J D Wetherspoon plc (JDW) Ordinary 2p

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J D Wetherspoon grew third quarter like-for-like sales by 5.6% compared to same period last year.

Over the first three quarters, two pubs were opened and seven sold, with £40mn of shares repurchased. The group currently operates 795 pubs.

Year-end net debt is expected between £720-740mn. Wage and tax increases are expected to cost £1.2mn per week.

J D Wetherspoon expects a ‘reasonable’ outcome for the year supported by favourable weather.

The shares fell 0.5% in early trading.

Our view

J D Wetherspoon’s sales resilience showed no sign of waning in its third quarter trading update. That’s just as well given the additional £1.2mn burden on profits its incurring each week due to increased wages and taxes. But it’s confident of a reasonable outcome for the year, which if analyst forecasts are anything to go by should mean that operating profit is similar to the £139mn seen last year.

The strong brand perception holds it in good stead, helping build out its position as the most visited licenced chain in the country, where its value proposition is helping it increasingly steal custom from casual dining operators. That’s been driven by an ongoing pivot towards a younger and more family-orientated demographic, which explains the growing importance of food in Wetherspoon’s sales mix.

We think Wetherspoon remains well placed to outperform the market in terms of topline growth. Recent performance is all the more impressive against a decline in overall spending across the sector over the first quarter.

After a period of reducing the estate by selling underperforming units, there are signs that the group is ready to build out its footprint again but progress is slow. A further four to five pubs are expected to be added to the 795 strong estate this year with around ten openings pencilled in for next year. Site launches appear to be focussed on high-footfall locations such as airports and travel hubs.

The recent addition of four franchise sites at Haven Holiday parks would seem a low-risk route to growth. It’s a small roll-out for now but has the potential to grow. The Group’s also been acquiring the freeholds of some rented premises which should help to improve profitability.

Cash flow has been a little disappointing of late, and with costs going up, there’s work to be done if cash generation is to improve. Earlier steps to strengthen the balance sheet now look to have been prudent moves. The recently re-instated dividend remains on the table and share buybacks have been continuing. But no further payouts can be guaranteed, particularly if the group accelerates its estate investment, or trading conditions deteriorate.

The valuation doesn’t look too demanding compared to the peer group, and we think in the long term, there’s an opportunity to significantly grow market share. But the combination of economic uncertainty and pressures on the cost-base means there could still be more pitfalls ahead.

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.

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.

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