Wetherspoons shares slump 10% following half-year results

There are clearly signs of further progress for Wetherspoon (J D) (LSE:JDW), but a weaker wider market and the moribund outlook for the UK economy have brushed any positives aside.

Spoons has been dealt some difficult hands over the years which, for the most part, it has been dogged in turning into profit. The latest challenge will come in the form of the measures announced in the Budget, where the group reiterated that increases in labour rates and National Insurance will add some £60 million per year to its costs, which the company somewhat morosely points out is equivalent to £1,500 per pub, per week.

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This leads into the traditional outburst against the treatment of pubs as compared to supermarkets, especially in terms of tax inequality on VAT and business rates. The sector as a whole is clearly under pressure, and the latest measures further harm the likes of Wetherspoon who are already trading on relatively thin margins. The group previously scoffed at the discussions being held to consider a reduction in opening hours, which has thus far come to nothing, while also pointing out that the traditional assumptions around pubs are increasingly inaccurate.

For example, food now represents 38% of group revenues, and the most popular drinks in its pubs – by far – are Pepsi, coffee and tea as habits continue to change. Of course, bar sales still represent the majority of income at 57% of the total, and as a combination the two are both complementary and compelling given the no-nonsense and no-frills value offering. In this period, each had some further success, with like-for-like sales growing by 4.3% and 5.4% for bar and food lines respectively.

Revenues overall increased by 3.9% in the 26 weeks ended 26 January to £1.03 billion, with adjusted pre-tax profit rising by 58.2% to £41.3 million. Without the adjustments, pre-tax profit showed a decline of 8.6% to £32.9 million, some of which was due to capital investment of £64.6 million compared to £57.2 million the year previous, and additional staff costs.

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Net debt rose to £703.5 million from £664.8 million, and the estate was further reduced to 796 pubs, although the group aspires to return this number to 1000 sites in due course.

The group’s net book value of its property assets, including its largely freehold pub estate, was reported at £1.4 billion and a general improvement in trading conditions previously led Wetherspoons to reintroduce a dividend payment after an absence of five years, which has now been bolstered by the announcement of a new interim payment. This takes the projected yield to a still modest 2.7%, but nonetheless represents management confidence in prospects and is also in addition to the previously undertaken £40 million share buyback programme.

For the moment, current trading remains sprightly, with like-for-like sales in the last seven weeks ahead by 5%. From a broader perspective, the economic outlook for the UK is another potential headwind. Wetherspoons has been able to pass on some of the inflationary costs without diminishing its appeal, but equally it will be mindful that prospects for the UK economy are currently tepid at best, which could yet result in the consumer choosing to stay at home rather than venture out as the more challenging financial times bite. 

Despite any progress which Wetherspoon has been able to engineer, the general level of uncertainty around prospects has weighed heavily on the share price. The shares are down by 25% over the last year, as compared to a gain of 1.8% for the wider FTSE250, while the picture over the last five years is rather darker.

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Since reaching the heady high of £17.25 in December 2019 just prior to the pandemic, the price has declined by 68% to its current level, which has been further harmed by poor reception to its numbers today. While this unsurprisingly leaves the shares on an undemanding valuation in historic terms, investors are far from being in the mood to celebrate.

The market consensus of the shares as a strong hold reflects some conviction in Wetherspoon’s ability to continue to fight its corner, but is also full of caution as the challenging mix continues with a potential hangover to come.