JD Wetherspoon has reported a jump in third-quarter sales at its 900-plus pubs in Britain and Ireland, but its shares fell by as much as 6% as analysts warned sales were not translating into higher profit due to rising costs.
Wetherspoon has been battling increased costs due to a minimum wage hike, higher property prices and power bills, as well as a move away from pub drinking by younger UK residents.
Wetherspoon's comparable sales rose 7.6% during the 13 weeks to April 28, with an 8.4% rise in total sales in Britain and Ireland. The company reiterated that it expects an unchanged trading outcome for the current financial year.
"Significantly Higher" Costs
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"Costs are significantly higher than last year, labour costs especially, stemming from very low unemployment. Other cost increases include business rates and repairs, the latter as a result of an aging estate of pubs," chairman Tim Martin told Reuters via text message.
Wetherspoon had warned in March that it expects costs in the second half to remain high, after rising wages hit the budget British pub chain's profit. It announced a pay increase for its employees in November.
"With a company that is growing so impressively on the top line ... it is unusual to not have a profit upgrade ... there isn't an upgrade because of margin pressure which is largely from labour cost but also from repair and maintenance cost," Liberum analyst Anna Barnfather told Reuters.
"I think the disappointment is that this strong sales growth isn't translating into profit growth," she added.
Pre-Tax Profit Expectations
Barnfather expects annual pre-tax profit to fall to £103 million from £107.2 million pounds in the year ended July 2018.
Rival Greene King recently forecast annual pre-tax profit above analysts' expectations as more UK residents headed to its pubs over a warm and sunny Easter.
Gin, Craft Beers, Coffee, Tea And Food
Growth for Wetherspoon had come from the sales of gin, craft beers from smaller brewers, and coffee and tea, which are now big sellers. Food sales were propped up by fish and chips, Martin said.
"Concern Over Mounting Costs"
"There is a concern over mounting costs for Wetherspoon. To a lesser extent, net debt ticked up as well, even though in the more medium term it anticipates debt to fall back again," CMC Markets analyst David Madden told Reuters.