Closing time at Wetherspoon

As our graph clearly illustrates, profitability has been under pressure at JD Wetherspoon for a number of years. While sales - measured on a last-12-months (LTM) basis - have climbed from £880m in the first quarter of 2007 to £1.5bn in the first quarter of this year, operating margins have steadily declined from over 10 per cent and hit 7.5 per cent in the 13 weeks to 26 April 2015 compared with 8 per cent a year earlier. Management has said full-year margins are likely to be in the region of 7.3 per cent to 7.7 per cent. Meanwhile like-for-like sales slowed to 1.7 per cent in the 13 weeks to 26 April compared with 5.8 per cent growth in the year to date.

The plan to discount coffee and encourage breakfast diners hasn't paid off and the board warned that 2016 would be difficult, too. It cited "a number of factors" which are likely to influence the trading performance, including "increased competition from supermarkets and restaurant groups", together with "additional staff and repair costs". Meanwhile, at the time of the interim results in March management said that the group would be hard-pressed to match last year's level of profit.

Since January, broker Numis Securities has downgraded pre-tax profit forecasts by 8 per cent to £77.5m, compared with £79.4m in 2014. True, share buybacks are expected to help EPS to rise, as reducing the number of shares in issue increases the amount of profit attributed to each remaining share. However, funding the group's expansion is pushing up debt and this could reduce the potential for future buybacks. Indeed, by the end of the financial year, analysts reckon net-debt-to-cash-profits could reach 3.6 times. Meanwhile, the performance of Wetherspoon's actual pubs doesn't look great, with Numis observing that cash profits per pub have increased just 2 per cent over the last 12 years but in the first half of this year alone fell by 5 per cent.

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WETHERSPOON VALUATION VS. PEERS

Source: S&P CapitalIQ