J D Wetherspoon’s like for like sales increased 3.4% in the third quarter, compared to 4.3% for the year so far.
The group notes ‘substantial’ cost increases across the industry and sees scope for profit to land slightly below market expectations. Current consensus forecasts point to full-year pre-tax profits falling 10.6% to £73mn.
Year-end net debt guidance of £740-760mn remains unchanged. J D Wetherspoon has bought back around £26mn of shares so far this year.
The shares were flat in early trading.
Our view
J D Wetherspoon’s sales are holding up fairly well, but with costs on the rise, the group has again warned on the profit outlook. But with the shares already languishing, it felt like investors may have been expecting worse.
Brand perception has historically held it in good stead, building out its position as the most visited licensed chain in the country, where its value proposition has helped it steal customers from casual dining operators. That’s been driven by an ongoing pivot towards a younger and more family-oriented demographic. However, recent weakness in food sales growth suggests parents may already be thinking twice about family meals out of the home, and consumer sentiment is coming under further pressure.
Investments in the pub estate and exits from underperforming units have seen average pub takings increase by 69% since 2015. The group is tentatively moving back into expansion mode with a focus on high-footfall locations such as airports and travel hubs.
This year’s plans will see the number of franchise pubs bearing the Wetherspoon name more than double. We see this as a relatively low-risk and scalable route to growth. The Group’s also been acquiring the freeholds of some rented premises, which should help improve profitability.
Cash flow was strong last year, supporting continued dividend payments and a step-up in share buybacks, which saw the company repurchase shares worth around 9% of its current market value. With margins being squeezed, there can be no guarantee that distributions will continue at that pace, or indeed at all.
The balance sheet also looks robust with a break-up value that could be in excess of the company’s stock market valuation. But it’s hard to put an exact number on it, as the company’s £1.1bn property portfolio hasn’t been revalued in 25 years. Guidance for a small increase in this year’s debt levels remains unchanged.
J D Wetherspoon looks well placed to outperform the market in terms of topline growth, and on paper, the valuation offers an attractive entry point for those willing to take a longer-term view. However, thin margins mean that profits are sensitive to weakening sales momentum and inflationary pressures.
Geopolitical unrest, high energy prices, and sluggish economic growth in the UK mean there’s scope for pressure to build on both sales and costs. Until the macro-outlook improves, the potential for disappointment remains high.
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.
Significant issues regarding the Board's quality and integrity have been identified, 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.
J D Wetherspoon key facts
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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 LSEG. 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.
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