JDW

Results from the pub operator could offer an opportunity to sell

by Dan Coatsworth

A bull run that has seen shares in JD Wetherspoon (JDW) rise 55% since mid-July may hit the buffers on Friday (5 September) when the pubs operator publishes full-year results. Rising costs and analyst concerns about the refinancing of £500 million in debt obligations starting next September could weigh on the stock and investors should sell Wetherspoon ahead of the figures as a short-term trading play.

An expected 1.6% decline in pre-tax profit to £55.2 million will not trouble the market too much, particularly as Wetherspoon took the market by surprise during the summer when it said like-for-like sales for the 11 weeks to 13 July had seen a marginal increase of 0.4%. Wetherspoon had been widely expected to report falling trade amid a slowdown in consumer spending. The small piece of good news triggered a revival in the share price, which had fallen by 70% since September 2007.

Wetherspoon has benefited from consumers trading down from restaurants and wine bars. Sales have been driven by food, but not even Wetherspoon has avoided passing on higher costs to customers. Meal prices have been raised, which could threaten future custom, and rising utility costs and staff wages could squeeze margins.

Management has remained optimistic about trading prospects throughout the market downturn this year. This has not stopped analysts downgrading earnings forecasts for 2009 in anticipation of a further deterioration in the consumer outlook. In July, Evolution cut its 2009 pre-tax profit forecast from £58.3 million to £54.4 million. The broker expressed concerns about two refinancing events. ‘The £87 million US placement note expires in September 2009 and the £415 million revolving loan facility expires the following year. This growing uncertainty could crimp its capex plans and we would not be surprised for the new opening programme to be cut again when it announces its full-year results,’ said analyst Nigel Parson.

Shares says: The results should not be too bad but the market may be on the lookout for negatives after such a good recent run. Sell