J D Wetherspoon’s Preliminary Results for the 52 weeks ended 27 July 2014, included an attack on corporate governance (H&C News will report on this separately), and have attracted general support from market commentators – though Finspreads.com (see below) recognises the strengths whilst pointing to the issues of margin and debt.
Chairman Tim Martin commented on the results:
“I am pleased to report another year of progress, with record sales, profit and earnings per share. The company generated £600.2 million in taxes, an increase of £48.7 million, compared with the previous year, equivalent to £662,000 per pub. We now employ over 34,000 people, an increase of over 3,000 in the last year. In addition, £29.2 million in bonuses and free shares was paid to employees, 82% to those working in our pubs.
“In the six weeks to 7 September 2014, like-for-like sales increased by 6.3%, with total sales increasing by 11.4%.
“The company is aiming for a reasonable outcome in the current financial year.”
“A screaming hold on reliability, with underlying strength”
Warren Ruhomon, Market Analyst at Finspreads.com sounded a more cautionary note on the results, regarding the report as ‘not particularly upbeat’ and, commenting on Wetherspoon’s expectation of a “reasonable” outcome for the current year:
“That’s code for: ‘it hasn’t been a stellar year’. The main problem with JDW remains that its margins are poor, in a sector in which margins are modest at best.
“Wetherspoon expects to confirm full-year profit before tax rose just 3% to £79.4m, but the firm is seeing improvements in trading conditions stemming from promotional and operational initiatives. These have increased like-for-like sales in the last 6 weeks.
“I continue to see Wetherspoon as an expertly managed, mature, and let’s face it, quite boring business. But for many investors, ‘boring’ is exactly what they want. After all, dividends like the one announced today at 8p per share have been trending steadily.
“No one invests in Wetherspoon because they want growth—JDW’s consolidated annual growth rate trails the sector by around 3.5 percentage points. JDW is a screaming hold on reliability, with underlying strength.
“So long as cash management remains good the market won’t call JDW on its questionable gearing: debt-to-equity is around 224.6%. JDW’s peers average more or less 100% debt-to-equity, each.
“If a trend in the sector to reduce debt ever takes hold Wetherspoon would rapidly lose favour.”
Financial Highlights
CHAIRMAN’S STATEMENT
The Chairman’s Statement supplies further detail, including the following:
Financing
As at 27 July 2014, the company’s total net debt, including bank borrowings and finance leases, but excluding derivatives, was £556.6 million (2013: £474.2 million), an increase of £82.4 million. Factors which have led to the increase in debt are 46 new pub openings costing £97.7 million, investment in existing pubs of £56.2 million, the acquisition of freehold reversions and investment properties of £23.6 million, the repurchase of shares of £24.6 million, a repayment of £16.7 million to HMRC in respect of a gaming machine legal judgement and dividend payments of £14.9 million. Year-end net-debt-to-EBITDA was 3.21 times (2013: 2.88 times).
As at 27 July 2014, the company had £138.1 million (2013: £111.0 million) of unutilised banking facilities and cash balances, with total facilities of £690.0 million (2013: £575.0 million). The company’s existing interest-rate swap arrangements remain in place.
Dividends and return of capital
The board proposes, subject to shareholders’ approval, to pay a final dividend of 8.0p per share (2013: 8.0p per share), on 27 November 2014, to those shareholders on the register on 24 October 2014, giving a total dividend for the year of 12.0p per share (2013: 12.0p per share). The dividend is covered 2.8 times (2013: 3.2 times). In view of high levels of capital expenditure in recent years and the potential for advantageous investments in the future, the board has decided to maintain the dividend at its current level for the time being.
During the year, 3,068,088 shares (representing 2.4% of the issued share capital) were purchased by the company for cancellation, at a total cost of £24.6 million, including stamp duty, representing an average cost per share of 800p.
Further progress
As in previous years, the company has tried to improve as many areas of the business as possible. For example, our food hygiene ratings are at record levels. We have 824 pubs rated on the Food Standards Agency’s website. The average score is 4.91, with 92% of the pubs achieving a top rating of five stars and 7% receiving four stars. This is the highest average rating for any pub or restaurant company. In the separate Scottish scheme, which records either a ‘pass’ or ‘fail’, all of our 65 pubs have passed.
