JD Wetherspoon (LSE:JDW) shares offer investors a stake in a much-loved British institution.
The pub chain’s cheap and cheery ethos has turned it into a mainstay since its founding in 1979.
But investors in the FTSE 350 stock are perched on the edge of their seats this week. That’s because on Friday, JD Wetherspoon will report its full-year earnings for 2022.
How have long-term shareholders been faring?
The shares have seen big losses since 2017
The pub chain’s shares changed hands at 1,252p in October 2017. Today, they’re trading at 422p – down a stomach-turning 66%.
If I’d invested £5,000 five years ago, that would now be worth £1,700, but I would have collected £128 in dividends. When the pandemic struck, JD Wetherspoon stopped paying dividends.
So, what has been weighing on the the share price?
Closing time
The end of lockdowns was meant to bring customers flooding back into pubs and restaurants. That has not been the case.
People have got used to spending their leisure time in different ways. They’re working from home more and spending less time in city centres.
In addition, founder Tim Martin’s outspoken views on politics have alienated some punters. An app called ‘Neverspoons’ that promises to point users to independently run pubs has been downloaded over 50,000 times on the Google Play store.
Analysts forecast JD Wetherspoon will report £1.69bn of revenue in FY22, below FY19’s level of £1.82bn. Profit is projected to go from £102.5m in FY19 to a loss of £30m in FY22.
Meanwhile, JD Wetherspoon has said it will sell 32 pubs across the country, representing around 3% of the 861 sites it operated in 2021.
Is this the start of a calamitous downfall?
Leaner and meaner
Maybe not. Contrary to what I might expect, the pub chain has been cutting back its total number of sites every year since 2015 – half a decade before the pandemic began.
From 2015 to 2019, the pub chain said farewell to 72 sites – equal to 7.5% of its 2015 peak total.
Yet sales over the same period went up by 20% and pre-tax profit by 32%.
Therefore, the decision to trim back its property portfolio is not necessarily a bad omen.
JD Wetherspoon’s winning formula involved packing its pubs to the rafters. Like airlines, the chain is a volume-based business. And how did it get such high volumes? With cut-throat prices.
As the cost-of-living crisis continues to bite, I wouldn’t be surprised to see more customers opting for JD Wetherspoon over pricier competitors.
Should I buy?
Analysts predict it will return to profitability in FY23.
At a price of 422p, the stock is trading at around 11 times forecast earnings for that year. Considering that pre-pandemic, 20 was a more normal price-to-earnings (P/E) ratio for the stock, in theory I could be looking at almost doubling my money within a year by buying JD Wetherspoon shares.
But I’m not convinced.
Rising wage costs and energy prices have steamrollered its operating margin from 8.2% in 2020 to just 0.2% in early 2022.
I don’t believe it will get out of the red as early as FY23, despite what analysts are saying.
Therefore, I don’t see the shares as a buy for me – and I’d need a strong pair of beer goggles to change my mind.