FTSE 350 Review: Niche opportunities in the hospitality industry

By many metrics, JD Wetherspoon (JDW) pubs appear to be the nation’s favourite. In a late January trading update, the group revealed that like-for-like sales rose by more than 15 per cent in December, while growth across the wider hospitality sector was just under 9 per cent. The group has now outperformed the industry’s CGA business tracker for 16 consecutive months – and its valuation is reflecting this success.

Its shares currently trade at around 21 times projected earnings for the 2024 financial year, which ends in July. This makes it significantly pricier than Mitchells & Butlers (MAB), its fellow pub and restaurant chain, which trades on a forward multiple of only 12 times. However, the latter is not materially struggling, either – its revenue for the 15 weeks to 13 January was up 7.7 per cent on last year.

The inflationary pressures that plagued businesses and consumers last year have, mercifully, started to abate. Mitchells & Butlers said in November that cost growth should slow from 10 per cent – or £175mn – to 3 per cent this year. That is in spite of the 9.8 per cent increase in the national living wage that will apply as of this April. 

Purveyors of pints and roast dinners aren’t the only ones praising the more hospitable business climate: lunch merchant Greggs (GRG) is also looking forward to a more stable year.

In its year-end trading update, the company said it has “good forward cover” on food, packaging and energy costs – after 2023 revenue rose 20 per cent to £1.8bn. It wasn’t too down on wage inflation, either, stating that greater rates of pay across the economy “will also provide support to consumer incomes”.

All in all, the pasty specialist looks to be on a solid footing, but its shares have been flat over the past year. Some analysts suspect investors have cooled on the company after it failed to upgrade full-year guidance for several consecutive quarters. But with 140 to 160 new shops due to open in 2024, we think earnings growth is a likely prospect in the medium term.

Things look less steady at travel concessions group SSP (SSPG), which owns train station brands such as Upper Crust and Caffè Ritazza. Perhaps unsurprisingly, the group accrued a serious amount of debt throughout the pandemic, with nearly £1.5bn on its books at the end of September. It managed to refinance around £600mn in July – meaning it has several more years to get back on track before payments come due. In the meantime, high leverage could give investors reason to remain sceptical.

Pizza delivery group Domino’s (DOM) has been on a debt reduction journey of its own, partly balanced out by its share buyback programme. The latter has been propping up earnings per share growth, and the use of borrowed money to fund it has had its critics. But last summer's sale of its stake in its German joint venture to fellow franchisor Dominos Pizza Enterprises (AU:DMP) raised £80mn that helped fund another buyback round. 

Andrew Rennie, a former chief executive at the Australian business, took the top role at the UK group last summer. The market greeted his arrival enthusiastically, and an investor day in December promised more details on his growth plans at the time of full-year results in March. A further increase in store numbers looks one possible outcome. But there are still questions over the extent of the growth that's still to be squeezed out of the pizza market. This, plus tough comparators, meant Domino's sales growth slowed to 3.7 per cent in the third quarter last year from 8.6 per cent in the second.