ii view: Wetherspoons hopeful of making record sales

This pub group lost over half its value in 2022 but its shares have risen more than 70% so far this year. Buy, sell, or hold?

Third-quarter trading update to 30 April

• Like-for-like sales up 12.2% compared to Q3 last year
• Like-for-like sales up 9.1% compared to Q3 2019 before the pandemic
• Net debt of £738 million down from £744 million at the end of January

Guidance:

• Expects full-year profit to be toward top of analyst forecasts

Chairman Tim Martin said:

"Lockdowns and associated restrictions have had more profound and longer-lasting consequences than most economists, politicians and commentators predicted.

 "Sales in the last quarter have continued their positive momentum, although inflation, especially in labour, energy and food costs, remains a more intractable issue.

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ii round-up:

Pub group Wetherspoon (J D) (LSE:JDW) today flagged its strongest Easter week ever, pushing expected full-year sales to a likely record and upping management’s annual profit hopes toward the top end of current analyst estimates.  

Sales for the 13 weeks to the end of April rose 12.2% year-over-year and by 9.1% compared to the same period just before the pandemic in 2019. 

Shares in the FTSE 250 company rose by more than 5% in UK trading having come into this latest news up by almost 70% year-to-date. Rival and owner of the ‘All Bar One’ chain Mitchells & Butlers (LSE:MAB) are up by close to a third during 2023, while the 250 index itself is up by less than 1% year-to-date. 

Accompanying Wetherspoon comments pointed to an exceptionally strong May bank holiday, including its busiest-ever Saturday. Sales for the Coronation weekend just gone were slightly less strong, with a noticeably quiet Saturday. 

Year-to-date, the Watford headquartered company has opened three pubs and closed 21, resulting in a net cash inflow of £4.7 million. Thirty pubs remain up for sale or are under offer, with its estate currently totally 834 outlets. 

Group net debt reduced to £738 million as of the end of April, down from £744 million at the end of the first half in late January. 

A full-year trading update is scheduled for 12 July. 

ii view:

Founded in 1979, JD Wetherspoon today employs over 40,000 people. Coming to the stock market in 1992, Wetherspoon is known for converting unconventional premises such as former cinemas and banks into pubs. Bar sales account for its biggest slug of revenue at around 57%, with food a further 38%, slot and fruit machines 3%, and 50 pub attached hotels the balance of 2%.

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For investors, the challenging economic backdrop, including rising interest rates and an ongoing cost-of-living crisis offer a difficult backdrop for 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 at fellow pub groups Fuller Smith & Turner A (LSE:FSTA) and Marston's (LSE:MARS), potentially suggesting better value elsewhere. 

On the upside, management hopes for both sales and profits over the current year have been raised, with revenues aided by drink and food price increases. A focus on reducing debt remains ongoing, supply and delivery issues have largely disappeared, while competition has reduced following the pandemic given the failure of many smaller operators. 

On balance, and while some caution remains sensible, constrained consumer budgets should continue to favour Wetherspoon’s value focused consumer offering, possibly convincing investors to sit tight.  

Positives: 

• Value customer offering
• Majority freehold properties

Negatives:

• Rising costs
• Uncertain economic outlook

The average rating of stock market analysts:

Strong hold