In fine spirits

Admittedly, that's not the sector's best performance - Greene King (GNK), for instance, grew underlying retail sales by 3.7 per cent in the 36 weeks to 6 January, while JD Wetherspoon (JDW) saw its underlying sales jump 7.6 per cent in the 24 weeks to 13 January. But, arguably, Spirit's food focus leaves it more accurately compared with such players as Mitchells & Butlers (MAB) and, on that basis, it's holding its own - Mitchells' underlying sales rose 2.1 per cent in the year to the end of September. Moreover, Spirit's self-help measures mean that it can point to better improvement prospects than many of its rivals.

Specifically, during its last financial year, 178 refurbishments of managed pubs were completed - from a 791-strong managed estate - with the entire portfolio likely to be fully refurbished by March 2014. "The positive impact from the self-help programme in managed has further to run, with a full contribution from full-year 2012 investment to come through in full-year 2013," reckons analyst Nick Batram at broker Peel Hunt.

In common with much of the sector, Spirit's leased estate is weaker. This month's trading statement revealed that like-for-like net turnover there had fallen 2.1 per cent, with underlying net income down 2.9 per cent. But, even here, there's scope for optimism. To begin with, the income slippage largely reflected last year's rent rebasing exercise and Spirit is investing to spruce up the estate. Management is also improving the retail discipline within the leased operations, through a focus on new sales, marketing and pricing programmes - which should drive income. Spirit is focusing on the estate's best pubs, too, and around 60 of the worst performing leased pubs have been sold, with another 40 or so earmarked for disposal. "The opportunity within leased is perhaps greater than the market perceives," says Mr Batram.

Management announced further measures to fine-tune the business this month, too. These involve scrapping the sub-scale Original Pub Company brand, leading to some cost savings and a more streamlined structure. Chief executive Mike Tye used that opportunity to also announce his intention of making Spirit the "number one hospitality company in the UK". That may sound ambitious, but brokers think the overall strategy should deliver decent earnings growth. Strip out hefty one-off hits, such as last year's £595m property revaluation charge, and Peel Hunt estimates that adjusted earnings will grow 13 per cent in 2013.

There is, however, a hefty net debt pile to worry about and that rose £32.5m in 2012 to £949m - although chunky gearing ratios aren't unusual for the pub operators. Weak consumer conditions are a concern, too. The UK economy contracted by 0.3 per cent in 2012's last quarter and, with wage levels still slipping, consumers are in no rush to spend.