.2 | nil |
| 2010 | 1.00 | 60.5 | 30.2 | 12.0 |
| 2011 | 1.07 | 61.4 | 35.4 | 12.0 |
| 2012* | 1.15 | 71.0 | 38.9 | 13.0 |
| % change | +8 | +16 | +10 | +8 |
Normal market size: 4,000 Matched Bargain Trading Beta: 0.7 * Espirito Santo forecasts | ||||
Meanwhile, Wetherspoon has been pursuing an expansion programme to capitalise on the availability of cheap premises. This looks like a good idea, but some City analysts think this growth is coming at the expense of profit margins. Last year operating margins slipped by half a percentage point to 9.5 per cent. True, the squeeze is exacerbated by rising costs coupled with the reluctance of consumers to stomach price increases. Sales of alcohol are also hampered by increases in excise duty set at inflation plus 2 per cent.
The bad news is that, from both the perspective of price inflation and demand, the situation is likely to get worse in 2012. True, Wetherspoon's first quarter may be decent because trade should have been boosted by unseasonably warm weather - and its share price has risen in anticipation of this. However, the economic indicators show that tougher times will be upon us soon enough, even if the UK avoids the big winter freeze that it has suffered in the past two years. Cost increases are expected to continue to hit, with Espirito Santo, another broker, predicting food and drinks inflation of about 4 per cent in 2012, a 3 per cent increase in wages, plus additional costs associated with carbon taxes.
The really unsettling predictions are about consumers' disposable income. The Institute of Fiscal Studies suggests that, while the recession that followed the credit crunch had a limited impact on consumer spending, the UK is now in for tough times. The think tank reckons real household spending power will fall by 7 per cent by 2013.
