JD Wetherspoon: are rising sales enough to offset higher costs for the FTSE 250 pub chain?

The UK’s low-cost pub chain is still Stephen Wright’s top FTSE 250 stock to buy, even with the prospect of higher costs on the way.

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This morning (22 January), FTSE 250 pub chain JD Wetherspoon (LSE:JDW) issued a trading update for the 12 weeks up to 19 January. And the stock’s down slightly in response.

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Overall, the report was mixed, with like-for-like sales up 4.6%. But the real focus for investors at the moment is on the company’s ability to manage its costs.

Sales

The latest update from JD Wetherspoon follows a few other reports from pub chains over the last couple of weeks. These include Mitchells & Butlers (MAB) and Fuller, Smith & Turner.

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Like-for-like sales increased 3.9% at MAB and 5.9% at Fuller’s. So the Wetherspoon’s update is roughly in the middle of the field. 

In the context of inflation levels at around 3.5%, those results are steadier than spectacular. But the real focus for investors is on the company’s ability to control/offset higher staffing costs.

After the government Budget, chairman Tim Martin estimated that the impact of higher National Living Wage and Employers’ National Insurance would be around £60m. And that’s a lot for this business to swallow.

Higher costs

Investors might be worried that Wetherspoon’s low customer prices limit its ability to offset higher staff costs. But that’s not the approach the Martin took in his comments. 

Instead, he chose to focus on the impact on the pub sector as a whole compared to supermarkets. With higher staffing expenses, hospitality venues stand to see a bigger impact from increased costs. 

To me, this shows two things. The first is the firm doesn’t have much to worry about in terms of competition from other pub chains – if prices go up across the industry, it will still be below its rivals.

The other is that, while Wetherspoon’s might have lower costs than other pubs, it’s at a disadvantage compared to supermarkets. And that’s a much bigger risk for investors to be aware of. 

Outlook

Wetherspoon’s hasn’t offered guidance for profitability over the full year. It’s going to wait and see how the impact of higher costs manifests itself – but beyond this, I see reasons for optimism. 

I think offering better value than competitors is likely to have a durable appeal with customers. And the company’s ability to do this is well-protected, giving it a strong competitive position.

Investors however can’t overlook the fact that Wetherspoon’s operates in a discretionary sector. The tax disadvantage compared to supermarkets is a long-term challenge for the business.

In my view though, the pressure on the industry as a whole might well mean that stronger operators get stronger as weaker competitors come under pressure. And that could be good for the firm.

I’m a buyer

The challenge of higher staffing costs does bring with it a positive. A higher National Living Wage might mean people have more money to spend – and this could be positive for the company.

Martin’s update wasn’t particularly optimistic – but then again, it almost never is. I think JD Wetherspoon’s a durable business and I’m looking to add to my investment at today’s prices.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in J D Wetherspoon Plc. The Motley Fool UK has recommended Fuller, Smith & Turner P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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