Pub chain JD Wetherspoon (LSE: JDW) has seen an almost 3% increase in share price as I write this Friday afternoon, taking its share price up by around 25% in the past year. I have to admit, I am puzzled. The company just reported results, which leave a lot to be desired. Let me explain.
For the full-year ending 25 July, it reported a revenue decline of almost 39% and even reported a ballooning in losses. This was to be expected. Pubs were closed during lockdowns for much of the past year. Even when they were open, much of the time, precautions were still in place. Things started easing only a few months ago. But by the time we reached ‘freedom day’, Wetherspoon’s full financial year was almost over too. As a result, these results do not reflect any spurt in pub activity that may have been seen in the following months.
Weak trading update for Wetherspoon
But here is the rub. Along with its full-year results, the company also released its latest trading update for August and September. And this is not encouraging either. It says that compared to 2019, which is the last year before the pandemic, its like-for-like (LFL) sales declined by 8.7% during this time.
Some of this can be explained by the fact that pubs at airports are yet to go back to pre-pandemic activity. As a result, it is not surprising that their LFL sales declined by a whole 47%. But even separating them from the overall numbers does not change the outcome very much. Sales still fell by 7.1%.
The company also flags low availability of staff as a challenge. In his comment, Tim Martin, chairman of the company says, “some areas of the country….have found it hard to attract staff”, and adds, “the pressure on pub managers and staff has been particularly acute…” . This follows his recent remarks expressing the challenges starting to pay value added tax (VAT) from October onwards.
To put it succinctly, Wetherspoon is still in a difficult place. Which ties in with why I was puzzled when its share price rose in yesterday’s trading. But I can conceive of reasons that are making investors optimistic.
Why there’s optimism about the JDW stock
The first is that even though the company’s LFL sales since the complete easing of restrictions are still declining, the extent of decline has slowed in the past four weeks. So September saw a smaller fall from 2019 than August. This indicates that demand is on its way back up. With consumer demand expected to increase as public spaces come back to life, I think it is reasonable to expect things to get better for it over time.
Also, the JD Wetherspoon share price has fallen some 25% since early April, when it reached one-year highs. And things cannot get much worse for it from here, so far. So, it could seem like a good time to buy Wetherspoon. To me, however, other pubs appear to be more optimistic about their outcomes, even though they use different comparator periods. I’ll wait for another update before considering whether to buy it or not.