With the UK slowly coming out of lockdown, many investors are looking for stocks that could rebound. FTSE 250 pub operator J D Wetherspoon (LSE: JDW) is a prime example of a stock that bargain hunters are looking at.
Are J D Wetherspoon shares a good investment right now? Let’s take a look at the investment case.
J D Wetherspoon shares: a nightmare year
It’s fair to say that 2020 has been a nightmare for J D Wetherspoon so far. Between March and early July, all of its pubs across the UK were closed due to lockdown measures. As a result, the company furloughed 43,000 employees – around 99% of its workforce.
The outlook for the FTSE 250 company appears to be improving though. On 4 July, pubs in England reopened. Meanwhile, pubs in Scotland opened on 15 July. This is a positive development for J D Wetherspoon shares.
It’s also worth pointing out that the company is set to fully pass on the recent VAT tax reduction to customers. This means the prices of real ale, burgers, and pizzas will be reduced. This is likely to help lure customers.
Near-term challenges
However, realistically, I think the environment for J D Wetherspoon is likely to remain challenging in the near term. For starters, the risks associated with Covid-19 have led to some adjustments in the way Wetherspoon pubs will operate.
For example, the group has advised that customers may not remain at the bar once they have ordered and paid for their drinks or food. It has also said large groups are discouraged. If customers do arrive in a large group they may be asked to leave the premises. Additionally, the company has said it won’t show football or other sporting events during July.
Clearly, the pub experience is going to be very different to what it was pre-Covid-19. Many pub-goers may simply think it’s not worth the effort.
80% of Britons don’t feel safe dining out
I’m also concerned that many Britons may avoid visiting pubs while Covid-19 is lingering. According to the Office for National Statistics (ONS), the majority of Britons feel uncomfortable at the prospect of dining out.
Indeed, a recent survey from the ONS found that just over two out of 10 adults in England, Scotland and Wales said they’d be happy to have a sit-down meal as restrictions ease. Around 60% of those surveyed said they would be ‘uncomfortable’ or ‘very uncomfortable’ eating indoors during the pandemic. This attitude towards dining out could hit J D Wetherspoon’s revenues in the near term.
The chairman just offloaded JDW shares
There are other issues that concern me about this FTSE 250 company as well. One is the group’s debt. At 26 January, the company’s net debt was £805m. By contrast, shareholders’ equity was £320m. That’s a high debt-to-equity ratio. This adds risk to the investment case.
Another issue is founder and chairman Tim Martin disposed of around £5m worth of J D Wetherspoon shares recently. This could be interpreted as a bearish signal.
Are Wetherspoon shares worth buying?
Weighing everything up, I think J D Wetherspoon shares are a bit too risky right now. The outlook is improving but there are plenty of challenges. All things considered, I think there are better stocks to buy at the moment.
