J D Wetherspoon’s Preliminary results (For the 26 weeks ended 28 January 2018) show an increase in revenue of 3.6% to £830.4m, with like-for like sales up 6.1%. Profit before tax also increased by 20.6% with operating profit up 13.6% to £74m. The current financial year comprises 52 trading weeks to 29 July 2018. The company explained, “In our pre-close statement of 24 January 2018, we stated that total sales growth was 4.3%. For the purposes of the pre-close statement, we compared weeks 1 to 25 of this financial year with weeks 2 to 26 of the last financial year – the same 25 ‘calendar weeks’. In the current half-year statement, we compare weeks 1 to 26 of this financial year with weeks 1 to 26 of the previous financial year. The reason for the difference in reference periods is that the year ended 30 July 2017 was a 53-week period. The next trading update will be issued on 9 May 2018.
Commenting on the results Paul Hickman, analyst at Edison Investment Research said, “Like-for-like sales growth of 6.1%, led by food, is healthy by the standards of the sector, indicating the relative attraction of Wetherspoon’s value offer. Operating margin has recovered 80 basis points to 8.9%.”
Commenting on the results, Tim Martin, the Chairman of J D Wetherspoon plc, said, “The company anticipates higher costs in the second half of the financial year, in areas including pay, taxes and utilities. In view of these additional costs, and our expectation that growth in like-for-like sales will be lower in the next six months, the company remains cautious about the second half of the year.
“Nevertheless, as a result of slightly better-than-expected year-to-date sales, we currently anticipate an unchanged trading outcome for the current financial year.”
As well as commenting on the results Tim Martin also took the opportunity to critise remainers. He said, “There has been a huge debate, since the referendum, about the economic effects of Brexit.
In particular, trade organisations like the CBI and the BRC, supported by the FT, the Sunday Times, the Guardian, the chairmen of Whitbread and Sainsbury’s and others, have misled
the public by saying that food prices will automatically rise if we leave the EU without a deal.
“This is a fallacy – the EU is a protectionist organisation which imposes high taxes on food, clothing, wine and thousands of other items from non-EU countries – which comprise around 93% of the world’s population.”
He continued, “In fact, MPs have the power to eliminate these import taxes in March 2019, thereby reducing prices for the public, just as their predecessors achieved the same objective by repealing the Corn Laws almost two centuries ago.”
Meanwhile Paul Hickman concluded, “We believe there will be few winners in the challenged consumer economy in the months ahead. Wetherspoon has a well-understood and consistent value brand which should equip it to perform relatively well.
“Tim Martin’s repeated use of results announcements to expound his political views on Brexit at considerable length does serve as a reminder that this company is led by a single, strong-minded individual. This has never been a secret but is something that investors in the shares need to take into account.”
CHAIRMAN’S STATEMENT AND OPERATING REVIEW
In the 26 weeks ended 28 January 2018, like-for-like sales increased by 6.1%
with total sales increasing by 3.6% to £830.4m (2017: £801.4m).
Like-for-like bar sales increased by 5.7% (2017: 2.4%), food by 6.9% (2017: 5.1%) and fruit machines by 4.6% (2017: decreased by 2.1%). Like-for-like room sales at our hotels increased by 3.1% (2017: 14.8%). Bar sales were 61.0% of total sales, food 35.3%, fruit machines 2.5% and room sales 1.1%.
Operating profit increased by 13.6% to £74.0m (2017: £65.1m). The operating margin was 8.9% (2017: 8.1%). Profit before tax and exceptional items increased by 20.6% to £62.0m (2017: £51.4m). The improved performance in the period was due mainly to strong sales and the sale of some lower-margin pubs.
Earnings per share, including shares held in trust by the employee share scheme, and before exceptional items, increased by 35.2% to 45.7p (2017: 33.8p). Earnings-per-share growth was higher than profit growth, mainly as a result of share buybacks.
As illustrated in the table in the tax section below, the company paid taxes of £356.1m in the period under review, approximately 30.2% higher than five years ago (2013: £273.5m).
Net interest was covered 5.5 times by profit before interest, tax and exceptional items (2017: 4.6 times). Total capital investment was £61.4m in the period (2017: £102.8m). £7.5m was spent on freehold reversions of properties where Wetherspoon was the tenant (2017: £55.8m), £35.1m on existing pubs (2017: £28.6m) and £18.8m on new pub openings and extensions (2017: £18.4m).
