I’ve thought J.D. Wetherspoon (LSE:JDW) shares looked like a bargain for some time. And the market has largely agreed with me – the FTSE 250 stock is up around 68% since the start of 2023.
The company released its interim trading update last month and the share price has fallen by 7%. I think the update is a more complicated one than it first seems, though, so it’s worth a closer look.
Headlines
At first sight, J.D. Wetherspoon’s latest trading update is a bit of a mixed bag. Revenues increased by around 8%, with higher like-for-like sales offset by an overall reduction in the number of pubs.
Expanding margins meant that operating income roughly doubled, going from £37.4m to £72m. But the picture with net profits is much less clear.
At face value, earnings per share fell from 29p to 14.7p. That looks like a disaster and might explain the share price decline, but I don’t think there’s a big problem for shareholders here.
In setting out its update, Wetherspoon’s distinguishes between its results before “separately disclosed items” and after. Understanding this distinction is key.
Separately disclosed items
Before separately disclosed items, Wetherspoon’s profits look pretty good – earnings per share increased from 1.1p to 19.6p. But a 4.9p per share loss on these items weighed on the final results.
Investors therefore need to figure out how much of a problem these separately disclosed items are. And the first order of business with this is to find out what they are.
Separately disclosed items include a recorded loss on the disposal of some of its pubs, a property impairment charge, and a charge for a shift in the value of interest rate swaps. So are these significant?
I don’t think so – in general, these are non-cash charges and I don’t anticipate them recurring. So while they aren’t entirely inconsequential, they don’t materially affect the core of the business.
Free cash (out)flow
One potentially more alarming number is the free cash flow figure. That was negative, implying the company sent out more cash than it brought in during the period.
Wetherspoon’s sent out £6m in cash, compared to an inflow of £166m during the same period a year ago. That’s also worth a closer look, but I don’t think it’s a huge issue.
The main reason for the outflow was a £48m payment to suppliers, reducing the amount the firm owed. By itself, I don’t see this as a huge issue, but the business financed this by taking on debt.
With interest rates high, that’s worth investors keeping an eye on. Wetherspoon’s borrowings are hedged with interest rate swaps, but an increasing debt pile is always a risk.
A stock I’m buying
J.D. Wetherspoon is a complicated business beneath the surface, but it’s important to not lose sight of the big picture. To buy its shares is to invest in a certain type of business model.
Above all, the company is known for its low prices and consistent standards. This is a strategy that I think can endure and provide good returns for investors.
Despite the falling share price, nothing in the firm’s latest results indicates to me this is a mistake. So I’m going to continue buying the stock for my portfolio in April.
