J D Wetherspoon plc (JDW) Ordinary 2p

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J D Wetherspoon has reported full-year revenue of £2.0bn after like-for-like sales growth of 7.6%.

Underlying operating profit was up 30.3% to £139.4mn, benefitting from the uplift in revenues, and careful cost control.

Free cash flow fell from £271.1mn to £33.0mn reflecting last year’s one-off refinancing benefit, the timing of certain payments and increased levels of investments in existing pubs. Net debt including lease liabilities came to £1.1bn.

Like-for-like sales grew 4.9% in the first nine weeks of the current year.

J D Wetherspoon declared a dividend of 12p, compared to none in the comparative period. Last year, the group also spent £39.5mn on share buybacks.

The shares were trading flat following the announcement.

Our view

JD Wetherspoon netted record revenues last year despite a reduction in the number of pubs. That was helped by improved average takings across the estate.

The strong brand perception holds it in good stead, helping it build out its position as the most visited licenced chain in the country, where its value proposition is helping it to 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’re also impressed by the strong uplift in profitability, but margins have not fully recovered to pre-pandemic levels. However, easing inflationary pressure and a solid start to the year means we don’t think consensus forecasts for operating profits of £150mn look demanding.

There are some headwinds to be mindful of though. There will be a full year’s impact of April’s 10% rise in the National Living Wage, which looks set to see another inflation beating increase next year.

Energy prices are also creeping back up and rising geopolitical tension means a further price shock can’t be ruled out. That could have a material impact on the group’s running costs as well as on the wholesale price of food ingredients and beverages.

Cash flow has been a little disappointing of late but is forecast to improve significantly. Meanwhile the balance sheet is the strongest it’s looked for quite some time. That’s given management the confidence to bring back the dividend and buyback shares in the company.

Although that’s yet to hit the data feed, it implies a low single digit yield if dividends stay at this level going forward. Of course, no dividends can be guaranteed, particularly if the group accelerates its estate investment.

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. Recent site launches have been in high-footfall areas, and that’s something we’re supportive of. And the group has re-iterated the potential to expand towards 1,000 units from around 800 currently.

With real wages on the up, the outlook for the eating out market feels relatively robust. And over the long term, we remain positive that the group can gain further market share, and weather ups and downs in the cycle. The valuation doesn’t look too demanding compared to the peer group meaning investors should be rewarded if the group continues on its current trajectory. But consumer sentiment remains fragile, and even J D Wetherspoon is unlikely to remain unscathed in the event of a downturn.

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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