J D Wetherspoon reported first half revenue of £991mn reflecting like-for-like growth of 9.9%.
Underlying operating profit grew by 81.0% to £67.7mn helped by limited growth in operating costs which expanded by just 5.1%.
Free cash flow swung from £166mn to an outflow of £6.1mn, impacted by the timing of payments to suppliers and the tax office. Net debt including lease-liabilities stood at £1.1bn.
Like-for-like sales growth in the first seven weeks of the second half has slowed to 5.8%.
The shares fell 6.8% following the announcement.
Our view
JD Wetherspoon's drinkers and diners showed remarkable resilience in the last financial year, and takings at the group's 814 pubs continued to rise at pace in the first half of this year. Investors appear to have taken fright at the slower growth seen early in the second half. But unless there’s a further drop in trading, market forecasts of around £2bn of revenue for the full year still seem within reach.
Profitability has not fully recovered to pre-pandemic levels, no surprise given the relentless rise of input costs. There are some glimmers of hope on that front though. There’s thought to be further margin improvement this year, which combined with revenue growth means that operating profit is expected to grow by over 20%. We think it looks an achievable target and improvement in performance seen so far should enable the group to maintain its value-for-money offer to customers.
On that front, seeing a wider range of customers in its pubs is encouraging. The pivot towards a younger and more family-orientated demographic looks good. The strong brand perception holds it in good stead, with the customer base enjoying a slightly higher income than the 'average pubgoer'. But neither the Company nor the punters will be immune from continuing cost pressures.
Wetherspoon put the free cash outflow seen at the half year point down to the timing of payments. As long as that evens out over the longer term, we’re not too concerned. But after a period of trimming lower performing units in the estate, there’s a suggestion that pub numbers could grow up to a total of around 1,000 sites. Recent openings have been in high footfall areas, and that’s something we’re supportive of.
There’s no firm guidance on the speed of openings, but any expansion will place more demands on the balance sheet, further limiting scope for dividends to be reinstated in the near term. Historically payouts have been relatively low, so this shouldn't be the main driver of any investment decision. Dividends are variable and not guaranteed.
Over the long term, we remain positive that Wetherspoon can gain further market share. That and its improving financials have been recognised by a strong recovery in the valuation from its lockdown lows. But, as the reaction to half year numbers shows, higher expectations mean more chance of ups and downs.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
The company's overall management of material ESG issues is average according to Sustainalytics, with significant issues identified around the Board's quality and integrity including worries about the length of service and independence of non-executive directors. ESG reporting practices are not aligned with leading reporting standards and the company's environmental policy is assessed as weak. Moreover, sustainability performance targets are not incorporated in the executive compensation plan. In terms of responsible drinking, there is a strong code of conduct in place with evidence to suggest this is an area the chain takes very seriously.
JD Wetherspoon key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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