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JD Wetherspoon shares have risen by more than 50 per cent this year as trading momentum at the pub chain has piqued the market’s interest, but they are still around 60 per cent down on their pre-pandemic level in January 2020.
In a pre-close update in July, the company said that like-for-like sales had grown by 13 per cent year-to-date. Compared with the financial year 2019, top line growth came in at 11 per cent in the first 10 weeks of its fourth quarter.
Demand in UK pubs and restaurants has been resilient despite cost-of-living pressures, although consumers haven’t yet felt the full impact of interest rate rises. Brunning and Price owner Restaurant Group reported sales growth of 8 per cent at its pubs in its interim results last week.
The outlook for company earnings has been helped by a softening of cost inflation headwinds. JD Wetherspoon flagged a “slightly reduced expectation for cost increases” in its update, while hospitality peer Loungers noted a “diminishing” of inflationary pressures in its full-year results in July.
JD Wetherspoon has also been making progress with debt reduction. The sale of both interest rate swaps and pubs has helped, with at least 28 sites “sold, closed or surrendered to the landlord” in the year to July 31. Net debt of £688mn is about £100mn down on the pre-pandemic level.
Chair Tim Martin is bullish on the outlook for further recovery in the share price, based on his recent activity. He bought £6.8mn-worth of shares on September 1, taking his total holding to just under a quarter of the issued share capital.
Full-year results are expected on October 6, and investors will be watching keenly for signs of further improvement. But Deutsche Bank analysts forecast that operating profits will not recover to pre-pandemic levels until financial year 2025.
The shares trade on a valuation of 17 times FactSet consensus forward earnings, which compares favourably to a five-year average of 29 times.
Watch sellers’ directors make timely buys
Watches of Switzerland is in a tight spot. Clouds have gathered over the company after Rolex acquired Swiss retailer Bucherer last month, a move which could fundamentally change the world of luxury watch retailing.
The company’s shares plunged by over a fifth as the market chewed over the potential implications of the deal. Watches of Switzerland derives around half of its sales from Rolex. There are fears, despite a statement from the former emphasising that the deal was driven by a desire to resolve a succession problem at the top of Bucherer, that Rolex could sell directly to consumers and that supply to London-listed Watches of Switzerland could ultimately be dented.
Broker Peel Hunt said in a less-than-sanguine note that “with the concerns being so fundamental, it is hard to be categorical on [Watches of Switzerland] shares”.
Others think the share price reaction has been overdone. Analysts at RBC Capital Markets argued that the company’s “relationship with Rolex is unchanged in the near- to midterm, and likely also the longer term, and the rationale for Rolex to acquire Bucherer has credible non-economic motives”.
Either way, senior figures at the company are unsurprisingly keen to send signs of confidence to the market. To that end, there were some notable purchases from board members on 1 September. Chair Ian Carter and chief financial officer Anders Romberg picked up £206,000 and £585,000-worth of shares respectively. Non-executive directors Robert Moorhead and Tea Colaianni also got in on the action, buying a cumulative £99,000-worth of shares.
A new “long range plan” is expected next month which will cover the company’s growth strategy up to 2028. Investors will be hoping for more reassurance on the long-term implications of the Bucherer acquisition.
While there is significant uncertainty, the valuation is attractive. The shares trade hands at 11 times forward earnings, according to FactSet, a notable discount to the five-year average of 18 times.
