Wetherspoons is outperforming its peers, but can it last?

The shadow of the pandemic no longer appears to be looming large over pub chain JD Wetherspoon (JDW) – at least not in a measurable financial sense. The group’s like-for-like sales in the first half of FY2024 were 15.3 per cent higher than the same period in 2019. According to a statement from chair Tim Martin, total sales are now about one-third higher than in 2015, when the number of Wetherspoon pubs was at its peak.

This progress wasn’t enough to keep Martin from speaking out against the perceived dangers of the type of restrictions brought in during the pandemic, which don’t appear to be on the cards, at least in the near term. “The company continues to be concerned about the possibility of further lockdowns and about the efficacy of the government enquiry into the pandemic, which will not be concluded for several years,” he said.

Investors and City analysts, however, seem to be more worried about the company’s immediate earnings outlook. Broker Peel Hunt predicted pre-tax profit could fall 11 per cent in the second half of the current financial year, as like-for-like sales slowed in the early part of Q3. The group’s trading margin of 6.8 per cent is also another area of concern, given it remains below pre-pandemic levels due to higher labour costs. 

Elsewhere, the company reported an astronomical rise in adjusted pre-tax profit – from under £5mn last year to £36mn in the first half – but this figure doesn’t tell the whole story. Wetherspoon also released a set of numbers that take separately disclosed items (ie exceptional items, impairments) into account. The largest of these items was a £9.3mn property impairment charge, in respect of pubs which were “deemed unlikely to generate sufficient cash flows, in the future, to support their carrying value”.

With these one-offs factored in, profit before tax was roughly £10mn lower, while operating profit was £72mn – nearly double what it was in the first half of FY2023. Meanwhile, the dividend remains suspended, with payments likely to resume once the group crosses the £100mn threshold in pre-tax profit. Peel Hunt foresees this milestone being reached some time in 2027. “The outcome of this will most likely be influenced by how the national living wage and the national minimum wage change over the next few years,” the analysts added. 

In the meantime, FactSet broker consensus has the shares trading at just over 17 times projected earnings for FY2024, which still feels a little rich for us. Hold.

Last IC view: Hold, 666p, 6 October 2023