In the 2015 Good Beer Guide, a CAMRA publication, 317 of our pubs have been recommended, more than any other pub company. In addition, over 900 of our pubs are Cask Marque approved – Cask Marque is a pub-industry scheme, run in conjunction with several brewers, which checks and approves the quality of real ale in pubs. We continue to source our traditional ales from a large number of microbreweries of varying sizes and believe that we are the biggest purchaser of microbrewery beer in the UK.
We continue to run the world’s biggest real-ale festival twice per annum and have added a cider festival in recent times, featuring a wide variety of suppliers from the UK, Europe and elsewhere in the world.
We continue to work with our suppliers on both a quality and marketing basis. For example, 97% of our pubs have achieved ‘Master Brewer Accreditation’ from Guinness; we are still the world’s number-one seller of Pimm’s, having sold more Pimm’s in one day on 16 August 2014 than any other company has ever done.
We paid £29.2 million in respect of bonuses and free shares to employees in the year, slightly more than the previous year, of which 96% was paid to staff below board level and 82% was paid to staff working in our pubs.
As in previous years, we continue to concentrate on areas such as training, where we have won numerous awards and endorsements over the years. We also continue to invest in our pubs and have upgraded, and continue to upgrade, many of our kitchens and back-of-house facilities. For example, we plan to spend £16.0 million in the next four years, creating and improving staff rooms.
In the field of charity, thanks to the work of our dedicated pub and head-office teams, we continue to raise record amounts of money for CLIC Sargent, which supports young cancer patients and their families. In the last year, we raised approximately £1.7 million, bringing the total raised to over £9.2million – more than any other corporate partner has raised for this charity.
General tax matters
We continue to believe that pubs are taxed excessively and that the government would create more jobs and receive higher levels of overall revenue, if it were to create tax equality among supermarkets, pubs and restaurants. Supermarkets pay virtually no VAT in respect of food sales, whereas pubs pay 20% – and this disparity enables supermarkets to subsidise their alcoholic drinks sales to the detriment of pubs and, indeed, restaurants. This serious economic disadvantage has contributed to the closure of many thousands of pubs, and the pub industry has lost approximately 50% of its beer sales to supermarkets since VAT was increased from 8% over 30 years ago.
Wetherspoon is happy to pay its share of tax and, in this respect, is a major contributor to the economy. In the year under review, we paid total taxes of £600.2 million, an increase of £48.7 million, compared with the previous year, which equates to approximately 43% of our sales.
This equates to an average payment per pub of £662,000 per annum or £12,700 per week.
Tax Equality Day
In order to draw attention to the current unfair tax régime, Wetherspoon is supporting Tax Equality Day (Wednesday 24 September 2014), in association with Jacques Borel’s VAT Club – also supported by many others, including Punch, Fuller’s, Adnams and thousands of individual publicans. At Wetherspoon, we are reducing our prices by about 7.5%, to reflect the likely reduction in prices which consumers would see, if VAT in pubs were reduced. We are sure that this offer will be extremely popular with customers and will, undoubtedly, increase the amount of revenue for the government as well, if it succeeds in reversing the increase in off-sales through supermarkets – even for one day.
Current trading and outlook
The biggest danger to the pub industry, as indicated above, is the VAT disparity between supermarkets and pubs. Wetherspoon, along with many pub and restaurant companies, is supporting Jacques Borel’s VAT Club on Tax Equality Day (Wednesday 24 September 2014) to publicise this inequality.
A similar danger relates to the general tone of corporate governance advice and practice, as discussed above, which has helped to create unstable board rooms, often preoccupied by the wrong considerations. For example, many do not even recognise the danger from the VAT disparity, despite the high weekly level of pub closures which has lasted for many years.
In the six weeks to 7 September 2014, like-for-like sales increased by 6.3%,with total sales increasing by 11.4%.
The company is aiming for a reasonable outcome in the current financial year.
Tim Martin, Chairman
11 September 2014
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Note: Warren Ruhomon, Market Analyst is at Finspreads.com