- Pubs group posts £30.4 million loss
- Shareholders won’t get a dividend yet again
- Recent trading more promising
The near-12% jump in Wetherspoons’ (JDW) share price would suggest that all is well in pub-land. However, the underlying message from the company is that many drinkers still prefer to reach for a can from the fridge rather than venture out and join friends at the bar.
Habits formed during lockdown seem to be hard to break. Inflationary pressures are also eating into Wetherspoons’ profits.
WHY DID WETHERSPOONS’ SHARE PRICE GO UP?
The reason why its shares jumped is that recent trading has perked up after a weaker-than-expected summer.
The market had already expected tough times as reflected by the share price falling for most of 2022 so far. The update on current trading was a pleasant surprise, hence the increase in the share price now. To quantify the recent success, like-for-like sales have gone up 10.1% in the first nine weeks of its new financial year.
Chairman Tim Martin seemed displeased. He said: ‘During lockdown, dyed-in-the-wool pub-goers, many for the first time, filled their fridges with supermarket beer - and it has proved to be a momentous challenge to persuade them to return to the more salubrious environment of the saloon bar.’
WHAT ARE OTHER PUBS SAYING?
In July, Fuller’s (FSTA) said its sales were picking up, particularly in Central London. It has an advantage over Wetherspoons in the current environment by appealing to a more affluent drinker. Its pubs are more luxurious in terms of fixtures and fittings, and it has premium-priced food and drink.
Wealthier people might be less affected by rising inflation, whereas Wetherspoons tends to attract middle to lower income earners because of its value proposition. They are being harder hit by the rising cost of living and so cutting back on a pie and pint might be necessary to keep paying the bills.
HOW MUCH MONEY IS WETHERSPOONS LOSING?
Results for the year to July 2022 confirmed that Wetherspoons continues to suffer from a crashing Covid hangover, revealing a pre-tax loss of £30.4 million versus profits of £102.5 million in the pre-pandemic year to July 2019.
Total revenue decreased by 4.3% in the past financial year versus the pre-pandemic year to July 2019 and the struggling company decided to pass the dividend for the third year in a row.
Although like-for-like sales decreased by 4.7% compared to FY19, sales trends improved last year. In the first half, like-for-like sales were down 7.4%; in the third quarter they were 4% lower, and in the fourth quarter they were just 0.6% lower.
As well as the slowly improving sales trend, Martin highlighted ‘a significant turnaround’ of £105 million in free cashflow, which improved to an inflow of £21.9 million in fiscal 2022 versus an outflow of £83.3 million in 2021.
WON’T IT BENEFIT FROM PEOPLE TRADING DOWN?
Julie Palmer, partner at Begbies Traynor, commented: ‘Wetherspoons’ pile it high and sell it cheap approach should be an obvious winner as consumers tighten their belts, but prices will no doubt have to rise and this will undoubtedly hit demand, however they are well placed to ride out the storm with a loyal following and the option of selling further high value sites.’
IS INFLATION HURTING WETHERSPOONS?
Charlie Huggins, head of equities at Wealth Club, said that while the Covid threat is receding, another has reared its ugly head in the form of inflation.
‘Wetherspoons’ business model is heavily exposed to the rise in energy and food bills. While it can pass on some of these cost increases, it will be reluctant to push prices too far, for fear of ostracizing its customer base.’
‘With almost 900 pubs, each massive and serving huge volumes of drink and pub grub, Spoons has a size advantage over pretty much all its rivals,’ added Huggins. ‘Growing sales are vital in an inflationary environment, giving greater scope to shoulder cost increases.’
Russ Mould, investment director at AJ Bell, said: ‘Operating profit margins are being squeezed as hard as a barman trying to get all the juice out of a lime to make a cocktail.
‘Inflation has been brutal for every business, and when your modus operandi is to sell drinks cheaper than others, it’s hard to be too aggressive on price increases, which means sacrificing some profit margin.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Daniel Coatsworth) own shares in AJ Bell.
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