JD Wetherspoon has issued its third profit warning this year, as the pub chain's chairman Tim Martin warned that rising costs could cause the company to miss expectations. The warning is the latest sign that the UK hospitality sector is struggling under the pressure of higher energy, food, labour, and tax bills.
Martin told investors on Wednesday: “As many hospitality operators, including Wetherspoon, have reported, there have been substantial increases in costs.” The company, which operates around 800 pubs across the UK and Ireland, had already seen investors expect a drop in pre-tax profit to £73 million, down from £81 million last year.
The hospitality industry is adjusting to a rise in the minimum wage and business rates that came into effect in April. Martin has previously stated that increases in national insurance contributions and wages would cost the business approximately £60 million annually. Additionally, the company faces an extra £1.6 million in tax this year due to the extended producer responsibility packaging levy.
The ongoing conflict between the US and Israel and Iran, along with the resulting surge in energy prices, is also expected to drive up food and heating costs this year. Despite these challenges, shares in JD Wetherspoon rose slightly by 1% in early trading on Wednesday.
Russ Mould, investment director at broker AJ Bell, suggested the rise likely reflected relief that profit might fall only “slightly short of expectations” and that sales growth indicated demand was “holding up well for now.” The pub chain reported that sales at established pubs grew by 3.4% in the 13 weeks to 26 April compared to the same period last year.
However, Mould added that Wetherspoon, which had an operating profit margin of 6.9% in its last financial year, is highly exposed to the energy price shock triggered by the Middle East conflict. “A legacy of the pandemic is the heavy load of borrowings the company is carrying. While interest costs are expected to remain broadly unchanged year-on-year as debt ticks up, if interest rates move higher that could create another headwind for the business,” he said.
Wetherspoon forecast its net debt to be between £740 million and £760 million by the end of its financial year, compared to its market capitalisation of about £644 million.
In contrast, drinks maker Diageo said on Wednesday it was “mindful” of geopolitical uncertainty, including the impact of the Iran war, but maintained its profit guidance for the year. The FTSE 100 company, owner of brands like Guinness and Johnnie Walker, reported a rise in sales from customers stocking up before the FIFA World Cup. Overall, its organic sales grew by 0.3%, ahead of an expected decline of 2.3% in the three months ending in April. Its shares rose nearly 5%.
