JD Wetherspoon, will cancel future dividend payments, and sharply reduce capital expenditure on new openings as the pub operator focuses on increasing cashflow to meet a $140m debt repayment deadline later this year.
“We have a private placement due at the end of September and we’re mindful of the external situation at the moment with relation to the credit markets,” said John Hutson, chief executive of JD Wetherspoon.
“Ordinarily in more stable markets, refinancing a debt of that nature with the financial profile and cashflow we have, we would be able to get pretty competitive terms. But we’re not certain that is going to be the case this time around, so rather than be forced into paying very unattractive rates, we do now have the fall-back position of being able to pay out of cashflow and our existing facilities.”
The company paid out £17.4m on dividends last year and analysts estimate that the company will make additional reductions in capital expenditure of £20m this year and £30m next year. Net borrowing has fallen by £20m over the last twelve months.
The company, which launched a 99p-a-pint promotion earlier this month, expects operating margins for the half-year ending on January 25 to be 1 percentage point lower than the same period last year.
Shares in JD Wetherspoon rose 38¼p or nearly 14 per cent to 312½p in morning trading.
Analyst reaction to the statement has been mixed. Investec gave a cautious welcome to the news, but still voiced concern over the company’s debt, while Oriel described the dividend decision as “disapointing”. Teathers was also disappointed with the dividend decision.
“[We] viewed the expansion programme as a way for Wetherspoon to take share during a difficult period for the industry,” it said in a note to investors, declining to change its full-year earnings estimates for the group.
Nigel Parson at Evolution Securities, who has a “reduce” rating on the stock, was more critical.
“This is a classic example of a good company ’crunched’ by the lack of credit - ultimately it should refinance but it may need a rights issue too,” he said.
KBC however applauded the fact that Wetherspoon had achieved “above average sales performance without significant margin cost”, and raised its forecast for annual pre-tax profit by 5 per cent to £49.5m.
So far this financial year, the company has opened 23 new pubs, and expects to open another 11 pubs before the year ends in August. However, Mr Hutson indicated that the level of new pub openings would be curtailed in the following year to no more than about a dozen, in spite of the relatively low cost of picking up new premises as existing pubs fall on hard times.
“We’re in line for about 33 new pubs this financial year, which is ten more than last year,” he said.
“We’re finding a number of opportunities with ex-pubs that have gotten themselves into trouble, so we’re able to pick up these assets for a very low premium. The fit-out costs are substantially less than fitting out brand new pubs from scratch and we’re able to renegotiate more attractive lease terms. We would like to be in a position to do a few of those as and when they come up, but in reality probably at a fewer number than we’ve done this year, bearing in mind our financing.”
In spite of the belt-tightening, day-to-day trading continues to improve, boosted by the company’s promotion.
“We’re only two weeks into the promotion so it’s too early to call a trend, but it’s gone very well so far and we’re pleased by the start,” said Mr Hutson.
From the 5th of January through to the 18th of January – the period during which the 99p a pint promotion has run – like-for-like sales grew by 6.4 per cent.
In the 12 weeks to the 18th of January, like-for-like sales increased by 2.6 per cent, while in the six months to the 18th of January, like for like sales grew by 2 per cent.