It still bears the scars of the pandemic, but the pub chain is pumping out good news and the share price is at levels not seen since last summer. Our head of markets explains why.
Wetherspoon (J D) (LSE:JDW) can raise a small glass after returning to pre-pandemic levels of trading, and then some.
Adjusted pre-tax profit of £57 million compares with £49 million pre-pandemic (and a loss of £13 million last year), like-for-like sales have risen by 5% versus 2019 and there has been a change of mix. Since the pandemic, bar sales have dipped by 0.8%, with increases in food sales (12%), fruit machines (+44%) and hotel rooms (+13%).
Even so, the pandemic left its stain on the hospitality sector, and Wetherspoon was no exception. The current strategy is to pay down some of the debt incurred at the time, and there is some promising progress, with the current level of net debt standing at £744 million compared to £920 million the year previous. By the same token, however, this leaves the chances of a reintroduced dividend or share buyback programme at virtually nil, until such time as there is a firmer financial footing.
Nor have the company’s challenges been solely related to the pandemic. The current trading environment has seen the benefit of improved supply issues which have now largely disappeared, but inflation remains a thorn in the side. Inflationary pressures have been “ferocious”, particularly in regard to energy, food and labour, and has inevitably led to Wetherspoons needing to hike some prices – although, crucially, not to the extent of threatening its value offering.
In addition, should projections that inflation subsides be correct, this would have an instantly positive impact on the company’s prospects. This would also be a welcome injection – operating margin of just 4.1% in the period compares to 7.1% pre-pandemic, and a wafer-thin 0.2% last year, underlining that the company has, in profit terms, been sailing close to the wind.
As the move towards a balance sheet clean-up continues, Wetherspoons has managed to maintain some capital investment of £48 million in the likes of pubs, pub extensions and technology. In addition, the group has a constant eye on its pub portfolio and the terms of the leasehold or freehold as appropriate.
There will be overarching concerns around the current state of the UK economy and, in particular, consumer propensity to spend on a discretionary basis. In some ways, this could play into the hands of Wetherspoons, with its no-nonsense, no-frills and value offering. Indeed, current trading is seemingly robust, and over the last seven weeks sales are up by 9.1% compared to pre-pandemic and by 14.9% against last year.
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The slivers of optimism surrounding Wetherspoons has led to a share price spike of 34% over the last three months, although this is not enough to repair some of the earlier damage, with the shares still down by 28% over the last year, as compared to a decline of 10.4% for the wider FTSE250 index.
Prospects for the group, like its margins, remain finely balanced, with the market consensus of the shares as a 'hold' suggesting that investors will cautiously await more fruitful developments and perhaps celebrate better results, as has been the case with the price in early exchanges.