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When I scan with FTSE 250one stock that stands out is JD Weatherspoon (LSE: JDW). The no-frills pub chain has a popular brand and a high competitive position in the industry.
However, the industry is struggling. Some 350 pubs closed their doors in England and Wales in the first half of this year, according to data from The Altus Group. That doesn't include vacant pubs that are offered to be allowed.
It looks like a tax increase is coming in 2025, which will make things very difficult for the industry. So I expect more pubs to disappear from communities.
Therefore, Spoons may not have much competition left in a few years. It may continue to consolidate market share automatically.
So does this make the stock a 'no-brainer' to buy for my ISA portfolio? Let's dig in.
A difficult assignment
In the stock price chart, we see a big drop caused by the first Covid shutdown. The stock has never recovered, sitting above the 700p it was at in March 2020. It is down 53% in five years.
Rising supply chain, energy and labor costs have had a major impact on business. Operating margin narrowed from over 7% in FY18 to less than 3% in FY23.
Having said that, the last trading update for the 10 weeks to July 7 was decent. Comparable sales were up 5.8% compared to the same period last year. Like-for-like sales for the year were up 7.7%.
The company currently has 801 bars, down from 951 in 2015. However it brings sales records from several places. In fact, the company said that sales per pub are about 21% higher than pre-pandemic levels.
Meanwhile, the total debt is estimated at £670m, down from £1.3bn during the crisis. It's encouraging to see that.
On October 4, we will receive the earnings report for the year ended July 28 (FY24).
To settle an inheritance
Despite ongoing cost pressures, Wetherspoons has opened a pub at Waterloo station. Others are opening at Fulham Broadway and Marlow stations in Buckinghamshire.
And the Mile Castle in Newcastle has been turned into a “super Spoons”, with a 26-room hotel and a 3,000 sq ft beer garden (Britain's largest).
In the long term, the company plans to have 1,000 pubs, although there is currently no time for this.
Should I buy shares?
Based on the current year's earnings per share forecast, the stock trades at a price-to-earnings (P/E) ratio of 13.6. Like a pint of beer at Spoons, that's pretty cheap.
On the other hand, there is no dividend yet. But as the business is slowly growing, I expect that will come back in the future.
Another concern I have here is the competition from supermarkets. Chairman Tim Martin is always talking about this issue. In the last trading update, he said: “The last government failed to implement tax parity between restaurants and supermarkets… Wetherspoon hopes the current Chancellor…[will] correct this imbalance.”
Another big risk is that younger generations drink less alcohol for health and financial reasons.
I already have a large position in spirit giant Diageo. If alcohol goes down for a long time, do I even want to own shares in Wetherspoons? I'm going to say no, which means I don't see it as a pointless purchase.
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