Chancellor Rachel Reeves will deliver the Autumn Budget tomorrow (26 November), and the mood among consumers and businesses can only be described as pessimistic.
Last year, Reeves raised taxes the most in more than 30 years, hoping to fill a budget “black hole“. Businesses got clobbered.
Unfortunately, there’s now another black hole that needs filling. And though we don’t know for certain, it sounds like the wealthy will have to cough up.
Meanwhile, Reeves is reportedly going to announce that the Office for Budget Responsibility (OBR) has downgraded its forecast for UK growth for every year through to 2030/31.
Of course, the OBR might turn out to be wrong. But it nevertheless adds to the overall bleak outlook, especially for UK stocks in the retail and hospitality sector.
Despite the doom and gloom, I’m quietly optimistic about pub chain J D Wetherspoon (LSE:JDW) moving forward. Here’s why.
Taking market share
It’s no secret — or surprise — that boss Sir Tim Martin isn’t a fan of excessive regulation and taxes. His shareholder letters often rip into the government of the day, outlining how short-sighted tax raids threaten the long-term survival of British pubs.
On 5 November, Martin ended a trading update by saying the company is “mindful of the Chancellor’s Budget statement later this month and, as a result, is slightly more cautious in its outlook for the remainder of the year“.
Reading Wetherspoons’ updates can make you feel like reaching for a stiff drink. Underneath, though, the actual business is not in decline. Far from it. In the 14 weeks to 2 November, like-for-like (LFL) sales rose 3.7%.
Year to date, total sales have grown by 4.2%. And in September, Wetherspoons grew 320 basis points faster than the sector, according to industry data. That was the 37th month in a row it had done so!
What this tells us is that the company is taking market share. Whether that’s through cheaper drinks or rivals going to the wall (probably both), Wetherspoons is strengthening its competitive position.
Yet this is not reflected in the share price, which is down 21% since July and 45% over five years.
A contrarian stock
Of course, the Chancellor may hike alcohol duty significantly tomorrow, driving drink prices even higher. As such, I can see why many investors wouldn’t want to touch this FTSE 250 stock with a bargepole. The dividend yield is also quite modest at 1.9%.
Yet the company is built to survive. It buys beer, food, and supplies on a massive scale. This gives it lower input costs than other pub chains and independents.
Given this, I think it’s highly probable that Wetherspoons keeps improving its competitive position as more pubs sadly disappear.
It’s also worth noting that the firm is quietly rolling out a franchise model. Eleven pubs now operate as Wetherspoon franchises, but this number is expected to more than double by July.
Over time, this strategy should allow capital-light expansion while improving profitability.
Meanwhile, the company recently announced that it will open its first pub in mainland Europe in the Spanish resort of Alicante. Will franchised Wetherspoons do well in Benidorm, Ibiza, and Majorca? I think they will.
Trading cheaply, I reckon ‘Spoons stock is worth a look, especially if the Budget causes a significant dip-buying opportunity.
