Langton Capital – 2015-11-04 – Daily Wrap: JD Wetherspoon, commodity prices, oil & other:
Leisure Wrap & Other:
So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:
JD Wetherspoon thoughts:
• No apologies, no nothing.
• Margin lower, estimates to be reduced.
• But yes, the group did put through 2 pay rises in the last 12mths, 5% and 8% and, yes, this could have impacted margins.
• No real guidance on whether they will finish the year above or below current levels.
• Leaves the group, which we basically support, open to the accusation that it is buying sales via low prices.
• This may have some veracity and, if true, it does limit the group’s room for manoeuvre should it go for profit at some point rather than simply sales.
• Elsewhere 1) the group is right to aim at coffee, other day parts, food in general and accommodation. But 2) this will not drive profits (and could actually have a negative impact on margins) in the short term.
• We would not be surprised to see the company buying back its own shares once more at current levels.
JD Wetherspoon Q1 IMS – Conference Call:
• Q1 Update – 13w to 25 October 2015:
• Following its Q1 update earlier this morning, JD Wetherspoon hosted a conference call for analysts and our comments thereon are set out below:
• Questions, not surprisingly, focused on margins. The group reiterated that the recent increase in wages was the main factor leading to reduced margins. Other costs have not really risen. Group reiterated that margin is an output rather than an input.
• Is the margin trend downwards, will the FY margin be below the Q1 margin? Analysts were told that they can see when wages rose & can do their own calculations thereon.
• Did staff receive two pay-rises in the year to end-Q1? Rose in October last year (5%) and then Aug (8%) this year. To some extent, therefore, margins should level off.
• What wage inflation are you expecting in FY16? Don’t focus on this but think it will be between 5% and 8%
• How will you mitigate rising costs? It’s a ‘fine balance’. Group doesn’t want to reduce service levels. There is ‘very little room for manoeuvre on prices.
• Group is pleased on current LfLs but can’t say whether this will continue into Q2 and beyond.
• Xmas bookings, any trends? Not really.
• Balance Sheet, Debt & Outlook:
• The group ‘is considering further disposals’. These could/should happen both this financial year and next.
• What ‘type’ of pubs are you looking to sell? Tend to be ‘pubs that the group has outgrown’. There may be a small number of pubs where there is some cannibalisation
• Net debt ‘will be slightly higher’ but this is not factoring in freehold disposals which, if achieved, would push debt lower.
• Why are you cutting back on new openings? Group is ‘pragmatic’ and has other uses for its cash. The pubs that the group actually has opened have been performing well. JDW has been buying in freeholds where it is the lessee, etc.
• Langton View: JD Wetherspoon has remained true to form – and take that how you may. The group has ‘done a Wetherspoon’ in that sales are good but margins, once more, are lower.
• The group expects wages to rise by between 5% and 8% next year (to July 2016) suggesting that margins are unlikely to rise markedly in the near term. Indeed the group reiterated its view (and the view of other operators) that this was not a market in which it could raise prices.
• Numbers are likely to edge back and, as expected, the group’s shares have opened lower.
• With that in mind, we would not be surprised to see the group buying back its own shares. It mentioned that it had ‘other uses’ for its cash and, alongside buying in freeholds, reducing the number of shares in circulation may also be a corporate goal.
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Oil up through $50. Moves seem to be positively correlated with equity markets (which are themselves at present correlated with manufacturing output, particularly as regards China).
• Commodities; further upward moves in sugar – now down only 1% over the last year – and in cocoa:
• Other soft commodities still very weak.
• Marks’ shares rise on soft numbers. General merchandise was poor (down 1.9% LfL) with a good performance from food. The City, however, is looking on the bright side & has swallowed the M&S line that, though sales were down, discounting was reduced as a result of “a decision to focus on full price sales”. Gross margin (are you listening JD Wetherspoon) was up by some 285bps.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. JD Wetherspoon Q1 Update: Sales better but margins worse; where have we heard that before. LfLs + 2.4% in Q1, margin now 6.2%
a. JDW Q1. Reduced new opening target of c15 this year. Some freeholds now to be sold. Co says profits to be slightly below last year
b. JDW Q1: Group says ‘sales have been slightly higher in the last 6 weeks, which has coincided with the Rugby World Cup.
c. JDW blames lower margin on higher wages. It knew this back in Sept and, at that time, it was guiding to higher profits.
d. JDW Q1: Shares may weaken on update. Wouldn’t be surprising to see company buying back shares thereafter
2. SAB + AB InBev have had their request to extend their Put Up or Shut Up deadline by a further week to 11 Nov granted
3. So how long is it before someone tries to deliver takeaways via drone? We could have burgers falling from the sky by Xmas
4. FT reports Molson Coors is nearing a deal to buy SABMiller’s US JV stake as a part of AB InBev’s moves to avoid competition probs
5. Marks & Spencer grew sales 1.4% to £5bn in the H1 to 26 September, with like-for-likes up 0.2%, as underlying PBT +6.1%
6. PPHE updates on Q3, says total 9mth revenues +9.7% to Euro 79.8m. Constant currency increase was 3.8%.
7. Wizz Air grew its amount of passengers carried by 20.4% in the six months to 30 September, pushing revenue up 15% to €836.4m