Time to buy a pint and the stock?
A look into JD Wetherspoon (LON: JDW)
JD Wetherspoon (Spoons): A Comprehensive Analysis of FY24 Financials and Outlook
Current Share Price: 703.00p
Market Capitalisation: £1.4 billion (approx.)
Introduction
JD Wetherspoon plc, founded in 1979, has become synonymous with affordable pub dining across the UK and Ireland. With a distinctive business model based on high footfall, aggressive pricing, and efficient operations, Spoons continues to be a favorite for customers and an intriguing prospect for investors. However, the company’s recovery from the pandemic, amidst rising costs and an increasingly competitive market, demands closer scrutiny.
Key Financial Performance in FY24
JD Wetherspoon saw a 5.7% increase in total revenue, reaching £2,035.5 million in FY24. This growth was driven by the post-pandemic recovery, a focus on expanding high-margin operations, and improvements in operational efficiency. Profits before tax and separately disclosed items rose significantly by 73.9%, reaching £73.9 million.
Earnings per Share (EPS) and Profitability
The standout performance in FY24 was the remarkable 80% growth in EPS, which surged from 27.0p in FY23 to 48.6p. This is reflective of the company’s sharp increase in profits and strong cost management, despite macroeconomic pressures such as inflation and rising interest rates.
Wetherspoon’s focus on improving operational efficiency and increasing revenue per pub has been instrumental in driving profitability. This significant boost in EPS underscores the company's ability to return value to shareholders and suggests a more optimistic outlook for investor returns in the near term.
Financial Ratios and Margins
Gross Profit Margin and Operating Margin have both improved, indicating better cost management and more efficient operations. The operating margin increased from 5.6% to 6.9%, demonstrating Wetherspoon’s ability to convert a larger percentage of sales into profit, even amid rising operating expenses, particularly in labor and utility costs.
Return on Equity (ROE) rose from 8.2% to 12.9%, reflecting an increase in profitability and more efficient use of shareholders’ equity. This significant jump in ROE is an indicator of Wetherspoon’s strong earnings growth and its ability to generate higher returns for investors.
Current Ratio remains low at 0.35, indicating that Wetherspoon has fewer liquid assets relative to its short-term liabilities. While this ratio reflects tight liquidity, the company’s focus on maintaining positive cash flow from operations provides a buffer against liquidity risks.
The Debt to Equity Ratio declined slightly from 1.72 to 1.64, showing a marginal improvement in the company’s leverage. However, this remains above the industry average, and the company’s debt levels still represent a potential risk, especially as rising interest rates increase debt servicing costs.
Freehold Ownership and Capital Expenditure
A key part of Wetherspoon’s long-term strategy has been increasing the share of pubs it owns outright (freehold properties). By the end of FY24, 72% of the company’s pubs were owned as freeholds, compared to 41% in 2010. This shift reduces the company’s exposure to rent increases and ensures better control over property costs, which directly impacts operating margins.
Wetherspoon’s total capital expenditure (CapEx) for FY24 amounted to £116.5 million, significantly higher than the £78.5 million in FY23. The bulk of this spending was directed toward refurbishing existing pubs and acquiring freeholds. While £21.9 million was invested in freehold reversions, Wetherspoon also invested £82.6 million in upgrading existing pub locations and IT infrastructure.
The company’s reduced spending on new pubs and extensions (down to £11.9 million) reflects a more cautious approach, prioritizing the optimization of existing assets rather than aggressive expansion. This strategy should help stabilize long-term costs and generate stronger cash flow from owned properties.
Free Cash Flow and Debt Management
One area of concern is the sharp decline in free cash flow (FCF) from £271.1 million in FY23 to £33.0 million in FY24. This steep drop is primarily due to increased capital reinvestments in freehold properties and significant refurbishments across the pub portfolio. While the increase in CapEx aligns with the company’s long-term strategy of improving pub infrastructure, it has temporarily limited free cash flow.
