J D Wetherspoon plc (JDW) Ordinary 2p

JD Wetherspoon’s like-for-like sales increased by 5.8% in the 10 weeks to 07 July 2024. Year to date growth stands at 7.7%.

It exited 26 pubs in the current financial year and opened two, with further openings expected in the months ahead.

The company is expecting net debt to be around £670mn at the year end, and profits to be in line with market expectations. The mid-point of analyst forecasts for pre-tax profit is currently £71.9mn.

The shares were broadly flat in early trading.

Our view

JD Wetherspoon has shrugged off a dismal start to the British Summer, with like-for-like sales growth picking up slightly from third-quarter levels as the year-end approaches. That should see full-year profits improve materially. The uplift will likely come from 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 nearly 30%. We think it looks like an achievable target, and the performance improvement 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 to ongoing cost pressure.

Wetherspoon put the free cash outflow seen at the half-year point down to the timing of payments. Modest progress on paying down debt in the second half suggests that the cash flow taps have opened again. But continued investment in the existing estate, and the potential for net pub openings to start moving upwards again, means there’s plenty of demand on the Company’s financial resources.

Recent site launches have been in high-footfall areas, and that’s something we’re supportive of. For now, disposals are still outpacing new openings, but acceleration in this trend may limit the 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, and weather ups and downs in consumer sentiment. 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. That won't be without challenges, with some early signs of consumers holding back 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. 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.

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