Comment: Wetherspoon resilient amid the headwinds

Martin Flanagan. Picture: Fiona Hanson/PA

SHARES in JD Wetherspoon took a 4 per cent hit yesterday, market disquiet triggered by a slight fall in half-time profits, increasing overheads ranging from staff to utilities, and a pegged dividend. Profit margins had come under a bit more pressure as well, as the company, which has well over 900 pubs, including dozens in Scotland, continued to compete heavily on price to address the threat from the cheap booze supermarkets.

That margin pressure is not going to dissipate any time soon, the stock market judged, particularly as Wetherspoon announced it would be cutting the cost of coffee and breakfast from next Wednesday by double-digit figures.

Obviously, chairman Tim Martin’s group hopes swift volume growth will offset the cost of the exercise, but the City is likely to have to reserve its judgement on the initiative for a while.

City analysts also noted that Wetherspoon’s best same-floorspace sales growth came from food – 10 per cent – compared with a much more pedestrian 1.5 per cent in bar sales, with the dining component being more cost-intensive.

The dividend yield at Wetherspoon is not what it was despite the regular share buybacks in recent years, and so the interim payout being only maintained did not lift the mood in the market.

Strong comparatives with the second half of last year also do not suggest the numbers at the group are likely to sprint in the near future at any rate.

But even with these caveats Wetherspoon remains a pretty decent defensive stock market play. Under Martin and his chief executive John Hutson, the business has never been obsessed with the two City pieties of profit margins and like-for-like sales growth.

The duo have consistently set more store by overall sales growth – hence the almost metronomic nationwide pub-opening programme – and overarching profitability rather than margins. This is sensible. Customers still seem to like the low-price business model to which the company is wedded, to the extent that anecdotal evidence suggests some of the one in six British pubs which have closed in the past decade actually blame a new Wetherspoon outlet opening in their area.

And, as Hutson says, investors should not extrapolate the conservative dividend this time as a harbinger of future policy.

He says the company decides divi policy on a six-monthly basis, and that not too long ago it actually tripled the payout.

All of which is not to say Wetherspoon is not facing the problems in the high street that its competitors – not just pubs but also coffee shops, the likes of McDonalds, Greggs and supermarkets, for instance – are.

But the business has proved its resilience. It has been consistently nimble-footed in its marketing to protect its position in the changing economic conditions.

Some subsidence for construction

Construction, about 7 per cent of British GDP, put in its worst performance in January since autumn 2013, with output down 2.6 per cent.

Apparently a fall in housebuilding has done some of the damage, perhaps brought about by the tougher Bank of England rules for mortgage-lending.

Preventing a “bubble” can have ramifications.

SUBSCRIBE TO THE SCOTSMAN’S BUSINESS BRIEFING

• Get the latest business headlines from a variety of news sources emailed to your inbox each morning