Exceptional items totalled £6.8m (2017: £7.3m). Twelve pubs were sold or closed in the period. There was a £5.9m (2017: £6.6m) loss on disposal and an impairment charge of £1.1m (2017: £5.2m) for closed pubs and pubs which are on the market. The cash effect of the exceptional charges was an inflow of £0.8m from the proceeds of pub disposals.
Free cash flow, after capital investment of £35.0m in existing pubs (2017: £28.4m) and payments of tax and interest, was £36.8m (2017: £49.2m). Free cash flow per share decreased by 21.3% to 34.8p (2017: 44.2p). The decrease was due mainly to increased expenditure on existing pubs, increased corporation tax payments and a
reduction in payables.
Dividends
The board declared an interim dividend of 4.0p per share for the current interim financial period ending 28 January 2018 (2017: 4.0p per share). The interim dividend will be paid on 31 May 2018 to those shareholders on the register at 4 May 2018.
Corporation tax
We expect the overall corporation tax charge for the financial year, including current and deferred taxation, to be approximately 23.4% before exceptional items (30 July 2017: 25.1%). This reduction is due primarily to decreases in the amounts of non-qualifying depreciation and expenditure not allowable for tax purposes.
As in previous years, the company’s tax rate is higher than the standard UK tax rate, owing mainly to depreciation which is not eligible for tax relief.
Share buybacks
During the half year, 3,497,500 shares were repurchased by the company for cancellation, representing approximately 3.21% of the issued share capital, at a cost of £36m, including stamp duty, representing an average cost per share of 1,025p.
At the year end, the company had a liability for share purchases of £15.5m which was settled during the half year, ended 28 January 2018.
Financing
As at 28 January 2018, the company’s net debt, including bank borrowings and finance leases, but excluding derivatives, was £756.4m, an increase of £60.1m, compared with that of the previous year end (30 July 2017: £696.3m).
The net-debt-to-EBITDA ratio was 3.48 times at the period end (30 July 2017: 3.39). The company has total bank facilities available, excluding finance leases, of £860m (30 July 2017: £860m).
For the foreseeable future, it is intended that the company’s net-debt-to-EBITDA ratio will be around 3.5 times. The ratio would rise for a temporary period, if there were, for example, a sudden deterioration in trading, in which instance the company would seek to reduce the level in a timely manner. Insofar as it is possible to generalise, the board believes that debt levels of between 0 and 2 times EBITDA are a sensible long-term benchmark.
As indicated previously, a higher level of debt may be justifiable when interest rates are low and other factors are favourable.
Property
During the period, we opened three new pubs and closed 12, bringing the number open at the period end to 886. Following a review of our estate, in recent years, we placed around 100 pubs on the market, 88 of which have now been sold, are under contract or have been closed.
UK taxes and regulation
Pubs and restaurants pay proportionally far higher levels of UK tax than do supermarkets. The main disparity relates to VAT (value added tax), since supermarkets pay no VAT in respect of their food sales, whereas pubs pay 20%, enabling supermarkets to subsidise their alcoholic drinks prices. Pubs also pay approximately 18p per pint in respect of business rates, while supermarkets pay less than 2p per pint.
In addition, the government has, in recent years, introduced both a ‘late-night levy’ and additional fruit/slot machine taxes, further reducing the competitive position of pubs in relation to supermarkets.
The tax disparity with supermarkets is unfair. Pubs create significantly more jobs and more taxes per pint or per meal than do supermarkets and it does not make social or economic sense for the UK tax régime to favour supermarkets. We acknowledge the need for companies to pay a reasonable level of taxes, but hope that legislators will make prompt progress in creating a level playing field for all businesses which sell similar products.
The taxes paid by Wetherspoon in the period under review were as follows:
|
First half |
2018 |
2017 |
|
(estimate – UK only) |
£m |
£m |
|
VAT |
162.5 |
156.5 |
|
Alcohol duty |
85.4 |
79.3 |
|
PAYE and NIC |
54.1 |
45.1 |
|
Business rates |
27.5 |
25.3 |
|
Corporation tax |
12.2 |
8.3 |
|
Machine duty |
5.2 |
5.0 |
|
Climate change levy |
4.5 |
4.8 |
|
Carbon tax |
1.7 |
1.7 |
|
Landfill tax |
1.3 |
1.2 |
|
Fuel duty |
1.0 |
1.0 |
|
Premise licence and TV licences |
0.4 |
0.4 |
|
Stamp duty |
0.3 |
3.0 |
|
TOTAL TAX |
356.1 |
331.6 |
|
Tax per pub (£000) |
402.0 |
362.8 |
|
Tax as % of sales |
42.9% |
41.4% |
|
Pre-exceptional profit after tax |
48.2 |
37.7 |
|
Profit after tax as % of sales |
5.8% |
4.7% |
Further progress
As previously highlighted, the company’s philosophy is to try continuously to upgrade as many areas of the business as possible.
