JDW: profit per pub static for eight years

When you look hard at the JD Wetherspoon financial trends for the past eight years, one figure jumps out.

Wetherspoon, which publishes the most transparent trend information in the sector, has struggled mightily and largely failed to increase profit per pub more than a smidge across its estate. In fact, in real terms the company has gone quite a long way backwards in per-pub terms over the years.

The company has grown sales by over 30% since 2000 at each pub, but Ebitda per site has risen by a rather paltry 1.5%. In 2000, Wetherspoon per pub Ebitda was £203,000 on sales of £1,004,000 including VAT. In the current year sales per pub had risen to £1,330,000 per pub while Ebitda per pub stands only slightly higher than the 2000 figure at £206,800.

In other words, sales have risen roughly in line with inflation while profits have been shrinking in real terms. Other factors in the intervening years should have helped Wetherspoon's per-pub profit. Wetherspoon has been opening pubs consistently bigger than its 2000 openings — last year, for example, each of its 23 openings were over 10% bigger and in 2004 they were more than 33% bigger.

There's also been a fair amount of churn with smaller pubs being sold. Between 2003 and 2006, agent Fleurets sold 54 JD Wetherspoon pubs on four tranches. These two factors alone should have resulted in some level of demonstrable profit-per-pub uplift. It simply hasn't happened. Profits have grown, of course, but entirely due to the company opening 266 new pubs since 2000.

The company would point to a variety of year-to-year factors. The start of the smoking ban and the rise of lower margin food sales trimmed Ebitda per pub by £13,000 in 2008 compared to 2007, the year that saw the first full-year benefit of the disposal of the aforementioned 54 lower-take pubs.

When I asked Wetherspoon founder Tim Martin why profits per pub had been so static he blamed two main items — intense competition from the rise of coffee shops and supermarkets squeezing profits, and the endless rising tide of regulatory costs. The coming year will bring an additional £16m of regulatory cost increases. Like-for-like sales will have to increase by 3% in the coming year for the current year profit figure to be maintained. But as Deutsche Bank analyst Geof Collyer points out: "The danger of driving like-for-like sales growth to generate more cash can come at a cost to the operating margin." He also calculates that simply by adding 1% to prices Wetherspoon can generate an extra £9.1m.

Pegging prices​

The only problem is that the company has promised to peg the price of a fairly large basket of products until the end of March next year. When you look at how even JD Wetherspoon has and will struggle to push profit forward on a per-pub basis, you really do wonder how the average pub licensee is faring in the current climate. Last week, Morgan Stanley analyst Jamie Rollo came to some rather stark conclusions, claiming as many as 30% of Punch and Enterprise's pubs could be "uneconomic" on current rental levels.

He added: "There is also some evidence that pub companies have been taking a bigger share of the pie than their lessees. Pubco profits have risen somewhat faster than lessee profits over the past five years, so we would not be surprised if this has squeezed the lower end of the market."

The next 12 months will test pub companies of all types, managed and tenanted. If Rollo's bear case is right, the current levels of pub company support for tenants will not be a temporary re-adjustment in challenging economic times. It will be, whether shareholders of tenanted pub companies like it or not, the prelude to a re-basing of what can be reasonably charged in rent at some pubs.