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Shares in JD Wetherspoon (JDW) have turned negative after a strong start this morning as management guides towards lower sales and higher costs in the second half of the year. Investors initially brushed off the warnings at the open, perhaps confident that higher like-for-like sales in H1 can either offset the H2 contraction, or hopeful that current pace of performance will continue and that management are being overly cautious in voicing their concerns, especially in a FIFA World Cup Year. However, in what some may see as a thinly-veiled profits warning, that early optimism has given way to a more vigorous move lower in a swift reversal.
The group saw an impressive uptick in like-for-like sales across all divisions in the first half, which saw the more lucrative and higher margin food division outperforming (+6.9%).
And, as has become the norm, Chairman Tim Martin took the opportunity to provide his personal view on the economic impact of UK’s vote to leave the EU, highlighting the ‘fallacies’ espoused by economists in the aftermath of the vote.
However, below his pro-Brexit literature review comes the warning that costs will increase in H2 due to the impact of pay, taxes and utilities. Those bullish on the outlook will note that the pub chain reiterated its full-year guidance thanks to a strong start to the year. Yet these figures don’t factor in the UK’s recent cold snap, whilst guiding towards lower sales despite the holy grail of pub attendance that is the World Cup falling in H2’s calendar doesn’t exactly inspire confidence. And rising costs are especially worrying for H2 profitability given the chain’s business model of selling drinks cheaply to outprice competitors but squeezing margins.
Either championing Martin’s cause or, more likely, impressed by the first half results, traders initially pushed the shares up by as much as 3.1% to better January’s all-time high of 1340p by a penny. However, after the strong opening, optimism has waned, with shares retreating back below breakeven as longer-term investors factor in the potential impact of management’s concerns this morning. With shares offside by as much as 3%, breaching both rising lows and horizontal intersecting support at 1292p, the door has been opened to an even sharper retreat towards 1200p.
Henry Croft, Research Analyst, 16 March 2018
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