In November 2015, the government’s Food Standards Agency (FSA) issued a report which named Wetherspoon equal top of the largest 20 food chains for hygiene standards over the preceding five years. Currently , 92% of our pubs have obtained the maximum five rating, under the FSA scheme, with 98% of pubs receiving a rating of four or above. This record reflects extremely hard work by our central catering, audit and operations team, as well as by the teams in our pubs.
We have recently been recognised as a ‘Top Employer UK’ by the Top Employers Institute for 15 consecutive years.
The company has also recently been recognised for the quality of the facilities in its pubs, winning in six categories at the ‘loo of the year’ awards.
During the period under review, we allocated £21.2m in bonuses and free shares to employees, 97% of which was paid to those below board level and 84% to those working in our pubs.
Current trading and outlook
There has been a huge debate, since the referendum, about the economic effects of Brexit. In particular, trade organisations like the CBI and the BRC, supported by the FT, the Sunday Times, the Guardian, the chairmen of Whitbread and Sainsbury’s and others, have misled the public by saying that food prices will automatically rise if we leave the EU without a deal.
This is a fallacy – the EU is a protectionist organisation which imposes high taxes on food, clothing, wine and thousands of other items from non-EU countries – which comprise around 93% of the world’s population. Like Monty Python’s Dennis Moore, as illustrated by Sam Akaki in appendix 1 below, the EU “….steals from the poor and gives to the rich…”.
In fact, MPs have the power to eliminate these import taxes in March 2019, thereby reducing prices for the public, just as their predecessors achieved the same objective by repealing the Corn Laws almost two centuries ago.
Two articles I have written on this subject for Wetherspoon News (appendix 1) and The Independent newspaper (appendix 2) are included below. The issues have also been examined by Matt Ridley in The Times (appendix 3).
Another frequently repeated Brexit concern is that the much bigger EU economy will be better able to withstand a Mexican standoff than the UK.
This is also a fallacy. For example, Wetherspoon is one of the biggest customers, or possibly the biggest customer, of the excellent Swedish cider-maker Kopparberg. If trade barriers were imposed, so as to make Kopparberg uneconomic, then Wetherspoon could switch to UK suppliers or those from elsewhere in the world.
In this case, the principal losers in a trade war would be the inhabitants of a small town in Sweden, where Kopparberg is produced, rather than the UK economy. Unfortunately for the Swedes, the EU negotiators, unlike those of the UK, are not subject to judgement at the ballot box, so Kopparberg’s influence on the outcome may be minimal.
The same principle applies to thousands of EU imports including Prosecco, Champagne and many wines and spirits – in almost all cases there are suitable, and often excellent, alternatives to EU products available elsewhere.
In fact, the biggest danger for EU producers, whose wine industry, for example, has lost huge market share to the New World, in spite of import taxes, is that UK consumers take umbrage at what they see as the overbearing behaviour of EU negotiators, and decide to favour products which originate elsewhere.
Provided that the UK parliament votes to eliminate tariffs, EU producers will, in any event, be faced with a far more competitive UK market – since New Zealand wine producers, for example, will be able to compete on an equal, import tax-free basis, for the first time. So, the antagonistic approach of EU negotiators, which risks alienating UK consumers, is extremely unhelpful to businesses within their own bloc.
Most economists who criticise Brexit use hypothetical arguments, but, in the real world, the UK can eliminate import taxes, improving living standards and simplifying the Byzantine tax system – both of these factors will improve the outlook for consumers and businesses in the UK.
In the six weeks to 11 March 2018, like-for-like sales increased by 3.8% and total sales increased by 2.6%.
The company anticipates higher costs in the second half of the financial year, in areas including pay, taxes and utilities. In view of these additional costs, and our expectation that growth in like-for-like sales will be lower in the next six months, the company remains cautious about the second half of the year.
Nevertheless, as a result of slightly better-than-expected year-to-date sales, we currently anticipate an unchanged trading outcome for the current financial year.
Tim Martin
Chairman
15 March 2018
Appendix 1 – Tim’s Viewpoint, Wetherspoon News, spring 2018
Ignore daft ideas – the public does know best
Wetherspoon News foils the CBI plan to fool the public about food prices
Few people are capable of expressing, with equanimity, opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.
