I’ve been on the lookout for reopening shares I’d consider for my portfolio.
Pub gardens in Scotland reopened today for the sale of alcohol. Gradually the pub trade is opening more across the UK, although there are still many restrictions in place.
What does this mean for shares in the pub operator J D Wetherspoon (LSE: JDW)? Below I look at the prospects for the well-known pub chain.
Better open than closed
It may sound obvious, but I think reopening is a critical step to bringing the Wetherspoons business back to life.
A lot of businesses weren’t as hard hit by lockdown as they feared. They were able to move sales online, for example. That’s not true for a pub chain. Not only does it need pubs open to generate most of its revenue, each lockdown adds costs as beer is a perishable product.
Pubs reopening even on a limited basis means that Wetherspoons will be able to get back to something like normal revenue.
Likely winner in hard times
It’s been a difficult time for the UK pub trade. Sadly many hostelries have shuttered and are unlikely to reopen.
While that is unfortunate, it does mean that there may be new customers for those pubs that have survived. After the financial crisis, Wetherspoons took advantage of a weak market to extend its estate. I think it may do the same again now, which could help the business in years to come. Indeed, last month the chain announced that it plans to spend £145m expanding and refurbishing its estate.
Reopening shares with a proven formula
The main reason I would pick Wetherspoons as an investment is that the company is a best in class operator when it comes to running a pub chain. The pandemic was challenging. The company raised more capital and recorded its first loss since the 1980s. Despite that, I think its quality still shines through.
Wetherspoons has developed a simple, consistent formula it knows works. From cheap ale to roomy pubs often in central locations, the focus is on delivering what the company knows its customers want.
That has worked very well. While the pandemic has changed some habits, I think that demand for pubs will remain high in future. Wetherspoons may need to adapt somewhat, but I expect the proven principles on which it runs its business will continue to deliver success. That is why I would pick Wetherspoons as a reopening share.
Profit generator
Despite its reputation for low beer prices, the chain usually turns a good profit. In its 2019 results, for example, the pre-pandemic chain had revenue of £1.8bn and made a pre-tax profit of £95m.
I find that impressive. I think the fact that Wetherspoons has economies of scale, focusses on delivering what customers want, and engenders loyalty helps it turn a sizeable profit even while maintaining keen pricing.
Risks
While I like the look of Wetherspoons as a reopening share, there are risks.
There could be further lockdowns, which would damage revenues, and incur additional costs. It is also unclear whether patrons will return. Wary of socialising and used to supermarket ale prices for the past year, some customers may decide to visit the pub less or not at all.