When I scan through the FTSE 250, one stock that stands out is J D Weatherspoon (LSE: JDW). The no-frills pub chain has an iconic brand and dominant competitive position in the industry.
However, the industry’s struggling badly. Another 350 pubs closed their doors across England and Wales in the first half of this year, according to data from Altus Group. That doesn’t include pubs that are vacant and being offered to let.
It looks like further tax rises are coming in 2025, which will make things even more difficult for the industry. So I expect more pubs to vanish from communities.
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Therefore, Spoons might not have much competition left in a few years’ time. It could continue hoovering up market share by default.
So does this make the stock a ‘no-brainer’ buy for my ISA portfolio? Let’s dig in.
A struggling share
On the share price chart, we see a huge drop caused by the first Covid lockdown. The stock’s never recovered, sitting just above the 700p it was at in March 2020. It’s down 53% in five years.
Rising supply chain, energy and staff costs have taken their toll on the business. The operating margin’s been squeezed from above 7% in FY18 to under 3% in FY23.
Having said that, the last trading update for the 10 weeks to 7 July was decent. Like-for-like sales increased by 5.8% compared to the same period last year. Like-for-like sales for the year rose 7.7%.
The company currently has 801 pubs, down from 951 in 2015. Yet it’s delivering record sales from fewer locations. In fact, the firm said that sales per pub are approximately 21% higher than pre-pandemic levels.
Meanwhile, net debt’s around £670m, down from £1.3bn during the pandemic. That’s encouraging to see.
On 4 October, we’ll get the earnings report for the year ended 28 July (FY24).
Streamlining the estate
Despite ongoing cost pressures, Wetherspoons has opened a new pub in Waterloo station. Others are opening in Fulham Broadway station and Marlow in Buckinghamshire.
And The Mile Castle in Newcastle has been turned into a “super Spoons”, with a 26-room hotel and a 3,000 sq ft beer garden (the biggest in Britain).
Longer term, the company plans to have 1,000 pubs, though there’s currently no time frame for this.
Should I buy the shares?
Based on the current year’s earnings per share forecast, the stock’s trading on a price-to-earnings (P/E) ratio of 13.6. Like a pint of beer in Spoons, that’s pretty cheap.
On the other hand, there’s still no dividend. But with the business steadily recovering, I expect that to return in future.
One worry I have here is competition from supermarkets. Chairman Tim Martin constantly mentions this issue. In the last trading update, he said: “The last government failed to implement tax equality between pubs and supermarkets… Wetherspoon hopes that the current Chancellor…[will] rectify this inequality.”
Another big risk is that younger generations are drinking less alcohol for health and financial reasons.
I already have a large position in spirits giant Diageo. If alcohol consumption’s in long-term decline, do I also want to own Wetherspoons shares? I’m going to say no, meaning I don’t see it as a no-brainer buy.