– Albert Einstein
Wetherspoon News has had, at least, a temporary victory in the battle to correct the myth that food prices would inevitably rise in the absence of a ‘deal’ with the EU – a battle in which we took on much of the national press and big business.
The perpetrators of the myth – the CBI, the British Retail Consortium, the Financial Times, The Sunday Times, The Guardian, the chairmen of Sainsbury’s and Whitbread and others – have had to accept that MPs do, indeed, have the power, in March next year, to lower food prices at a stroke, by voting to eliminate taxes, also called tariffs, on non-EU food imports, including coffee, rice, wine and thousands of other products.
Imports
This will mean, under World Trade Organisation rules, that there are no taxes, either, on food imports from the EU itself.
In addition, on leaving, MPs have the power, as government lawyers have repeatedly stated, to end the £200 million per week of net payments to the EU, and to divert those funds for domestic purposes – maybe the NHS, maybe tax breaks for the less well-off… MPs can choose.
Another benefit is that the UK can regain control of its historic fishing waters – 60% of fish in UK waters are now caught by EU boats, with devastating effects in many fishing communities.
Economists
So, why have the CBI, the City and most banks and economists insisted that we’re all doomed without a deal?
The main reason is that highly educated people (and the heads of the above organisations, who all went to Oxford or Cambridge University) are often more susceptible to daft ideas than the ‘man on the Clapham omnibus’.
Philby, Burgess and the Apostles of the 1930s, seduced by undemocratic creeds, all went to Cambridge University.
The truly clever people, who created democracy and the jury system, for example, understood these dangers.
But not all graduates are seduced – as the above quotation from Einstein implies, there are non- conformist exceptions.
Indeed, some of the most articulate advocates of democracy in the referendum were Oxbridge grads.
An unfortunate by-product of education, for the credulous, is the toxic belief that the elite knows best.
Twenty years ago, middle-aged Oxbridge males like Clarke, Mandelson, Blair, Heseltine and Howe, along with their peers at the CBI, Goldman Sachs, Arthur Andersen, Ernst and Young, most of the City and the Financial Times, urged us, with revolutionary zeal, to join the disastrous euro – in spite of the fact that its predecessor, the exchange rate mechanism, had brought the country to its knees only a few years before.
Luckily you, the public, remained unimpressed.
Elite
This ‘we know best’ attitude, incorporating a grudging view of democracy, is typical of the elite – and is illustrated by comments from City investment adviser, and Cambridge graduate, Mark Brumby.
In a February newsletter to clients, he said: “Democracy, which is great, but which gave us Boaty McBoatface and the Birdie Song … has now given us Brexit.”
Brumby adds that The Times newspaper warns liberals that “they should not sneer at populism”.
Brumby himself then says that “if you substitute ‘look aghast’ for ‘sneer’ and ‘ignorance’ for ‘populism’ … you might get a different answer”. The indiscreet Brumby, influential in the City, says in public what around 70–80% of the elite say in privat
They mistrust the hoi polloi – and have started to call ideas or movements with which they disagree ‘populism’. But, in reality, populism is Churchill in the 1930s, the Boston Tea Party, the Beatles, Rap, Punk,
Martin Luther King, Mahatma Gandhi, the suffragettes, the smashing of the Berlin Wall, the Internet and a million other interventions. Not all are great, but populism, distilled through a democratic system, is humanity’s greatest achievement.
But the modern-day apostles, who evangelise the EU’s unelected presidents, unaccountable court and parliament whose MPs can’t even initiate legislation, don’t hesitate to attribute the referendum result to racism or ignorance. They also have a more immediate motive for the orchestrated campaign to frighten the public about food price rises.
Deal
If the public can be convinced about the necessity of a deal with the EU, they can also be convinced to stay in the EU’s ‘customs union’.
In effect, this means staying in the EU by stealth, since the UK would then have to obey most EU laws – and would lose the benefits of independence, such as lower food prices and control of fishing rights.
The customs union means that EU countries, which comprise seven per cent of the world’s population, charge no food taxes to one another, but charge punitive taxes to the rest of the world, thereby keeping prices at artificially high levels for UK and EU consumers.
The customs union also causes huge damage to African economies, as Sam Akaki emphasises on the opposite page.
