J D Wetherspoon grew like-for-like sales by 5.2% in the third quarter with growth rates held back a little by the timing of public holidays.
The group now trades from an estate of 809 pubs, down from 814 at the end of January. 17 of these units are on the market or under offer.
Net debt on 28 April was £685mn, down from £694mn at the half-year mark.
The company expects full-year profits to be at the top end of market expectations, which at a pre-tax level currently sit between £67mn and £75mn.
The shares were up 3.2% following the announcement.
Our view
JD Wetherspoon's drinkers and diners continue to show resilience. Despite a slowdown in the rate of growth, the market responded positively to the third-quarter trading update, which suggested confidence that profits will improve materially this year. The uplift’s likely to come from both an improved operating performance and lower financing charges due to earlier efforts to strengthen the balance sheet.
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. There’s thought to be further margin improvement this year, which combined with revenue growth means that operating profit is expected to grow by close to 30%. We think it looks like an achievable target, and the 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.
Wetherspoon put the free cash outflow seen at the half-year point down to the timing of payments. As long as that evens out over the longer term, we’re not too concerned. But after a period of trimming lower performing units in the estate, at the half-year mark there was a suggestion that pub numbers could grow up to a total of around 1,000 sites.
Recent pub openings have been in high-footfall areas, and that’s something we’re supportive of. For now, disposals are still outpacing new openings, but any expansion will place more demands on the balance sheet, further limiting 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. That and its improving financials have been recognised by a strong recovery in the valuation from its lockdown lows. But that does add some pressure to keep delivering. We think the group’s better placed than most to weather ups and downs in consumer sentiment. But it won’t be totally immune, and there are some early signs of a pullback when it comes to eating and drinking out.
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 this is an area the chain takes very seriously.
J D Wetherspoon key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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