JD Wetherspoon making money again but costs are hurting

Wetherspoon (J D) (LSE:JDW) continues to recover from the pandemic hangover which has left some stains on the business, but where progress is increasingly evident.

Revenues increased by 10.6% in the 52 weeks ended 30 July 2023 and like-for-like sales by 12.7%, the latter of which has also seen a strong start to the new year, with a further boost of 9.9%. The group has also swung back to profit, with the loss from the corresponding period of £30.4 million transitioning to a profit of £42.6 million this time around.

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At the same time, net debt continues to fall, with a reduction from the previous level of £892 million to £642 million. The reintroduction of shareholder returns in terms of buybacks and the payment of a dividend still seem some way off, as the company continues to regroup.

Wetherspoon’s comparison against its pre-pandemic position is an interesting one. Trading has clearly recovered and then some, with like-for-like sales now ahead by 7.4%, comprising an increase of 2.1% in bar sales, 13.7% in food, 43% in fruit machines and 15.4% in hotel rooms. The group also highlights a stronger balance sheet since pre-pandemic, due both to a revision of its estate (over the last 12 years the proportion of freehold pubs has risen from 43% to 70%) and a previous fundraising exercise.

However, on closer inspection, the fallout from the pandemic and the subsequent spike in input costs has resulted in a situation where the pre-tax profit reported this year of £42.6 million compares with a number of £102.5 million in 2019.

The traditional salvo aimed at the authorities is also contained within the release. On this occasion the group points out that the biggest threat to the hospitality industry would be the introduction of further lockdowns and restrictions, and indeed questioning the efficacy of past ones compared to findings in other countries.

In addition, Wetherspoons also reiterates its perennial point on the disparity of tax treatment on alcohol between pubs and supermarkets, both in terms of VAT and business rates and the situation in its Scottish estate, where it describes business rates as a sales rather than property tax.

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The group had previously reported that the sale of a number of interest rate swaps had raised £169 million before tax. In addition, a revision to the pub estate saw three new pubs opened in the year to date, but with 31 closed for any number of reasons, such as the expiry of the lease or simply an outright sale. The group had also clarified that in the majority of cases, any closures were offset by the fact that another Wetherspoons outlet was available nearby. 

While sales may have returned to something resembling normality, the pressure on margin and profit remains evident. However, there has been progress, with the previous year’s wafer-thin operating margin of 1.5% rising to 5.6%. Wetherspoons had previously noted “ferocious” inflationary pressures, particularly in regard to energy, food and labour, but more recently some of these pressures have started to ease.

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 this particular strategy needs to be reined in where possible in order to maintain its no-nonsense and no-frills value offering.

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In the meantime, the share price has yet to regain the previously heady levels of pre-pandemic, where the shares peaked at almost £17 in December 2019, as opposed to the current level around £7.

Some significant progress has been made recently, with the price having added 63% over the last year, which compares to a marginal dip of 0.2% for the wider FTSE250 in that period. Despite this bounce, the shares are still down by 33% over the last two years, and with some optimism for the nature of the group’s model, the valuation is now slightly higher than the longer-term average, which could crimp further prospects.

The market consensus of the shares as a 'strong hold' reflects some conviction in Wetherspoon’s ability to continue to fight its corner, while also adding some caution into the mix.