And the food taxes on non-EU imports are sent to Brussels, too, rather than being used for the benefit of the UK public. Can you Adam and Eve it? Nice try Carolyn Fairbairn of the CBI, David Tyler of Sainsbury’s, Richard Baker of Whitbread and others, but we’ve rumbled the latest edition of Project Fear. Listen up, big chiefs. The EU is leading most of Europe on a tragic path, away from democracy.Just ask the Greeks.
Einstein, a seriously clever guy who never went to university, said that real genius was knowing what you don’t know.
So, when it comes to complex issues like the euro and democracy, take a cue from Einstein and understand that the collective intelligence of the public is infinitely greater than yours. It’s painful for big egos to accept, but the public really does know best.
Tim Martin, Chairman
Appendix 2 – Tim Martin, The Independent, 21 December 2017
“Brexit will be great for our food industry and our pubs…
According to historian Martin Gilbert the truth exists, but it’s hidden in a fog by lack of evidence and lack of perspective – other impediments include intellectual arrogance and misinformation, especially in politics. It’s fascinating to see, at close quarters, the process by which myths are dismantled and the truth emerges in our democratic system.
The Confederation of British Industry (CBI) and the British Retail Consortium (BRC), abetted by the chairmen of Whitbread and Sainsbury’s, have had considerable success in creating a fog which has misled the public, MPs and commentators about food prices. The Financial Times, Sunday Times and Guardian, for example, have all run stories stating that failure to agree a deal with the EU will result in substantial food price rises – a key part of their “cliff-edge” narrative of economic dislocation.
The false thesis is that reverting to World Trade Organisation rules, in the absence of an EU “deal”, automatically results in tariffs, currently imposed on non-EU countries only, applying equally to imports from the EU itself. This is untrue, since WTO rules allow our Parliament to emulate New Zealand, Singapore and Hong Kong, among others, by eliminating food tariffs, provided the policy applies equally to all nations. Such rules would, as many Remainers admit, cause prices to fall in shops – and pubs.
In a Jeremy Vine show debate the Labour MP, Chuka Umunna, repeated the canard about food price rises. It was obvious that Chuka had swallowed the CBI line and really believed what he was saying, so I took to Twitter, for the first time ever, to try to correct his understandable misinterpretation. In an exchange of tweets, Chuka stuck religiously to his guns, but his followers got the point even so.
Their comments, hidden in a fog of abuse, abandoned the automatic-price-rise-post-Brexit position and instead said that UK farmers would suffer. That at least, unlike Chuka’s position, is a valid argument. Indeed, it was a vexed and divisive debate in the 1830s and 40s, when almost precisely the same issues arose with regard to the Corn Laws. They were created to keep corn prices at a high level, by restricting imports, principally to protect landowners whose views predominated in Parliament at the time. However, their imposition eventually had devastating consequences for the poor, and was felt by many to have had catastrophic consequences in Ireland during the potato famine. When the Corn Laws were eventually abandoned, food prices fell.
The pub industry in the UK was also notorious for “trade protection” for most of the 20th century. Brewers were protected by a licensing system which favoured vested interests, but caused high prices and reduced competition in pubs and restaurants. Nostalgia aside, it is clear to most people that the abandonment of “barriers to entry” has led to a dramatic increase in the number of independent pubs, bars and restaurants, and to greater choice and higher standards than in the past.
There are thousands of examples of the benefits to the public of increased choice and competition. New Zealand farmers, to take one example, were protected by trade barriers in the recent past. There was huge anxiety about the elimination of tariffs there, but free trade has been a great success — farming productivity has surged, living standards have improved and food exports have boomed.
For those with long memories, tariffs and protection also did little to help the British car manufacturing industry – and are unlikely to help British farmers or manufacturers today, especially in the long run.
The CBI and big-business boardrooms, through religious attachment to the EU – which follows their equivalent zeal for the disastrous Exchange Rate Mechanism and the euro – have undoubtedly fooled some of the people some of the time. However, in a democracy the truth will emerge, and Chuka and members of the public who have been duped will quickly see through the cloud of misinformation. In due course, the debate will move on to the question of the validity of the EU’s modern-day Corn Laws.
The emergence of the truth about food prices may, or may not, change political positions in the country about the EU, but the existence of the debate shows how democracy works, and why it’s the best system. The main argument in favour of Brexit, ill-understood in the echo chamber of Remain, is that the EU’s lack of democracy, its distant parliament, unelected presidents and unaccountable court prevent the very debates and direct dialogues with lawmakers, like Chuka, upon which freedom and prosperity depend.”
Tim Martin