J D Wetherspoon plc (JDW) Ordinary 2p

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J D Wetherspoon has reported full-year revenue of £2.1bn reflecting like-for-like sales of 5.1%, as previously guided.

Underlying operating profit grew at a similar pace to £146.4mn despite a fall in gross profit margins.

Free cash flow increased by 71% to £56.6mn, helped by a reduction in interest payments. Net debt, including leases, rose slightly to £1.1bn as increased pay outs to shareholders offset better cash flow.

The first nine weeks of the new year saw like-for-like sales growth of 3.2%. The company expects a reasonable outcome for the year but remains wary of government-led cost increases.

The dividend was held flat at 12p.

The shares fell 2.9% in early trading.

Our view

J D Wetherspoon has come out with a resilient set of full-year numbers. But slowing growth and warnings over cost pressures, saw investors shy away from the shares on results day.

The group’s worked hard to keep prices down while mitigating cost increases. However, the group’s yet to feel the full impact of higher employment costs from Labour’s 2024 budget, and the industry is nervous what this year’s autumn statement will bring.

But the chain’s brand perception holds it in good stead, helping build out its position as the most visited licensed 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-oriented demographic, which explains the growing importance of food in Wetherspoon’s sales mix.

Overall Wetherspoon looks well placed to outperform the market in terms of topline growth. But consumer confidence is flagging, and the group won’t escape totally unscathed if that trend continues.

Investments in the pub estate and exits from underperforming units has seen average pub takings increase by 66% over the last decade. 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 include doubling the number of franchise pubs bearing the Wetherspoon name. 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 to improve profitability.

Cash flow was strong last year supporting continued dividend payments and a step up in the level of share buybacks which saw the company repurchase shares worth around 9% of its current market value. There can be no guarantee that distributions will continue at that pace, or indeed at all.

But the balance set looks robust, with debt levels under control and 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.

That, and the scope to make continued market-share gains gives us reason to believe there’s upside on offer at the current valuation. But the current economic and fiscal uncertainty means there’s plenty of scope for disappointments in the near-term.

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.

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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