As a Spoons shareholder, that dismal performance concerns me. But I think it could also present me with a buying opportunity to top up my position the next time I have spare funds to invest. Here is why.

Valuing businesses

The foundation of a good business is long-term customer demand. On that front I think Spoons is well-positioned. People will want a place to socialise for decades to come. For many it may be the boozer. Higher beer prices and health concerns could dent demand for pubs, but I think by offering non-alcoholic drinks and food, the business will be able to ride that trend.

Next, a firm needs some competitive advantage that can set it apart from rivals. That gives it (in some cases) pricing power, which can help profits. In this regard, Wetherspoon sacrifices pricing power for pulling power as its pricing is extremely competitive. But it also has central locations, longer opening hours and a wide range of cheaper ales and food to help it stand apart. Walk into almost any branch even early in the day and it tends to be doing good business.

Finally, a business needs to convert its popularity into profits. It can do that by keeping debt low and managing costs properly. Here I have a concern about the firm’s net debt. It stood at £892m at the end of July, which is larger than the chain’s current market capitalisation of £597m. Servicing and paying down that debt could be a drag on profitability for years to come.

Roll out the barrel

After a very difficult time during lockdowns, the company’s financial performance has been recovering.

Revenues last year were within 5% of pre-pandemic 2019 levels. The company reported an operating profit once more and, after exceptional items, a £146m post-tax loss the previous year turned to a £19m profit this time around. That all suggests that the pub chain’s business has been moving in the right direction.

Like-for-like sales in the first nine weeks of the firm’s current financial year grew by double-digits compared to the same period in the prior year.

I think the JD Wetherspoon share price looks cheap

But while the business performance has been improving strongly, the share price has been moving the other way.

I think that reflects risks such as the company’s debt burden eating into profits and soaring costs hurting margins. With its focus on value for money, Spoons may struggle to pass on price increases fully to patrons without losing some sales.

However, I feel the underlying business is very attractive. It was profitable for decades and I believe it can return to a strong financial performance in years to come.

Given all that, the current JD Wetherspoon share price looks cheap to me. Using 2019 earnings, the current price-to-earnings ratio is just six. The company has almost got back to 2019 levels of revenue – if it can do the same with earnings, today’s price could turn out to be a bargain for my portfolio.

However, as I write this, the shares are up 12% in this morning’s trading. Does this suggest they might be turning the corner – and could now be the time to increase my stake?

Results give glimmers of hope

The jump follows the release this morning of the pub landlord’s preliminary results. But at first blush, it might be hard to see why these would cause the share price to rise.

The company opened the results by comparing the figures to its pre-pandemic 2019 prelims. Compared to then and before exceptional items, like-for-like sales fell. So did revenue. So did operating profit. So did free cash flow. The company made a loss in the first six months of the year and there will be no dividend paid, compared to a 12p per share payout back in 2019.

So why have the shares risen? I think it is because the battered JD Wetherspoon share price already had so many dismal expectations priced in that the results themselves were a reminder of the business potential. After all, the company made an operating profit and generated free cash flow. After exceptional items, it also recorded a profit.

I think the operating profit and free cash flow are a welcome sign that the business is rebuilding. It has faced and continues to experience considerable challenges, from energy inflation to staff availability. The fact it has turned an operating profit provides a foundation for improved results in future, I hope.

Strong prospects

In fact, it is those prospects that give me pause to consider whether now might be the time to increase my holding of Spoons shares. If I had spare to money to invest, I would buy more shares for my portfolio even after today’s jump in the JD Wetherspoon share price.

I think the underlying business model is strong and proven. The company has built a loyal customer base that I think gives it a competitive advantage against rival pub chains like Mitchells & Butlers.

Clearly, as the results show, the pub trade is experiencing a perfect storm of challenges. Unfortunately, I expect that to mean that some pubs will fold. Spoons itself has earmarked several dozen of its own pubs for sale. But by focusing on the company’s core strengths and maintaining its historical focus on costs, I think JD Wetherspoon could end up in a stronger position than it entered the pandemic.

Can the share price recover?

Although I would be happy to buy more Spoons shares today, I expect its business recovery to take years and there may be bumps along the road. That could dog the short-term JD Wetherspoon share price.

As a long-term investor though, that does not bother me. I hope the business model, competitive advantage and proven ability as an efficient operator will see it recover in coming years.

