JD Wetherspoon has issued its third profit warning this year, with chair Tim Martin indicating that the pub chain may fall short of expectations due to escalating costs. This latest warning highlights the mounting pressure on the UK hospitality sector from higher energy, food, labour, and tax bills.
Rising Costs Hit Profit Forecasts
Investors had already anticipated a decline in pre-tax profit to £73m, down from £81m last year. However, Martin told investors on Wednesday that cost increases have been substantial, affecting many hospitality operators including Wetherspoon. The company operates approximately 800 pubs across the UK and Ireland.
The industry is grappling with a rise in the minimum wage and business rates that took effect in April. Martin has previously stated that increases in national insurance contributions and wages would cost the business around £60m annually. Additionally, an extra £1.6m in tax is due this year from the extended producer responsibility packaging levy.
Geopolitical Impact on Energy Prices
The US-Israel conflict with Iran and the resulting surge in energy prices are also expected to drive up food and heating bills this year. Despite these challenges, shares in JD Wetherspoon rose slightly by 1% on Wednesday. Russ Mould, investment director at AJ Bell, suggested the rise may reflect relief that profit might fall only slightly short of expectations, with sales growth indicating demand is holding up well for now.
The pub chain reported a 3.4% increase in sales at established pubs in the 13 weeks to 26 April, compared to the same period last year. However, Mould noted 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 Middle East tensions.
Debt and Market Concerns
Wetherspoon forecast net debt between £740m and £760m by the end of its financial year, with a market capitalisation of about £644m. Mould cautioned that a legacy of the pandemic is the heavy debt load, and if interest rates rise further, it could create another headwind for the business.
Elsewhere, drinks maker Diageo reported a rise in sales from customers stocking up before the Fifa World Cup, with organic sales growing by 0.3% in the three months ending in April, ahead of an expected decline. Diageo maintained its profit guidance for the year despite geopolitical uncertainty, and its shares rose nearly 5%.
