Shares in JD Wetherspoon (LSE:JDW) fell 12% on Friday (20 March). It’s one of my largest investments, so I’m interested in why.
The firm’s half-year results revealed a 30% fall in earnings per share. That’s not a good thing, so should I cut my losses and sell?
Results
If the firm’s news had been a revenue update, things might have looked pretty good. Like-for-like sales increased 4.8%, which is pretty good.
In fact, it’s better than good. Despite growth slowing in the last few weeks, the business is well ahead of the wider industry.
The trouble is, it isn’t a sales report and margins have been under pressure. The firm also stated that full-year profits might be below expectations.
This is the risk that the market has been worried about for some time with JD Wetherspoon. And it’s pretty clearly manifesting itself.
A total of £71m in extra costs this year looks like a huge problem. Especially for a business that reported £67m in net income last year.
My view, though, has been that JD Wetherspoon is a better business than its numbers show. And I still think that after these results.
Competitive strength
Higher costs across the pub industry are an issue. But I think they’re less of a problem for JD Wethrspoon than its competitors.
The reason for this is that the company’s scale gives it a purchasing advantage. And this is still the case even as other costs go up.
The counter to this is that JD Wetherspoon can’t increase its prices in the way competitors can. A focus on customer value restricts this ability.
Yet I think that seeing this as negative is a mistake. One reason is that it’s not clear other pubs can increase prices – their sales are going backwards.
Another is that the gap between the firm’s prices and its rivals is huge and widening. So it has scope to raise prices while still offering the best value.
I think that means the company is still in a terrific competitive position. But it’s impossible to ignore the fact that profits are getting hit.
Long-term investing
At the end of the day, profits are what matter for investors. But I think that day is a long one and I’m prepared to wait for them.
The firm’s issues are clearly industry-wide, rather than company-specific. And I think that makes all the difference for this business.
The hospitality industry has seen big challenges before. The most recent was the Covid-19 pandemic, which was a disaster.
JD Wetherspoon took advantage of the crisis in a spectacular way. As a result, average weekly sales per pub are 31% higher than they were before the pandemic.
The firm has also widened the gap with its competitors. And I expect it to do so again in another challenging environment.
I’m not thrilled about the fact that costs are going up. But I think it could be that short-term difficulties create long-term opportunities.
What I’m doing
A 12% decline seems like a fair reaction to the latest results from a short-term perspective. But that’s not what I’m looking at.
I think the company’s long-term prospects are still very strong. So I see the falling share price as an opportunity.
There’s a lot that I want to buy in today’s stock market. But JD Wetherspoon is definitely on the list.
