JD Wetherspoon vulnerable as investors call last orders

While others in the sector have been hailing a boost to sales from the impact of the World Cup and generally warm weather, Wetherspoon (J D) (LSE:JDW) has apparently not joined the party.

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In the briefest of updates, like-for-like sales in the final quarter arrested a recent trend which was moving in the wrong direction and came in at 4%, as compared to 3.7% in the first quarter, 6.1% in the second and 3.4% in the third. While this brings the cumulative year to date number to 4.2% and above the industry average for the 43rd consecutive month in March, sales are marginally below the comparable period.

In turn, Spoons has reiterated that profits for the year are likely to be below market expectations, citing higher costs in the form of food, labour, repairs, energy and business rates. The profit warning from earlier in the year means that the unfortunate prediction seems to be playing out, with additional annual costs of £60 million for the likes of wages and National Insurance contributions, £7 million for non-commodity energy and £2.4 million on a packaging levy being heavy headwinds.

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There may be a slight positive in terms of year-end net debt, which is now estimated to land at £720 million, versus previous guidance that it would be in a range of £740-760 million. The group continues to search for new venues en route to its target of 1,000 outlets in the medium term from the current 800 level, although in the year to date there is a net deficit, with eight pubs opened and nine sold. Even so, the failure of some smaller pubs following the pandemic lessens some of the competition, while the group remains committed to its share buyback policy.

Spoons has been dealt some difficult hands over the years which, for the most part, it has been resolute in turning into profit. However, this year has compounded some earlier difficulties, while the Chairman has never been backwards in coming forward on the issues which the group feel are both crimping growth while also giving others an unfair advantage. The different tax treatment of alcohol sales in supermarkets is a case in point, alongside wrongly applied business rates and even the question of whether the lockdown was necessary in the UK at all, compared to the experience of other countries.

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Indeed, even now the previous lockdown continues to leave a stain and the share price remains 55% below pre-pandemic levels. At the last count, revenues had finally recovered to stand 22% higher than that period, but the group has 85 fewer pubs. This results in sales per pub which have increased by 35.4%, but in terms of profit that progress has been largely obliterated by growth of 80% and 61% in energy and wage costs respectively.

In addition, at the half-year results the group warned that an already wafer-thin operating margin of 6.3% had fallen to 4.86% and, despite a 5.7% increase in revenues to £1.09 billion, pre-tax profit was down by 31.9% to £22.4 million for the period. More positively, the group is trading above the industry average despite its own disappointment, while access to liquidity and a largely freehold estate valued at £1.4 billion lessen any immediate financial concerns.

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Wetherspoon’s dogged determination to fight its corner has won the brand many friends, but from an investment perspective the jury remains out on prospects. The group’s value model leaves it continually bumping up against a wall of higher costs, which puts perennial pressure on margins and profits.

Despite the shares having bounced by 20% over the last three months in anticipation of a World Cup bonanza, the price remains down by 4% over the last year, as compared to a gain of 8.3% for the wider FTSE250. In reaction to the dour update, the price has suffered another precipitous drop at the open with many investors calling last orders, leaving the market consensus of the shares as a hold vulnerable to further downgrades.