JD Wetherspoon’s sales have not yet recovered to pre-pandemic levels. Like-for-like sales in the 25 weeks to January 22 were down by 1 per cent against the last equivalent pre-Covid period. The decline worsened in the latter part of this period, down 2 per cent over the last 12 weeks.
This compares poorly to peers such as Mitchells & Butlers. A key issue is JD Wetherspoon’s customer base, which is particularly vulnerable to cost-of-living pressures.
HSBC analysts said the company “is exposed to weak demographics: older age groups and lower incomes”. They added that customers are being lost to supermarkets and home drinking, despite the company potentially benefiting from punters trading down from more expensive establishments.
Chair Tim Martin pointed to the threat from the supermarkets in last month’s trading update.
“We estimate that supermarkets have taken about half of the pub industry’s beer volumes since Wetherspoon started trading in 1979, a process that has likely accelerated following the pandemic.”
The biggest threat to hospitality, he said, comes from the tax regime. Supermarkets do not pay VAT on food sales, while pubs and restaurants pay 20 per cent.
The impact of challenging trading conditions was also evident in the company’s decision to put 35 pubs up for sale. Most of these are still waiting for a buyer.
On the balance sheet side of things, the sale of interest rate swaps in October brought in a chunky £170mn. But Numis analysts think that “leverage remains too high”.
The energy bill situation remains, as with hospitality peers, a material threat to profitability.
And while utility costs have fallen, the company’s (pre-pandemic) energy hedge expires at the end of this financial year.
The shares have been on the up this year, though they have shed over 40 per cent of their value over the past 12 months. Martin seems to think they will continue to climb. He bought 2.6mn shares on February 1 at 457p a share.
Next Fifteen chief prunes stake
According to received wisdom, marketing is one of the first things to be cut in a recession. The chief executive of Next Fifteen Communications, Tim Dyson, did little to debunk this theory when he recently sold 300,000 company shares for a total of £3.15mn.
It is important not to jump to conclusions, though. The group stressed that the sale was for personal financial planning purposes and flagged that there had been few opportunities for directors to trade during its current financial year. This is partly because Next Fifteen made an offer for rival M&C Saatchi in May, which only fell apart in October.
Investors have been jittery about marketing companies for several months now, but Next Fifteen looks to be in better shape than most. For starters, its sophisticated tech operations mean it has more in common with IT consultancies than the descendants of Madison Avenue. The more traditional side of the business is still performing strongly, with organic net revenue up by 13 per cent at the half-year mark. Yet this was overshadowed by growth of 157 per cent from its ‘business transformation’ arm, which is now its second-biggest segment.
Operations slowed in the second half, but organic growth for the year to January 31 is still expected to reach 20 per cent. Looking further ahead, analysts think that Next Fifteen’s exposure to the US, which represents half of sales, and the size of its clients should protect it from the worst of the economic turbulence. This could backfire, however: the group’s top 10 clients contributed over a fifth of revenues in 2021. The loss of any of them, therefore, could seriously dent the group’s top line.
After selling 6 per cent of his holding on January 27, Dyson retains a 4.8 per cent stake in Next Fifteen.
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