I see the current share price as a bargain for my portfolio. If I had spare cash to invest, I would put in another order at my stockbroker — and at the bar!

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.

But plenty of shares are down. And I think it’s made a lot of attractive ones look even more tempting. Here are three that look like better buys to me.

Pillows to cry on

Home furnishings provider Dunelm Group (LSE: DNLM) did well during the pandemic. When it was harder to move house, or even to go shopping for home improvement items, online sales saw big benefits.

That effect has pretty much faded and the share price is back down close to its long-term trend. But could a new squeeze on mortgages lead more people to buy stuff at Dunelm instead of trying to move house?

Investors didn’t seem to think so Wednesday, pushing the Dunelm share price down another 4% by the afternoon. But that’s dropped the stock’s trailing price-to-earnings (P/E) ratio down to 8.6. And it’s boosted the forecast dividend yield above 5%.

There will be uncertainty over that dividend now, and I expect more short-term pain. But I think Dunelm looks like a good one for investors to buy for the long term.

Investors fleeing

The financial sector has taken a battering, and that includes investment manager M&G (MNG). It’s not surprising, as investors withdraw funds to invest in things they consider safer.

I expect short-term pain here again, following an 8% share price fall on Wednesday. And there could well be further declines to come as we head into a gloomy financial winter.

But what about the long term? I reckon all those investors will return when the storm clouds start clearing, shovelling their cash back into investment managers’ hands. It happens every time there’s a stock market slump followed by a recovery. And I don’t know any stock market slump yet that hasn’t recovered.

So yes, I see M&G as a good long-term investment. It might, however, get even cheaper in the coming months.

Drowning sorrows

J D Weatherspoon (LSE: JDW) shares fell 6.5% on Wednesday, tumbling to a 12-month loss of more than 60%.

The pub chain is due to deliver full-year results on 7 October. And it’s not set to be a good year, as the hospitality business is still rebuilding after its pandemic hammering. We should see a second year of losses this year.

But forecasts indicate a return to profit in 2023, with a fairly undemanding forward P/E of around 13. There’s some earnings growth on the cards for 2024 too. These are tentative forecasts, and I think Wetherspoon could be the riskiest of the three stocks here.

But I can’t help seeing a decent stock market recovery candidate here. I mean, Brits and booze, we kind of go together, don’t we? It’s a bit like Americans and incomprehensible sports — though I probably shouldn’t say that, in case anyone mentions cricket.

I tried to think of which FTSE 350 companies would best support the idea of investing in what you know, and of course the usual supermarkets, clothing companies, and online retailers all fit the bill. Yet there is just one place that truly unites the generations, and whose infamy and loyalty is appreciated by all swathes of the British public. I am, of course, referring to shares in J D Wetherspoon (LSE:JDW). A place that, for better or worse, has truly become a staple of British life since its founding over 40 years ago. From a quiet breakfast meeting place for OAPs, a post-work drinking hotspot, or even a fresher’s filled student nightclub, Wetherspoons caters for it all.

It should come as no surprise, then, that the pandemic was not kind to Wetherspoons, and despite what looked like a strong recovery in the summer of 2021, the share price has continued to suffer, down 55% since its year high, and 70% from pre-pandemic levels.

This has undoubtedly been a difficult time for shareholders in this beloved institution, as the continued fall in share price appears almost at odds with the high-level performance of the chain. Pubs are no longer shut due to Covid-19, sales have reached pre-pandemic levels, and management continues to increase the freehold portion of the pub portfolio.

Despite these positive factors, and it is important to stress these are certainly encouraging signs, the company is struggling to perform at the same level as before the pandemic. Labour and marketing costs have increased dramatically, driving down margins and leading to an expected loss of £30m, post-IFRS (International Financial Reporting Standards), for the current financial year. Likewise, the cost of pub refurbishment has taken a significant chunk out of the 2022 profits, owing to the minimal levels of repair that was possible during the pandemic.

It’s for these reasons that I’ll be the first to admit that Wetherspoons is certainly a mixed bag, and although investing in what you know sounds easy, the reality is that in order to find the best opportunity, you often need to be willing to wait. The company is, of course, going through a tough period, yet is well capitalised after raising close to £100m at the beginning of 2021, and consequently has boosted its liquidity and reduced the impact of this negative profit environment.

