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The JD Wetherspoon (LSE:JDW) share price has climbed 25% in the last three months. But I still think the stock is one of the most systematically underappreciated UK shares by investors.
The FTSE 250 pub chain released its full-year results this morning (23 July). And the market is largely muted in response to what I think is a solid update.
Q4 results
During the 12 weeks leading up to 20 July, like-for-like sales at JD Wetherspoon grew 5.1%. That’s lower than the 5.6% the firm achieved during the previous quarter, but in line with growth during the rest of the year.
I think that’s a solid result, especially in an environment where the likes of Greggs and B&M European Value Retail have been faltering. But investors probably shouldn’t be too surprised by this.
The CGA RSM Hospitality Business Tracker has been showing a clear trend. While the industry as a whole has been struggling, pubs have generated consistent growth over the last three months.
Even in this context though, JD Wetherspoon has been faring better than its peers. The firm’s low prices have been proving attractive to customers, especially in the warm recent weather.
Outlook
In terms of outlook, Tim Martin — the JD Wetherspoon chairman — said: “The company has benefitted from favourable weather in the fourth quarter, so that profits are anticipated to be in line with market expectations, notwithstanding the high tax and labour increases for the hospitality industry, which have been widely reported.“
The main thing investors have been concerned about recently is the impact of cost inflation. Most notably, these include National Living Wage and Employers National Insurance contributions.
These have indeed been dramatic, but they’ve also been highly predictable. I think the threat of rising staff costs is probably the biggest ongoing challenge for JD Wetherspoon over time.
Increasing sales is one way of looking to offset this. But it can only go so far, and the firm has also been making other moves to pre-empt with this, which I think are worth highlighting
Customer value
Businesses usually have two options for dealing with cost increases – raise prices, or face lower profits. Neither is particularly attractive, especially for a company like JD Wetherspoon.
But the firm has been trying to find a third option. This has involved looking to reduce costs elsewhere to maintain low prices while remaining profitable.
This has involved adjusting its menu, shifting its estate to larger pubs over smaller ones, and reducing lease liabilities by buying freeholds. All of these bring down costs elsewhere.
Every time JD Wetherspoon avoids raising prices, it widens the gap with its nearest competitors. And I think this is a huge long-term advantage for the FTSE 250 company.
Long-term investing
Over the long term, there’s not much I’d rather be invested in than the future of (1) British people going to the pub and (2) enjoying a bargain. That’s why I like owning shares in JD Wetherspoon.
Being able to make money while charging customers less than competitors is extremely powerful. And I think it’s something investors regularly underestimate.
I’ve been buying the stock over the last couple of years and I’ve no intention of selling a single share. But with the stock now up 29% this year, I’m waiting for opportunities to add to my investment.
