One of the companies I thought might benefit as the UK recovered from the pandemic was pub operator JD Wetherspoon (LSE: JDW). But in the past year, while the FTSE 100 index has grown in value by 14%, the JD Wetherspoon share price has moved in exactly the opposite direction. It has lost 14% over the past 12 months, at the time of writing this today.
So, why is the Spoons share price going down like a good ale? Is this a buying opportunity for my portfolio?
Challenging conditions
While Wetherspoons has the advantage of a loyal customer base and very efficient business model, it has not been a great time to be in the pub business. Some patrons remain wary of going to their local hostelry, something I think could continue for years. Staff wages are facing inflationary pressures. Supply chain problems have meant that even where demand is high, it cannot always be met. Like its rivals, Wetherspoons is beset by many of these challenges, over which it has little or no control.
Last week, the company issued a trading statement in which it reported that like-for-like sales for the first 15 weeks of its financial year were 8.9% lower than in the equivalent period in 2019. That may not sound like a large decline. But pubs have a lot of fixed costs, so lower revenues can lead to disproportionately larger falls in profits.
The future looks challenging
I like Wetherspoons as a business — it has a proven model it applied very successfully before the pandemic. But I foresee ongoing difficulties for the company along with peers in the hospitality sector. Staffing costs will likely rise. Supply chain issues may persist for several years in my opinion.
It also has older customers among its clientele, thanks to the style of its pubs and service along with pensioner-friendly pricing. Older customers are among the most hesitant to socialise in pubs at the moment. That hurts the outlook for revenues and profits at Wetherspoons. I think that could be the case for some years to come, even if there are no further lockdown restrictions.
So, while I like how the business is run, I reckon the next several years will test the mettle of management at Wetherspoons.
My next move on the JD Wetherspoon share price
Despite that, I’d consider adding Wetherspoons to my portfolio with the intention of holding it patiently, for years if necessary.
The hospitality industry isn’t going to go away. It will adjust to changed circumstances. For example, it may pass on higher costs to patrons in the form of price increases. While that will take time to happen, I expect Wetherspoons to be among the winners in the end. Its very successful track record shows it is a highly skilled operator. Several years from now, I reckon today’s JD Wetherspoon share price may well look like a bargain.