When JD Wetherspoon (LSE:JDW) floated in October 1992, it reported annual sales of approximately £30m. Today, it’s a member of the FTSE 250, with FY24 (52 weeks ended 28 July 2024) turnover of £2.04bn.
Tim Martin, the founder of the group, retains a near-25% shareholding. Having started in 1979 with one pub in London, he’s now responsible for over 800 of them, throughout the UK and Ireland.
And yet despite this success, he often appears unhappy.
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Doom and gloom
A flick through the winter/spring edition of Wetherspoon’s in-house magazine confirms this.
On page four, Martin describes the government’s plans for pubs as “daft”. Understandably, he doesn’t like the sound of reports (now denied) suggesting that opening times should be restricted further.
He also expresses his concerns about an idea floated by academics at Cambridge University to discourage drinking. Reducing the size of pint glasses by around a third would fail, simply encouraging more drinking at home, he claims.
But Martin’s biggest gripe appears to be that supermarkets pay “virtually no VAT” in respect of food sales. In contrast, pubs have to add 20% to bills. He also takes aim at other “large pub companies” who, he claims, have remained silent about this so-called “tax inequality”.
And if this isn’t depressing enough, the pub chain’s chairman is “concerned about the possibility of further lockdowns”.
Let’s raise a glass
But ‘Spoons’ has much to celebrate.
Its FY24 results revealed a 5.7% rise in revenue and a 74% increase in adjusted pre-tax profits, compared to FY23. It also reinstated its dividend, which was suspended during the pandemic.
Earnings per share increased by 77%, to 46.8p.
In its most recent trading update — for the 14 weeks to 3 November 2024 — it reported a 5.9% increase in like-for-like sales, compared to the same period in 2023.
And yet its share price appears to be going in the opposite direction. It’s down 27% since January 2024.
This means it currently trades on a historical price-to-earnings ratio of 12.6. Pre-Covid it was over 20. Now could be a good time for me to invest.
What should I do?
However, the government’s decision to increase the rate of employer’s national insurance contributions has major implications for the business.
It’s expected to add an additional £60m to its annual costs. And given that its pre-tax profit for FY24 was £74m, this is a big hit to its bottom line.
No wonder Wetherspoon’s boss is unhappy about the decision.
In my opinion, the pub chain — famous for its cheap beer and distinctive carpets — is a British icon. But this doesn’t mean I want to invest. I think the national insurance hit is too big to overlook.
And I’ve noticed that the company’s share price started falling before the budget. It fell 8% in the week up to the Chancellor’s statement and, since then, it’s down a further 9%.
This suggests a loss of investor confidence even before the full implications of the government’s new tax policies were known. It seems to me that the stock’s fallen out of favour for no apparent reason.
It’ll need something to change fundamentally for sentiment to recover. And at the risk of sounding as gloomy as Tim Martin, I don’t know what this could be.
For these reasons, I’m not going to buy.
