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At first glance, JD Wetherspoon (LSE:JDW) may look like a business in decline, especially given the UK's struggling pub scene. But I think I'll take a closer look FTSE 250 series reveals a very attractive investment opportunity.
The stock has been falling recently. But the core business has been strengthening its competitive position and I think it's set up for long-term success.
Business model
JD Wetherspoon is famous for its low prices. And while this puts you in a strong position with customers, this is not the most attractive thing about the stock from an investment perspective.
There is a strong appeal for charging the lowest prices in the industry. But it does not make for a good business unless it is supported by lower costs than its competitors.
Wetherspoon however, has a number of significant advantages in this respect. Some are obvious, like its ability to buy products at scale, but others are less obvious.
One of these is the company's strategy of owning its pubs without renting them. I think this is an important benefit that may be overlooked by the market.
Business is slowing down?
The number of pubs JD Wetherspoon operates has fallen from 951 to 801 over the past decade. That seems to be cause for concern, but I think the result is an improved competitive position.
As a result of this closing, the company now owns 71% of its assets outright, up from 47% a decade ago. This lowers the firm's key cost – hiring costs.
Wetherspoon reduced its pub count by 27 last year, saving itself £37m in long-term lease payments in the process. In the long run, that should mean two things.
One is lower prices for customers, which reinforces the company's unique value proposition. Another is lower costs, which should translate to wider margins and better returns for shareholders.
Accidents
The least JD Wetherspoon wants to do is put its prices on customers. Every time it does this, it runs the risk of people deciding they can't go to their pubs as often, if at all.
A company's ability to avoid doing this however, is not entirely within its control. There are costs it can't do much about, including energy and manpower.
If these begin to increase further, the company may find itself with margin pressure that it cannot easily relieve. However, every industry will have to face the same challenges.
In addition, they will have to do with other Wetherspoon's cost benefits. As a result, even if higher costs suppress the company's bottom line, it can improve its competitive position.
I'm still shopping
Since the start of the year, JD Wetherspoon shares have fallen by around 13%. But sales were strong during the first half of the year, even as the company continued to reduce its print volume.
It may take a while for its reduced lease payments to be reflected in profits, but I think the long-term picture looks good. As a result, I am looking to continue buying stocks for my portfolio.
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