I have always thought JD Wetherspoon (LSE: JDW) had an attractive business model. But, over the past year, the price of JD Wetherspoon shares has more than halved. So, could now be a good moment to buy some for my portfolio?
Why I like the business model
The attraction of the Wetherspoon business model to me is that it has figured out what its customer base wants and is highly efficient at delivering it to them. It is basically a version of the old ‘pile it high and sell it cheap’ retail model. Large pubs across the country give the chain buying power. It can use that to offer very competitive prices, which in turns pushes up volumes and helps push down buying costs further.
Wetherspoon has also spotted some previously underserved gaps in the market, from all-day hot drinks to music-free pubs. That is one reason it is so popular with patrons. But its decades of experience can also be seen in the efficient way it runs its business. That helps explain why it was profitable year in and year out until the pandemic struck. In 2019, for example, earnings per share stood at an impressive 76p.
Ongoing risks
A lot has changed since then. Wetherspoons is loss-making. Some people are reluctant to return to pubs. Cost inflation and a tight labour market have pushed up costs for the company, weighing on profitability.
Its most recent trading statement showed a 4% decline in revenues compared to the same period in 2019. That is not good. But I think it is promising that the company is now at least getting close to where it was in terms of sales before the pandemic. Profitability is a different matter. Debt is expected to be around £870m at the end of the year, and the business expects only to break even this year.
However, it seems that progress is being made. Although the full-year forecast is to break even, that may obscure what seems to be an improving position over the course of the year. The company said it has already returned to profitability and free cash flow. It has also commented that it is “cautiously optimistic about the prospect of a return to relative normality” next year.
That makes it sound like Wetherspoon is turning the corner. So, with the shares still struggling, should I buy?
Why I’d buy JD Wetherspoon shares
I own some shares in the company and am tempted to use the current share price to add some more to my portfolio.
I think the attractions of the business model are as strong as ever. The company’s proven ability to run a tight ship and make money should stand it in good stead in future. Inflation and wage increases are high at the moment, but I do not expect that to be the case indefinitely. As a believer in long-term investing, I do not think the current price of JD Wetherspoon shares reflects the long-term potential for the business. I would therefore consider adding more to my portfolio.