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J D Wetherspoon - dividend on hold despite cautious optimism

For the 53 weeks to July 2022, J D Wetherspoon saw underlying revenue fall 4.3% to £1.74bn compared to 2019.

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For the 53 weeks to July 2022, JD Wetherspoon saw underlying revenue fall 4.3% to £1.74bn compared to 2019. This was driven by a 4.7% decrease in like-for-like (LFL) sales, citing a sector-wide ''painstakingly low recovery in sales'' as pub goers emerged from lockdown.

The lower revenue and an increase in operating costs meant there was an underlying pre-tax loss of £30.4m against profit of £102.5m in 2019.

In the first 9 weeks of the current financial year, LFL sales are up 10.1%. Spoons is mindful of inflation and interest rate costs, and spoke of concerns about the prospect of further lockdowns.

No dividend was announced, compared to a full year dividend payment of 12p per share in 2019.

The shares were up 14% by midday.

View the latest J D Wetherspoon share price and how to deal

Our view

Although not a sport led pub chain, November's World Cup could help JDW's positive trading in the current financial year continue. Looking ahead we see some significant headwinds on the horizon as consumers battle with energy prices, general inflation and the recent spike in mortgage rates.

Wetherspoon has been fighting hard to maintain its value offering. Prices were up around 4% last year and going forward it's hoping to keep price rises below inflation. On costs, we're told that it has seen it only experience modest inflation in the prices its paying for goods and services so far.

Energy prices have been fixed until September 2023, but JDW warned that if the outlook for energy prices doesn't improve, it'll add £100m a year to its cost base, which would translate to price rises of 15 to 20% for it's customers.

Wetherspoon's is selling about 30 pubs as it seeks to increase the average size of its pubs, as well as the distance between them. It looks a positive move, and should help increase average footfall and profitability.

Debt levels are high and lenders have had to show some leniency. We think that debt repayment will remain the priority for some time and don't see a return to cash rewards to shareholders is on the cards anytime soon.

We like the pivot towards a younger and more family orientated demographic with recent weeks seeing record sales per pub in terms of food and drinks categories such as cocktails doing particularly. Wetherspoon's strong brand perception holds it in good stead. It's a place to get a reasonably priced pint, where you can hear yourself think, and its also family friendly without breaking the bank. Wetherspoon's is never going to be a premium destination. We think mid-range hospitality could suffer most in a downturn. It looks like JDW can keep its budget credentials in tact for now but we don't know how well customers will tolerate potentially significant price rises further down the line.

Wetherspoon's is proud of its progress towards sustainability but we still have question marks over the G in ESG (environmental, social and governance), The company doesn't agree with the guidance in the UK Corporate Governance Code on the length of board member tenure, board member independence, or the relative importance of shareholder engagement.

The market valuation also has some support from the company's net asset value, which is itself arguably understated given that the property portfolio has not been revalued since 1999.

Over the long term we remain positive that Wetherspoon can return to profit growth and increase its market share. But the pathway ahead is very cloudy. Its true that on an earnings basis the valuation is below the long-term average but we are on the cautious side for the earnings outlook, and if big price rises can't be avoided, this as a big threat to its value offer. There is plenty of scope for volatility ahead, and that's before baking in the potential for a return to lockdowns.

JD Wetherspoon key facts

All ratios are sourced from Refinitiv. 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.

Full Year Results

Like for like revenue falls vs 2019 were seen against all revenue lines, with food being the most resilient and gambling terminals seeing the biggest relative decline. Like-for-like bar sales decreased by 6.5% and food sales by 3.2%. Slot/fruit machine sales increased by 12.3% and hotel room sales increased by 6.5%.

However, bar and food sales are by far the biggest parts of the business accounting for 92% of sales in the year just reported.

JDW reported a return to free cash flow of £21.9m against an £83.3m outflow last year, but it's a big fall against the £97m inflow seen in 2019. Free cash flow was after capital expenditure of £127.3m and JDW has today guided that it expects this to moderate to around £75m for the next two years.

Against 2021 underlying net debt increased from £846bn to £892m. Wetherspoon has received support from its lenders who have relaxed their lending rules.

Compared to pre-pandemic levels Wetherspoons has trimmed the size of it's estate from 879 outlets, to 852, and now owns 68.8% of its trading properties.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 7th October 2022