Net Debt increased slightly to £660.0 million, up from £641.9 million in FY23. The company’s debt burden, combined with rising interest rates, poses a risk to future profitability. The average interest rate on debt increased from 6.09% in FY23 to 7.05% in FY24, further exacerbating the cost of borrowing.
Despite these challenges, Wetherspoon has maintained a disciplined approach to debt management, and its strategy of reducing rental liabilities through freehold purchases should alleviate some pressure on cash flows in the medium term.
Dividend Policy and Share Buybacks
JD Wetherspoon reinstated its dividend policy in FY24, declaring a final dividend of 12p per share, which is equivalent to the company’s 2019 pre-pandemic payout. The resumption of dividends, following their suspension during the pandemic, signals confidence in the company’s financial recovery.
Additionally, Wetherspoon executed a share buyback program in FY24, purchasing 5.1 million shares for £39.5 million, at an average price of 770p per share. This move reflects the company’s commitment to enhancing shareholder value and improving its earnings per share (EPS). However, these buybacks, alongside dividends, must be carefully balanced against the need to manage debt.
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Trading Performance: Like-for-Like Sales
Wetherspoon’s like-for-like (LFL) sales in FY24 were robust, growing by 7.6% compared to FY23. The company’s ability to increase LFL sales across its core segments highlights its strong brand and value proposition, particularly in an inflationary environment where consumers are increasingly seeking affordable dining options.
Bar sales remain the largest contributor to Wetherspoon’s revenue, with an 8.9% increase in LFL sales. This growth reflects the company’s ability to attract budget-conscious customers seeking value in an environment of rising pub and restaurant prices.
Food sales also saw solid growth at 5.6%, driven by menu enhancements and competitive pricing.
Slot machine revenue experienced a strong recovery, up by 10.8%, while hotel sales were up by 2.7%, reflecting modest recovery in the company’s accommodation offerings.
Key Risks
1. Rising Debt Servicing Costs
Wetherspoon’s growing debt burden is exacerbated by the rising cost of borrowing. The average interest rate on the company’s debt increased to 7.05% in FY24, and further interest rate hikes in the UK could place additional pressure on profitability.
2. Regulatory and Licensing Risks
Potential changes to alcohol licensing laws, including restrictions on pub opening hours, could negatively impact sales, particularly in the evening. Wetherspoon’s reliance on peak trading hours makes it vulnerable to such regulatory changes.
3. VAT Inequality
Wetherspoon continues to advocate for VAT equality between the on-trade (pubs) and off-trade (supermarkets). Currently, pubs pay 20% VAT on food sales, while supermarkets pay none, creating a significant competitive disadvantage. The growing preference for cheaper supermarket alcohol continues to challenge the profitability of pubs like Wetherspoon.
Future Opportunities
1. Franchising Growth
The introduction of franchising provides a low-risk expansion opportunity for Wetherspoon. In FY24, the company opened its second franchised pub at Newcastle University, following the success of its first franchise at Hull University. This model allows the company to expand its footprint with minimal capital outlay, potentially boosting revenues without significant investment.
2. Sustainability Initiatives
Wetherspoon has made considerable strides in sustainability, reducing its greenhouse gas emissions by 66% over the past decade. The company’s focus on renewable energy, waste reduction, and sustainable sourcing aligns with consumer preferences and could help attract environmentally-conscious customers.
Conclusion
JD Wetherspoon’s FY24 performance reflects a company that has successfully navigated post-pandemic challenges while laying the groundwork for long-term stability. With rising sales, improving margins, and a renewed focus on freehold ownership, Wetherspoon is well-positioned for future growth. However, significant risks remain, particularly related to its debt load and rising borrowing costs. Investors should closely monitor the company’s cash flow and debt management strategy in the coming years.
For long-term investors, Wetherspoon presents a balanced opportunity: a business with strong fundamentals, recovering profitability, and an expanding freehold portfolio, though tempered by the need for disciplined capital management.
Thanks for Reading,
Ollz