J D Wetherspoon plc (JDW) Ordinary 2p
HL comment (24 January 2024)
JD Wetherspoon has reported like-for-like (LFL) revenue growth of 10.1% for the first 25 weeks of the financial year. Growth was weighted towards the latter half of the period. Notably, LFL sales were up 15.2% in December compared to just 8.8% for the broader industry.
The estate now comprises 814 pubs compared to 826 at the year end.
The group noted that "although inflation is, in general, reducing, labour and energy costs are far higher than pre-pandemic."
The full year is expected to be in line with market expectations. Consensus forecasts are currently suggesting total revenue growth of 5.4% to just over £2bn and a 23.9% increase in operating profit to £132.6mn.
The shares were broadly flat following the announcement.
JD Wetherspoon's drinkers and diners showed remarkable resilience in the last financial year, and takings at the group's 814 pubs are moving in the right direction so far this year.
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. Market forecasts suggest further margin improvement this year, which combined with revenue growth means that operating profit is expected to grow by over 20%. Whilst there's no certainty this will be achieved, 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.
Ongoing efforts to reduce the size of the estate, as it seeks to increase their average size and the distance between them, looks positive and should help increase average footfall and profitability. However, we would like to see some more concrete guidance on the company's vision for the optimum size of its footprint. There are only so many pubs you can shut before profits start going the wrong way.
The return to cash generation has enabled further upgrades to the estate, as well as a decent reduction in net debt levels. But with capital expenditure on the increase and no material reduction to debt expected in the current year, there may be limited 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 as capacity continues to come out of the hospitality market. That and its improving financials have been recognised by a strong recovery in the valuation. This raises expectations amongst investors for a further uplift in growth. Whilst we feel the company is in a strong position, there can be no guarantees of a further improvement in financial performance, so be prepared for some volatility.
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 suggests this is an area the chain takes very seriously.
JD Wetherspoon key facts
Forward price/earnings ratio (next 12 months): 18.8
Ten year average forward price/earnings ratio: 20.1
Prospective dividend yield (next 12 months): 0.0%
Ten year average prospective dividend yield): 1.0%
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.
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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