The question, therefore, is whether the current negative factors impacting the share price today are likely to persist three, five, or 10 years into the future, and I do not believe that to be the case. We are in a unique time period, with elevated inflation, reduced economic growth, and huge amounts of market uncertainty, yet I believe patience — and investing in what you know — may be the key to market outperformance over the next few years, so I am strongly considering adding J D Wetherspoon shares to my long-term investment 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.

As the bad news keeps on coming, what should be my next move as a JD Wetherspoon shareholder?

Glass half empty

The immediate cause for today’s fall was a trading update issued this morning that painted a downbeat picture of prospects for the publican.

The first 11 weeks of its current financial quarter were better than the quarter before when it came to sales. They were still lower on a like-for-like basis than in the equivalent period before the pandemic, but only by 0.4%. That suggests that Wetherspoon has staged almost a full recovery from the sales woes of the past couple of years brought on by government restrictions.

However, sales are only one part of the story. As the company put it, “Although sales now match 2019, labour costs are far higher”. Given Wetherspoons’ focus on low selling prices, the firm may find it harder than competitors to pass on spiralling costs to customers. Not only are labour costs now higher than before, the company has also been spending more heavily than before on areas like building repairs and printing menus.

That led the company to warn on profits, saying that it expects losses for the year to come in at around £30m, worse than previously expected. The share price weakened in response to the prospect of a third consecutive year of losses.

Glass half full

Despite that, I continue to see reasons to be optimistic about the long-term outlook for the chain.

The sorts of investments the company is making to keep its properties in decent condition should help it retain current patrons and hopefully attract new ones too. At some stage I expect cost inflation in the economy generally will start to slow. Meanwhile, the company’s proven business model feels as relevant as ever to me. It pointed out in today’s update that pubs located in city centres outside of London are doing markedly better than they were before.

The cost pressures on Wetherspoon are being felt across the hospitality industry. Some smaller operators may end up going to the wall, unfortunately. In the longer term, Wetherspoons’ size and experience could help it pick up new opportunities such as buying pub sites from other players.

My move on the JD Wetherspoon share price

It is not easy to watch a company in which one owns shares issue bad news time and time again.

But despite the touch market conditions, I still think the business model is attractive and could create value over the long term. As a believer in long-term investing, I may consider acting on the falling JD Wetherspoon share price to add to my existing holding in the company.

As a believer in the investment case, is the current JD Wetherspoon share price an opportunity for me to add more to my portfolio?

Falling share price

What I find attractive about pub groups right now is the demand outlook. People like to go out and socialise and a pub is the obvious place to do that in many areas. Customer loyalty is often strong, which leads to repeat purchases. Financial and regulatory pressure on pubs in recent years has led to many closing. That is a shame for them, but offers increased opportunity for successful pub operators.

I see Wetherspoon as an attractive way to get exposure to the sector because of the company’s well-honed business model. It has developed a clear position in the market and has stuck to it. I feel it executes its strategy very well. Wetherspoon offers a consistent experience with a large, loyal customer base.

Despite that, the JD Wetherspoon share price has lost almost half its value in the past year.

But although Wetherspoon, like its rivals, faces significant challenges right now, I expect them to pass with time.  I reckon inflation will start to fall at some point in coming years and staffing shortages should ease. But the share price fall does not reflect that optimistic view.

Another round of risks?

Indeed, things could get worse for the trade before they get better. In its half-year results this week, Mitchells & Butler said: “The trading environment remains difficult. Cost headwinds present a significant challenge to the industry”.

That could mean higher costs at Wetherspoon keep eating into profits. In 2020, the company recorded its first loss since 1984. It remained lossmaking last year and the interim results for this year were again in the red.

It may be that some patrons have got out the habit of visiting pubs and will return less frequently than before the pandemic, if at all. A looming recession could also make cost-conscious drinkers opt for cheaper alternatives than visiting a pub.

Why I’d buy

Even considering all of that, I see the company as a well-run business with an attractive model, which is simply in a sustained period of difficult trading conditions. If they pass, which I expect them to, the underlying strengths will hopefully reassert themselves.

I therefore think the company looks cheap at the moment, with its market capitalisation of £915m. The company’s freehold and long-leasehold property alone is valued at £1.1bn and has not been revalued in over 20 years. Its business has a large, loyal customer base and its focus on low prices could help it do well, even in a recession.

