- JD Wetherspoons
One of Britain’s largest pub chains is performing surprisingly well and bucking the trend many other pubs are experiencing of reduced business and cash flow, according to Barclays analysts.
After Wetherspoons posted strong annual results last week, with a 15.6% jump in pre-tax profit, Barclays raised its estimate for the group’s earnings for the 2018 financial year by 11%, and predicted it would continue to perform well.
Barclays said it was “surprised to see” sales growth of 6.1% for the financial year so far, but that the strong performance would benefit shareholders, whether used to “build new pubs, buy back shares, freehold assets, or to reduce debt.”
Last week ratings agency Moody’s warned that pubs may suffer over the next 12-18 months, as earnings are hit by a decline in demand for beer, a weak pound and rises in the national living wage and inflation. Moody’s said reduced cash flow meant pubs were struggling to service their debt, and noted total beer sales in the UK had fallen 23.5% between 2000 and 2016.
The agency said a move towards selling food had helped offset this problem, but that converting pubs to include restaurants often required substantial upfront costs, which had limited free cash flow growth.
In comparison, Wetherspoons’ pubs have long had food available all day: Wetherspoons is the fourth most visited brand in the UK for breakfast, according to Barclays, behind only McDonald’s, Costa and Greggs. The group is also close to spending a record high on pub upkeep, said the note, but could reduce this significantly if sales begin to fall – providing a “huge cushion for profits.”
However, Barclays’ note does not mention the impact Brexit may have on Wetherspoons’ future trading. Moody’s cited this as a significant concern, since a high proportion of the food and drink sold at pubs is imported from the EU.
Wetherspoons chairman and Founder Tim Martin is a prominent Brexiteer. Commenting on the company’s strong profits last week, he denied that leaving the EU would pose problems for the company or for the UK, despite the fact that the chain relies on a large number of low-skilled migrant workers.
He said EU negotiators’ “current posturing and threats” were forcing British companies to “look elsewhere for supplies,” although said he would be “very reluctant” to do so. He said EU negotiators needed to “take a wise-up pill” to retain British business and avoid causing “further economic damage to struggling economies like Greece, Portugal, Spain and Italy.”
According to Moody’s, the rise of the national living wage – which went up to £7.50 per hour in April 2017 – has also negatively impacted pubs’ profits, as has the rise in inflation and a weaker pound Barclays conceded Wetherspoons is “highly sensitive to the UK economy,” and said ongoing increases in the national living wage “could be hard for the group to fully digest without suffering margin hit, or cash profit headwinds.”
On Monday, Barclays raised Wetherspoons’ price target to 1250p, up from 1150p.