UK pub chain saw Q1 LFL sales increase, but warned of rising costs and Brexit uncertainty
Companies: J D Wetherspoon plc
One of the UK's best known pub chains J D Wetherspoon Plc put out a mixed Q1 trading update this morning saying that LFL sales had increased 3.5%, operating margin had increased 1.8%, but confirmed performance had slowed towards the end of the period, that its net debt/EBITDA was slightly too high, and that Brexit was going to lead to higher costs for the remainder of the year.
Like for like sales increased 3.5% during the quarter, with total sales up 2.3%. But LFL sales reduced 2.3% in the last 5 weeks of the period, highlighting the slowdown the company is facing.
The company's operating margin was 8.6%, a significant increase from the 5.8% it reported for the same period last year, and slightly ahead of the 7% that the company anticipates for the current financial year.
Addressing investor concerns about the firm’s level of debt, management said:
"The Company understands that debt always involves risk: the greater the debt, the greater the risk. As a rapidly expanding company, Wetherspoon has historically had higher debt levels than the conservatively financed 'family brewers'."
The company said it had expanded rapidly since 200, buying back c.£400m in shares and spending c.£140m on freehold reversions:
"... the Company's debt levels during this period, which have benefited shareholders, have clearly involved significant risk. As at 24 July 2016, the Company's net debt/EBITDA was 3.47 times...
... the board believes that debt levels of between 0 and 2 times EBITDA are a sensible long-term benchmark."
Broker Panmure Gordon said the Q1 slowdown was partially offset by pub closures and disposals to give total sales growth of +2.3%. Analyst Anna Barnfather confirmed Panmure was cautious towards JDW as "rising capital intensity and falling returns" are "compounded by mounting inflationary headwinds":
"As was the case at the full year, margin pressure has temporarily abated, and was unusually high at 8.6% (5.8% last year) but is still expected to remain c.7.0% for the full year as inflationary pressures mount. No change to outlook. Maintenance capex will step up (from £34m to £60m) with net debt/EBITDA remaining around 3.5x - suggesting a slowdown in share buybacks (of which there is no mention)."
Chairman Tim Martin, who campaigned ardently for Brexit himself, placed the blame for upcoming uncertainties on Merkel, Hollande and the "unelected EU 'President' Juncker" and their attitude towards Brexit negotiations:
"According to press reports, Juncker told European business leaders, in October, not to negotiate with UK companies and to adopt an "intransigent" attitude. This... puts an unfair burden on the excellent European suppliers with which UK companies, like Wetherspoon, have traded for many decades... Wetherspoon normally agrees on trade deals with suppliers for 3 to 10 years.
If we, and companies like ours, are unable to agree on tariff-free transactions, it will inevitably result in a loss of business for European companies which have done nothing to deserve this outcome."
Mr Martin said the company's sales growth had slowed in recent weeks and confirmed that the board anticipated higher costs in the remainder of the year.
"The Company has made a reasonable start in the current year, but any forecasts for the full year are inevitably tentative, with nine months still to go - and the outlook for the current financial year is unchanged. We will provide updates as we progress through the year."
Today's announcement is quite a contrast from the more positive pre-Brexit updates, and shares in the company reacted accordingly, falling 5% in early trading.
