ii view: JD Wetherspoon's glass half-full despite tax hikes

First-half trading update to 26 January

• Total Like-For-Like (LFL) sales up 5.1%
• LFL bar sales up 4.5% - LFL food up 5.6% 
• LFL slot/fruit machines sales up 11.7% - LFL hotel room sales down 6.5%

Guidance:

• Full-year net debt expected to be between £680 million and £700 million (FY24: £660 million)
• Full-year interest costs expected to be around £47 million (2024: £53 million)

Chairman Tim Martin said:

"From 1 April 2025 labour-related costs at Wetherspoon will increase by around £60 million per annum. Government-mandated wage increases have a significantly bigger impact on pub and restaurant companies than supermarkets.

"The company is confident of a reasonable outcome for the year, although forecasting is more difficult, given the extent of the increased costs."

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ii round-up:

Began in 1979, Wetherspoon (J D) (LSE:JDW) today operates 796 pubs across the UK and Ireland with some also offering hotel accommodation.

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

For a round-up of this latest trading update announced on 22 January, please click here. 

ii view:

The pub chain is known for converting unconventional premises such as former cinemas and banks into pubs. The FTSE 250 company today competes against rivals such as All Bar One owner Mitchells & Butlers (LSE:MAB), Fuller Smith & Turner Class A (LSE:FSTA) and Marston's (LSE:MARS).

Headed by founder Tim Martin, the pub operator’s estate peaked at 955 in December 2015. Management recently hinted at a return to 1,000 pubs. Bar sales over the 2024 financial year accounted for its biggest slug of revenues at 57%, followed by food at 38%, slot and fruit machines 3% and hotel accommodation most of the 2% balance. 

For investors, increased staff related taxes following the government’s autumn 2024 Budget now see the pub operator increasing expected annual costs by £60 million. Full-year net debt may rise as high as £700 million compared with last year’s £660 million. Second-quarter LFL sales growth of 4.6% is down from 5.9% in the first quarter, while the weather regularly impacts customer demand and sales. 

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On the upside, management hopes to open seven pubs over the second half of the full year 2025, meaning its estate might not shrink for the first time in a decade. Investment in areas such as beer gardens and improved beer dispense systems is being made. A previous rejigging of its debt potentially assists management’s forecast for lower interest costs in 2025. The dividend was previously restarted leaving the shares on a forecast dividend yield of 2%, while competition has eased since the pandemic given the failure of many smaller players.

For now, thin profit margins, increased taxes and an ongoing tough backdrop for consumers warrant caution. A focus on consumer value and consensus analyst fair value estimate above 800p per share does imply potential here, although when that valuation might be realised is less clear.

Positives: 

• Value customer offering
• Majority freehold properties

Negatives:

• Tough economic backdrop
• Rising taxes

The average rating of stock market analysts:

Strong hold