J D Wetherspoon has served a flat pint to shareholders in its latest earnings update, as an expected post-pandemic hospitality boom has yet to check in with the 900-strong pub chain.
While like-for-like (LFL) sales did improve in the second half, analysts at Peel Hunt have cut their profit-before-tax (PBT) forecasts to reflect higher costs burdens to the company.
Douglas Jack and Ivor Jones of Peel Hunt stated: “We view the shares as being attractive on a long-term basis, however in the short term, JDW is particularly exposed to the demographic groups that will be most affected by inflation. We are cutting our target price from 925p to 725p.”
Wetherspoon’s believes that tax disparity between the supermarkets — which in fairness pay no VAT on food compared to the pubs’ 20% levy — is the main long-term challenge for the industry.
However, that VAT discount doesn’t apply to alcohol sales, while pubs also benefited from a 75% VAT reduction on food sales throughout 2020/21.
“Supermarket costs are missing the point,” said equities analyst Anna Barnfather at Liberum, pointing out that customers are willing to pay a premium for a genuine hospitality experience.
Barnfather also believes that Wetherspoon’s “over-indexed” its older demographic, which is still more cautious over coronavirus compared to millennials.
Tax is not the only bugbear for Wetherspoon’s.
Work from home “has had a significant impact on transport and hospitality businesses,” Martin stated, while inflation and rising staffing costs have invariably copped blame too.
Wetherspoons’ oversized venues have also contributed to mounting maintenance costs of nearly £100mln in the latest financial year, while marketing costs have also “increased substantially”.
On the staffing front, Barnfather said: “While all companies are seeing increased staff costs, the companies who looked after their workers (throughout lockdown) have come out with a more loyal workforce.”
Drinking competition mounts
Supermarkets aside, Wetherspoon’s is also underperforming against its more direct competitors.
The chain’s business model of massive sites and huge volumes might be working against its favour, as a younger patrons gravitate to the more bespoke experience provided by smaller chains.
AIM-listed Loungers for instance, which operates 193 sites across England and Wales, posted a comparatively top-rate LFL sales growth of 14.2%.
The Bristol-based chain is 6% ahead of Peel Hunt’s forecast, while record revenues and strong operating cash flows bode well for further self-financed site additions.
Young’s Pubs, which operates 200+ pubs across London and the Southeast, also posted bumper results in May, with a 350% year-on-year revenue bounce back and a PBT of £41.8mln.
On the bright side
Despite mediocre post-pandemic growth, it’s not all bad news for Wetherspoon’s.
Staff retention rates at the managerial level have actually increased at the front and back of house, while market-leading hygiene scores are higher than ever.
Fixed supply contracts for energy, bar and food purchases could also stem rising inflation costs.
On the back of the lukewarm earning update, JDW was 8.02% down on Wednesday July 13.