I see the current JD Wetherspoon share price as a bargain and would consider buying more to hold in my portfolio with a patient investing mindset.

boohoo

After losing almost three quarters of its value in the past year, the boohoo (LSE: BOO) share price reminds me of the online retailer’s fashion offer. In other words, cheap and cheerful.

I see it as cheap because the company remains firmly in growth mode. It should post double-digit sales growth for last year. Its expanding operations in the huge US market could be another driver for future increases in revenue.

The earnings picture may be less cheery. The company has warned several times that last year’s profits will be hit by factors including cost inflation, supply chain challenges, and a higher rate of customer returns. I see these as real challenges — but ones the company should be able to get over in the next year or two.

That is why I see the struggling boohoo share price as a buying opportunity for my portfolio.

J D Wetherspoon

I also like the look of J D Wetherspoon (LSE: JDW). The pub operator needs little introduction, as its outlets are a familiar sight in towns and cities up and down the country.

Although Wetherspoon comes in for a lot of criticism for everything from the calibre of its customers to the condition of its carpets, I notice that whenever I go into one it seems to be busy. The chain has hit on a successful combination of cheap prices and central locations.

The pandemic hit the pub trade hard and some of the effects of that are still being felt. For example, many older drinkers feel uncomfortable in crowded pubs and so are going out less. Inflation has pushed up the cost of drink and food. Growing labour costs are another risk to the company’s profits.

All of that helps explain why the Wetherspoon share price is now 46% below where it was a year ago. Given the challenges and another year of losses at the chain last year, why do I see value here?

Basically, Wetherspoon has a proven business model that worked brilliantly for years and I think will do so again. As other pubs go to the wall, its venues can soak up demand. I expect it to move strongly back into the black in the medium term.

My next move on these cheap UK shares

I have already added both these shares to my portfolio this year and I consider their current share prices as ongoing buying opportunities.

I see both companies as quality operators, despite struggling with significant challenges of late. Inflation and supply chain issues may lessen at some point, but they do look set to continue for the next few months at least — and possibly much longer.

So although I am optimistic about the long-term prospects for these two shares, I would not be surprised if there are bumps along the way. But as a buy-and-hold investor, I accept that.

1. Balance of risks with opportunities

Over the past couple of years, a lot of the discussion when it comes to Wetherspoon has been about some of the risks it faces. I think it is important to remember these as they are indeed significant. Cost increases could eat into profit margins. Labour shortages might push up staffing costs. Meanwhile, the demand outlook for the pub sector remains unclear. Wetherspoon has a lot of older patrons. Some of them may no longer feel comfortable drinking in a crowded pub.

But while these risks are real, I think they are more than priced into the J D Wetherspoon share price. The shares have crashed 42% over the past year and have more than halved since before the pandemic.

But it has a proven business model honed over decades. It is pioneering new ways of involving frontline staff in managing the business, including having some of them on the board of directors. With its proven model and innovative approach to a changing market, I see a lot of opportunities for the firm. For example, its hotel business could see strong demand due to the rise in popularity of local holidays. I think investors pushing the J D Wetherspoon share price down may have been focusing on the risks to the pub market without giving the firm enough credit for its position in that market.

2. The pub chain has a large property portfolio

With a market capitalisation of just under £1bn, it may come as a surprise that the company has £1.1bn on its balance sheet of freehold and long leasehold property alone.

Interestingly, the properties have not been revalued since 1999. That suggests Wetherspoon may not be in a hurry to revalue them any time soon. But, given the boom in commercial property prices over the past 20 years, it also makes me wonder whether the real value of the company’s property portfolio is substantially higher than the value at which it is carried on the balance sheet.

If that is the case, I see this as helping the investment case. It could help support the share price in the long term.

3. The share price and mass market exposure

Until the pandemic, Wetherspoon had been profitable for every year of its life as a listed company. Aside from being forced by the government to close during lockdowns, the pub chain has seen resilient customer demand.

An economic downturn can hurt revenues and profits at many companies, but even in a recession, people want to go to the pub. With its large market size, fairly resilient long-term demand and a decline in competition due to some pubs going to the wall recently, I think the company is well-positioned to benefit from its broad exposure to the British economy. With pent-up demand likely to benefit sales in the next couple of years, I think that could help boost trading at the company.