Lockdown brings JD Wetherspoon’s first losses but investors see glass half full

When the group listed in 1992, it was home to 50 pubs and had a share price of 160p. Today, 42 years after it was founded and 29 years since its listing, the FTSE 250 stock houses more than 900 pubs and had a peak share price of 1734p, almost a 1,000% increase.

However, despite the lifting of lockdown restrictions and impressive share price performance, the company reported its second annual loss since 1984 last month.

On a pre-tax basis, the firm lost £154.7m in the year to 31 July 2021, which compares to the previous year’s loss of £34m for the period to 31 July 2020.

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While the firm is still down 30% on its year-to-date highs, 44% down on its all-time high and has recorded its first consecutive losses in 37 years, Adam Vettese, analyst at eToro, argued the chain’s history remains impressive.

“The fact that Wetherspoon has only reported two losses in almost 40 years remains a testament to the underlying strength in the business in the long term,” he said. “Even in the short term, a case could be made for buying the stock at its current low.”

The short-term investment case also offers both up and downsides, with consumers’ inflation fears playing positively into the hands of a famously cheap pub, although supply chain and labour issues “hang like a cloud over the market”, Vettese added.

JD Wetherspoon holds a “leading position” in the UK pub sector, according to Richard Garstang, co-manager of the Oldfield Partners Overstone Global Equity Income fund, who explained this through its “strong consumer following and well-located freehold estate”.

“It is the low-cost volume operator and it shares these scale benefits with customers through low prices,” Garstang added. “It has some of the highest sales per pub in the industry helped, in part, by serving food and drinks all day. This effective use of assets, combined with the low-cost operations, has resulted in exceptional returns on equity over time.”

Andrew Hollingworth, founder of Holland Advisors and manager of its VT Holland Advisors Equity fund, put it more simply.

“JDW is the Walmart of the UK pub industry and Tim Martin is its Sam Walton,” he stated. “Over a basket of food and drink, JDW pubs are a remarkable 25-30% cheaper than their nearest local competitor peers and in some cases that price gap is far greater. Customers love this value.”

However, while these differentiating factors help set Wetherspoon apart, it is also these factors that led it to suffer more heavily during the myriad lockdown rules over the past 18 months, as senior investment and markets analyst at Hargreaves Lansdown Susannah Streeter detailed.

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“The pandemic took a sledgehammer to Wetherspoon’s business model, which is focused on pulling in high volumes of punters while keeping prices low,” she said. “Before the crisis hit, the pile ‘em high sell ‘em cheap approach already meant margins were below competitors.

“The group’s operating profit margin was just 7.3% before exceptional items, which was behind many peers. It meant the company was already slightly closer to the edge than some of its competitors and the pandemic pushed it into a big loss.”

Some have been put off the pub chain due to its behaviour throughout the pandemic and often anti-lockdown stance, including pasting a Daily Mail article with the headline “What they don’t tell you about Covid[…]how the facts can be twisted to strike fear in our hearts” in the windows of some of its pubs. However, the reputation for passing its value to consumers instead of hoarding it has kept many enamoured.

“Rather than focusing on maximising near-term profits, those gains have consistently been shared with their customers over the years in the form of cheap prices,” Derek Stuart, co-founder of Artemis, said. “The combination of cheap prices and a well invested estate has served the company well, building a strong and sustainable competitive position.

“Management’s willingness to be one of the few pub companies to pass on VAT cuts to customers is a case in point.”

Substantial property portfolio

The Wetherspoon’s estate itself is an often-overlooked element of the business, which Streeter highlighted as a substantial asset.

“It is worth noting that two thirds of its pubs are freeholds, giving the group a substantial property portfolio,” she said. “The balance sheet lists £1.1bn in freehold and long leasehold property – and since it has not been revalued since 1999, that is likely a severe underestimate of the portfolio’s true value.”

As the country continues to emerge from the pandemic, further investment in both the size and quality of JD Wetherspoon’s estate of pubs provides strong potential for the chain, according to manager of Aegon UK Smaller Companies Elaine Morgan.

“Longer term, there is upside potential from the growth strategy to invest in the expansion of the trading space of the existing pubs and to add 100-200 new pubs,” she said.

“This would support management’s ambition to increase sales by £1bn, against pre pandemic levels, over the next decade.”

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