J D Wetherspoon has updated on current trading, before entering its closed period for its interim results, for the six months ending 26 January 2014. Like-for-like sales have increased by 5.2% and total sales increased by 9.0%, operating margin is around 8.1% (slightly lower), and 40 to 50 pubs will open in this financial year.
Current trading
For the first 12 weeks of the second quarter (to 19 January 2014), like-for-like sales increased by 6.7% and total sales by 10.6%. In the year to date (25 weeks to 19 January 2014), like-for-like sales increased by 5.2% and total sales increased by 9.0%.
Operating margin (before any exceptional items), for the half year ending 26 January 2014, is expected to be around 8.1%, 0.2% lower than the same period last year, due primarily to increased investment in a number of areas – for example IT, training and additional operating personnel – as Wetherspoon prepares for an increased number of pubs in the years ahead. Estimated operating margin (before any exceptional items) is now expected in the region of 8.1% to 8.3% for this financial year, assuming reasonable sales growth.
Also now anticipated is slightly higher corporation tax rate for this financial year, at around 27%, due to higher-than-expected non-qualifying capital expenditure.
Property
The Company has opened 18 new pubs so far this financial year and currently has 11 sites under development. In line with previous estimates, it intends to open approximately 40 to 50 pubs in the current financial year.
Financial position
In the period under review, the Company bought back 411,000 shares for cancellation, at a total cost of £2.9 million, at an average price of £6.98 per share. The Company also entered into agreements to fix the interest rates on part of its existing debt from July 2018 to July 2023 at rates which are lower than the average rate currently being paid. There have been no significant changes in the Company’s overall financial position since the publication, on 11 October 2013, of the annual report and accounts for the year ended 28 July 2013.
Outlook
As the Company has pointed out on previous occasions, the pub industry continues to pay far higher taxes than supermarkets do, mainly as a result of an unequal and unfair VAT and business rates burden. This tax inequality has greatly widened the pricing differential for beer and other products between the on and off trade. Approximately 10,000 pubs have shut down in the last decade, about 15% of the total, and these closures are certain to continue unless politicians and governments create a fair tax system. Since pubs generate much higher taxes and many more jobs per pint or per meal than supermarkets do, tax equality would be beneficial for the wider economy, as well as the pub industry.
Already highlighted is the impact on margin of the increased investment which is being made to prepare for an increased number of pubs and the continued pressure from taxes. Assuming reasonable sales growth, the Company is targeting a reasonable outcome for the current financial year.