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Summer sun for Wetherspoon

Created:
17 July 2008
Updated:
30 July 2008
Written by:
Nathalie Olof-Ors

JD Wetherspoon gave investors a reason to cheer, for a change, with a trading update which said that like-for-like sales had swung back into positive territory, increasing by 0.4 per cent during the 11 weeks to 13 July.

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Trading benefited from increased promotional activity during the period, with special offers on food and seasonal drinks such as Pimm's. This improved figure means total like-for-like sales are down by 1 per cent as the group approaches its year-end.

But the read-across for the pub sector as a whole is not so clear. Although JD Wetherspoon is often considered a bellwether for the pub industry, analysts believe that its improved sales are a sign that consumers are starting to trade down and that the group is gaining market share at the expense of less well-financed rivals. Still, brokers believe its rivals are now more likely to follow suit and post better like-for-like sales figures following the anniversary of the smoking ban, as comparatives are not so tough.

Yet the sector's troubles are far from over. Like all its rivals, JD Wetherspoon flagged serious inflationary pressure on food and utility bills. The group also launched a vociferous attack on the government, saying higher costs were also driven by the hikes on alcohol duties and the minimum wage.

Landsbanki's view

Buy. This trading update - marginally ahead of our forecasts - was reassuring and the outlook statement contained no surprises, highlighting inflationary pressures on food, labour and tax. And while we continue to be underweight on the pub sector (as the slowdown is set to be more prolonged than many expect), JD Wetherspoon remains our only buy recommendation in the sector. Its key attractions are undiminished. Its value based offering is appropriate in the current climate, while its expansion is largely funded by internally generated cash.

Royal Bank of Scotland

Sell. Like-for-like sales were stronger than anticipated, but costs - including marketing - were also higher. And, while this fourth-quarter performance was solid, it is not enough to be confident on the sales outlook for 2008-09. We are unlikely to materially alter our forecasts, which stand at £56.1m for 2007-08 pre-tax profits (against a consensus of £55.2m) and at £47.9m for the following year, 15 per cent below consensus.

TIP UPDATE

Profit margins are under pressure. But the shares have fallen by 25 per cent since our last sell recommendation (274p, 3 Mar 2008) and now trade on a 2008 PE ratio of 8. Although Wetherspoon is better placed than most rivals to face the consumer downturn, the shares are high enough, at 203p.

Last IC view: Sell, 3 Mar 2008, at 274p.

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