Growth still solid
JD Wetherspoon last week proved that the UK has not lost its appetite or its thirst if the price is right. The company said that like-for-like sales in the first quarter, ending in October, were 3.7pc higher than the same period last year. The pub group is paying for that growth through lower profit margins. The company said that profit margins had slipped by 0.3pc, to 8.3pc, as it had invested in more staff and made repairs to the pub estate. The strong start comes after the company reported sales up 7pc, to £1.28bn, giving pre-tax profits of £57.1m for the year to July.
New pubs opening
The group plans to accelerate pub openings in the year ahead. At the end of July the company had an estate of 886 pubs across the country, after adding 29 new sites during the year. The pub chain said it will open 40 to 50 new sites in the year ahead, more than previously expected. With eight opened and 12 under construction during the first quarter, the company appears well on target to achieve these goals. With pub openings picking up in pace, it could add further pressure on profit margins, and this will be something to focus on in the next trading update.
Growth vs profit
The group has decided to prioritise sales growth and market share gains in the short term and shoulder above-inflation increases in costs. Wetherspoon is refusing to increase prices for its customers while the UK economy remains in the doldrums, even though it is facing rising taxation and other costs such as utilities. The profit margin may be falling, but the group insists it is investing for the “long term” and will be well placed, through its market share gains, now the UK is showing signs of recovery. Wetherspoon maintained its full-year dividend at 12p a share.
Progress priced in
Wetherspoon shares have soared more than 40pc in the year to date, and well above the wider FTSE 350, up 15pc during the same period. The pub chain is forecast to make £1.36bn in revenue in the year ahead, giving adjusted pre-tax profits of £78m, and earnings per share of 48.1p. That places the group on 14.8 times forecast earnings, falling to 12.7 times next year. That rating is not especially expensive, but with growth looking harder to come by and the shares only offering 1.7pc by way of forecast dividend yield, there is not a compelling case after the strong run.