Friday should be a good day to be in the pub business. After all, it’s usually when folks head for the boozer after a long week at work, and the weekend can truly get going.
Alas that wasn’t the case for JD Wetherspoon this week. The British pub chain saw its shares plunge after weaker-than-expected earnings for the first half of its financial year.
Shares in the Tim Martin-led firm fell as much as 10 per cent in London to its lowest level in two years, amid a weaker-than-expected outlook and guidance around free cash flow that left investors wanting more.
The company, which has six locations in Dublin and another three in Northern Ireland, said operating profit fell 4.3 per cent even as like-for-like sales increased 4.8 per cent. Pretax profits dropped a whopping 8.6 per cent. No surprise then that operating margins were squeezed, compressing to 6.3 per cent from 6.8 per cent previously due to what Martin characterised as increases in labour costs thanks to higher national insurance contributions in the UK.
“Since labour costs are around 35 per cent of the pub industry’s sales, compared to around 11 per cent for supermarkets, increases of this nature inevitably have a disproportionate impact on pubs, exacerbating the already-wide price differential for customers between the on and off-trade.
“The combination of much higher VAT rates for pubs than supermarkets, combined with increased labour costs will weigh heavily on the pub industry,” Martin said.
Free cash flow meanwhile, will only be in line with pretax profits instead of being higher, as it has been in much of the past, the company added.
In a sense the slide was inevitable once UK chancellor Rachel Reeves increased national insurance contributions for firms.
“With the lowest margins already among its peers, we have highlighted that JDW has the most earnings sensitivity to the up and downside from revenue and cost variables,” Goodbody analyst Fintan Ryan said in a research note.
The shares ended Friday down a shade under 10 per cent, and the rough day underlines the sensitivities for investors around what are essentially high-street businesses that rely on a lot of relatively low paid staff. Even if wages remain in line with what the market expects, changes in government policy such as national insurance or corporation tax, can have a huge impact on what is already a low margin business.
Wetherspoon shares are down more than a third since February last year. The trend is not good.
