Interactive Investor

ii view: cost pressures ease but Wetherspoons shares are flat

Growing sales and outperforming the wider industry. We assess prospects for this value focused FTSE 250 pub chain.

8th November 2023 16:40

by Keith Bowman from interactive investor

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First-quarter trading update to 14 weeks to 5 November

  • Like-for-like revenues up 9.5%
  • Drink sales up 10.7% / food sales up 8.2%
  • Slot and fruit machine sales up 10% / hotel room revenues up 6.2%

ii round-up:

Budget pub chain Wetherspoon (J D) (LSE:JDW) today detailed a slight slowing in quarterly sales growth, but pointed to a general easing in inflationary cost pressures, with the full-year outcome expected to meet current City forecasts. 

First-quarter like-for-like sales for the 14 weeks to 5 November rose 9.5% compared to the same quarter last year, although that's down from growth of 11.5% in the prior fourth quarter. 

Shares in the FTSE 250 company are up about 0.3% in UK trading having come into this latest news up 50%. That’s similar to All Bar One owner Mitchells & Butlers (LSE:MAB) and in contrast to a near 6% fall for the FTSE 250 index itself. 

Wetherspoons operates 816 pubs across the UK and Ireland including a new opening during the quarter at London’s Heathrow airport. 

Growth in drink sales was the driver over the quarter, gaining 10.7%, with food sales rising 8.2%, slot and fruit machine takings up 10% and hotel revenues improving 6.2%. 

An industry sales survey in September saw Wetherspoons outperforming for a 13th consecutive month, with sales growth of 9.4% set against an industry wide gain of 5.9%.   

A second-quarter trading update is scheduled for 24 January. 

ii view:

Coming to the stock market in 1992, the Watford headquartered company employs more than 40,000 people. The group is known for converting unconventional premises such as former cinemas and banks into pubs. Bar sales over its last financial year accounted for its biggest slug of sales at around 57%, with food a further 38%, slot and fruit machines 3% and pub attached hotels most of the 2% balance.

For investors, heightened costs such as elevated mortgage and rental payments now put pressure on customer wallets. Business costs including energy, food and wages have also risen, the dividend payment has been suspended since the start of the pandemic, while an estimated price-to-net asset value of just over 2 times compares to under 1 at fellow pub groups Mitchells, Fuller Smith & Turner Class A (LSE:FSTA) and Marston's (LSE:MARS), potentially suggesting better value elsewhere. 

More favourably, sales have made a recovery from the pandemic. Rises in some drink and food prices have helped boost revenues, countering elevated costs. Some easing in inflationary costs such as food have also been seen. Net debt, as at its last full-year results, fell by more than a quarter year-over-year and came in below the level it was before the Covid crisis, while competition has reduced since the pandemic given the failure of many smaller players. 

A value customer offering in hard economic times puts Wetherspoons in a good position, and a consensus analyst estimate of fair value at over 800p per share suggests the City is bullish about prospects. However, the shares aren't cheap and investors might want to keep an eye on further indicators that the business can justify that price target.

Positives: 

  • Value customer offering
  • Majority freehold properties

Negatives:

  • Uncertain economic outlook
  • Elevated costs

The average rating of stock market analysts:

Strong hold

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