The pandemic hangover is something from which Wetherspoons (LON:JDW) has not fully recovered, but there are nonetheless increasing signs of progress.
The pre-tax profit number of £60.6 million is down by 33% from the previous year, largely due to a number of factors such as payments to creditors and some losses arising from the disposal of a number of pubs and leases. More promisingly, the adjusted pre-tax profit figure which strips out such exceptional items rose by 74% to £73.9 million, ahead of the estimated £71.9 million. Revenues also increased by 5.7% for the year to £2.036 billion, underpinned by an increase of 7.6% in like for like sales.
Indeed, Wetherspoon’s comparison against its pre-pandemic position is an interesting one. Trading has clearly recovered and then some, with like-for-like sales now ahead by 16%. The group also highlights a stronger balance sheet since pre-pandemic, due both to a revision of its estate (over the last 12 years the proportion of freehold pubs has risen from 43% to 72%) and a previous fundraising exercise. However, on closer inspection, the fallout from the pandemic and the subsequent spike in input costs has resulted in a situation where the pre-tax profit reported this year compares with a number of £102.5 million in 2019.
Even so, net debt has reduced to £660 million versus an expected £670 million and compared to a number of £694 million in late January. The pub estate has been reduced from 879 to 800, although the group aspires to return this number to 1000 sites in due course. The group’s net book value of its assets, including its largely freehold pub estate, is now £1.4 billion and the general improvement in trading conditions has led Wetherspoons to reintroduce a dividend payment after an absence of five years. The projected yield is a modest 1.7%, but nonetheless represents management confidence in prospects and also runs alongside a £40 million share buyback programme in the period.
There are other glimmers of light within the release, such as an improvement of 30% in operating profit and an adjusted operating margin of 6.9%, up from 5.6% and perhaps more tellingly drifting further away from the wafer-thin margin of just 1.5% two years ago. Even though some of the metrics have surpassed pre-pandemic levels, overall profitability has been hamstrung by a number of subsequent headwinds in the meantime, such as the previously noted “ferocious” inflationary pressures, particularly in regard to energy, food and labour, although more recently some of these pressures have started to ease.
Wetherspoons will continue to rail against the authorities on a number of issues which it feels are detrimental to its business, such as tax inequality with regard to VAT and business rates compared to the supermarkets, as well as some of the current proposals being considered which could further hinder progress. For example, a reduction in opening hours is reportedly under discussion, with Wetherspoons pointing out that despite the obvious conclusion, the most popular drinks in its pubs – by far – are Pepsi, coffee and tea as habits continue to change. Further out the group remains concerned by the possibility of future lockdowns, despite its insistence in questioning the efficacy of past ones compared to findings in other countries.
For the moment, current trading remains sprightly, with like for like sales in the nine weeks since the end of this financial year ahead by 4.9%. From a broader perspective, the economic outlook for the UK is another potential headwind. Wetherspoons has been able to pass on some of the inflationary costs without diminishing its appeal, but equally it will be mindful that this particular strategy needs to be reined in where possible in order to maintain its no-nonsense and no-frills value offering.
In the meantime, the share price has yet to regain the previously heady levels of pre-pandemic, where the shares peaked at almost £17 in December 2019, as opposed to the current level around £7.30. Some limited progress has been made most recently, with the price having added 9% over the last year, which compares to a gain of 18.6% for the wider FTSE250. Despite this bounce, the shares are still down by 32% over the last two years, leaving the valuation slightly lower than the longer-term average, which could in turn enhance further prospects. The market consensus of the shares as a strong hold reflects some conviction in Wetherspoon’s ability to continue to fight its corner, while also adding some caution into a challenging mix.