Great expectations

Prudent management of a company’s affairs is the raison d’être for a board of directors, so one of their prime obligations is to keep shareholders informed. Key to that is managing their reasonable expectations.

In the past week various companies in the drinks sector have shown how – and how not – to achieve this.

Managing expectations is a key tool in keeping the City and shareholders abreast of progress and thus fairly pricing shares. Both Diageo and Pernod Ricard are adept at doing so. When their annual figures for the year to the end of June are announced both will show organic growth in low single figures, as promised. If there is any deviation it will be on the upside.

Similarly, with JD Wetherspoon closing its year in 10 days’ time, investors know that although it has had to manage its way through a tough couple of years, its dividend is almost certain to rise because its cash flow is strong and sales are rising, partially due to breakfast opening. In the financial year to date sales are up by 4.4% and net debt is stable.

In the same vein, as Young & Co’s shareholders celebrated the 13th consecutive increase in their annual dividend, chairman Chris Sandland told the AGM that he was pleased with the first quarter of the company’s financial year, with like-for-like sales up 2.4%, and remained confident of further progress – code that he is planning for a 14th consecutive dividend increase.   

Compare those accurate (and necessarily conservative) pictures with that from Luminar, Britain’s biggest nightclub group, which has issued three profits warnings in a year! Like-for-like sales in its 76 clubs fell by 20% in the 19 weeks to July 8.

Revenue was down 26% on a 19.6% decline in the number of admissions. Not what shareholders wanted to hear from a group whose shares have been hammered and which in May warned that it could breach its banking covenants (talks with the bankers are “constructive”).

But although Luminar predicted that the World Cup would hit takings, it can hardly lay the complete blame on the tournament for its worsening trading.

It knew six months ago exactly when England would be playing, and a Friday afternoon kick-off against Slovenia is hardly going to dent nightclub takings.

Further, England’s failure to progress beyond the last 16 was regarded as a blow by pubs and clubs gearing their business to a successful run. The obverse is that Luminar did not suffer as much as it might.

Much more at the heart of the group’s problems is the inability of analysts to see how it can improve its parlous financial position and reduce its debt pile. For the year to the end of February, the company lost £110 million following £114m of writedowns compared with a profit of £10.5m the previous year.

There has since been a succession of boardroom departures. The upshot is that the shares have collapsed by more than 90% in 12 months.

Those who bought into an equity issue last July at 95p a share must be dumbfounded that they are now down to 10p. That was not in the game plan. Their expectations have been very poorly managed.

Finance on Friday, 16.07.2010