Better prospects for Wetherspoons but headwinds remain

Improved weather has led to sunnier prospects this year for Wetherspoon (J D) (LSE:JDW), although there is little doubt that the immediate future is fraught with challenges.

The group 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 has 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 is as the company previously pointed out, equivalent to £1,500 per pub, per week.

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In wider terms, 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.

At the same time, the group is estimating that net debt at year end will be in the range of £720 million to £740 million, up from the reported £703.5 million at the half-year numbers and largely due to the purchase of seven freehold reversions for around £17 million.

More positively, before, during and since the pandemic pub closures have remained high, which by definition improves the group’s position. Wetherspoons retains a longer-term target of a pub estate of 1,000, but for the moment is taking smaller steps. Two have been opened this year, with another four or five to follow and a further 10 next year, which will bolster the current number of 795.

In addition, a general improvement in trading conditions previously led Wetherspoons to reintroduce a dividend payment after an absence of five years. Although the yield is a pedestrian 2.3%, it nonetheless represents management confidence in prospects and is  in addition to the ongoing £40 million share buyback programme.

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The combination of a third quarter which saw like-like sales grow by 5.6% compared to the previous year and the group’s no-nonsense and no-frills value offering, are providing some insulation, and the shares have risen by 11% over the last six months. However, over the last year the price is down by 6%, as compared to a dip of 0.3% for the wider FTSE250, and remains some 60% shy of the heady highs of the £17.25 achieved in December 2019 just prior to the pandemic.

The lukewarm reception to its numbers today unsurprisingly leaves the shares on an undemanding valuation in historic terms, although investors are far from being in the mood to celebrate. The market consensus of the shares as a hold reflects a general unwillingness to take the plunge just yet, even though investors retain some conviction in Wetherspoon’s ability to continue to fight its corner.

Market snapshot

In what is becoming an all too familiar turn of events, the US President’s latest remarks on trade deals seemed to contradict not only his earlier comments but also those recently made by the Treasury Secretary. As an inevitable result, this quarterly reporting season will likely be remembered as one in which a slew of companies tore up the rulebook and stepped away from even attempting to give any meaningful guidance given the backdrop.

This will not be news to the Federal Reserve, where a no-change interest rate decision is fully priced in for later today. The accompanying comments from Chair Jerome Powell will be of more interest, not least of which will be its current take on the uncertainty which has plagued investors, businesses and consumers leading to increasingly pessimistic levels of sentiment.

The markets may at least have moved away from some of the recent volatility for the time being, but remain in the red and will likely do so until a clearer picture emerges. The Dow Jones has lost 4% so far this year, the benchmark S&P500 4.7% while the Nasdaq’s decline of 8.4% is symptomatic of a cooling of sentiment towards growth stocks, and indeed the US in general as an investment destination.

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Asian markets attempted a brief but unconvincing rally on the news that Chinese and US officials could at least be sitting down together next week, but such hopes failed to wash through to UK shores. The FTSE100 opened on the back foot, despite some strength in the likes of Standard Chartered (LSE:STAN), Prudential (LSE:PRU) and to some extent Diageo (LSE:DGE) on the China strength, also underpinned by a broad range of broker upgrades which additionally applied to the tobacco sector.

However, pressure on the heavyweight pharmaceutical sector more than outweighed these gains, with a downgrade for GSK (LSE:GSK) also extending to the likes of BT Group (LSE:BT.A) and Vodafone Group (LSE:VOD), along with Associated British Foods (LSE:ABF). Even so, the FTSE100 remains ahead by 5% so far this year in contrast to many of its global peers as the UK garners additional investor attention after some years in the wilderness.