ii view: JD Wetherspoon sees glass half-full

A value customer offering, reducing debt and hopeful that cost pressures will ease. Buy, sell, or hold?

Fourth-quarter trading update

• Like-for-like sales up 11.5% compared to Q4 last year
• Like-for-like sales up 11% compared to Q4 2019 before the pandemic
• Net debt of £688 million down from £920 million last year

Guidance:

• Expects an improved outcome for the next financial year

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ii round-up:

Founded in 1979, Wetherspoon (J D) (LSE:JDW) today operates 827 pubs with around 50 also offering an attached hotel.

Headquartered in Watford, Hertfordshire, it employs over 40,000 people.

For a round-up of this latest trading update announced on 12 July, please click here. 

ii view:

Coming to the stock market in 1992, Wetherspoon is known for converting unconventional premises such as former cinemas and banks into pubs. Its rivals include owner of the All Bar One chain Mitchells & Butlers (LSE:MAB), Young & Co's Brewery Class A (LSE:YNGA) and Fuller Smith & Turner Class A (LSE:FSTA). Bar sales account for its biggest slug of revenue at around 57%, with food a further 38%, slot and fruit machines 3% and pub attached hotels the balance of 2%.

For investors, the difficult economic backdrop including rising mortgage and rental costs may now be pressuring the disposable income of its customers. Costs such as energy, food and wages have risen, the dividend payment has remained suspended since the start of the pandemic, while an estimated price-to-net asset value of over 2.5 times compares to under 1 times at fellow pub groups Fullers and Marston's (LSE:MARS), potentially suggesting better value elsewhere. 

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More favourably, increases in some drink and food prices have helped boost revenue, countering rising costs. Any decline in energy costs could assist performance during its next financial year, a focus on reducing debt remains ongoing, while competition has reduced following the pandemic given the failure of many smaller operators. 

For now, and while some caution looks sensible, constrained consumer budgets should continue to favour Wetherspoon’s value orientated approach, giving grounds for investors to stay patient.

Positives: 

• Value customer offering
• Majority freehold properties

Negatives:

• Elevated costs
• Uncertain economic outlook

The average rating of stock market analysts:

Strong hold