Late night drinking venue operator Eclectic Bar (BAR:AIM) has experienced its first major setback since joining the stock market exactly a year ago, sending its share price down 14% to 162.5p. The leisure business issues a profit warning and scales back its expansion plans following lower-than-expected spending by its core student market, higher competition and weak performance from two new site openings.

We've doubted the investment appeal of the stock since its floated in November 2013, primarily because there's no barriers to entry for the type of late-night bar it operates. As we've said in Shares on several occasions, anyone with a pile of cash can open a themed bar along the likes of those offered by Eclectic Bar. It operates in a fickle market where anyone with a new trendy site can steal the competition from others, but it won't take long before the next contender comes along and does the same trick.

The latest trend is for 'speakeasy' bars which are venues hidden behind kitchens or barber shops, copying the Prohibition era in 1920s America when people tried to find ways to drink when boozing was illegal. Eclectic Bar's take on this concept is the 'Dirty Blonde' brand where its first site opened in Brighton in March. Today's trading update says this site, along with Lola Lo in Derby, hasn't met expectations.

Speakeasy-inspired bars are now all over London and spreading across the UK. They are heavily reliant on social media and word-of-mouth, given that you wouldn't know the bar existed by walking past as there's no outside branding. We've heard anecdotal evidence that some of these concept venues in London are struggling because they are too much of a secret – no-one knows they are there!

Eclectic Bars says university students nationwide have been 'less active' and 'less predictable' during Freshers' week which is traditionally a time when undergraduates spend a great deal of time in bars and clubs.

The small cap says it will scale back expansion plans for the current year from two to three sites, to now just one or two. It also looks the dividend is at risk of being cancelled at the year-end if trading doesn't improve.

House broker Panmure Gordon two months ago downgraded its EBITDA (earnings before interest, tax, depreciation and amortisation) forecasts for the financial year to June 2015 by 11%. The broker said: 'This reflects the later timing of new sites with returns more aligned to the company’s guidance, refurbishment work on (single site venue) Embargo and higher rental charge associated with extending the Embargo lease, in addition to a slightly higher interest charge.'

Eclectic Bar says trading is now stabilising but at a lower level than expected. It doesn't believe there's a chance of making up for the earnings shortfall, hence why it believes first-half EBITDA will come in at £1.1 million versus £1.4 million a year earlier.

Issue Date: 25 Nov 2014