JD Wetherspoon Investment Case
July 30, 2023
Ticker: JDW LN
Price: £6.93
Mkt Cap: £0.9bn
EV: £1.6bn
Despite visiting Wetherspoon’s pubs countless times, I have not focused on its stock for long. I only realised it was a public company in May 2017, when its founder, chairman and largest shareholder (23.9%), Tim Martin, spoke at the London Value Investor Conference. I have attended all the conferences since except for 2020, when it was cancelled due to COVID.
I was lucky that when I looked at it in 2017, it did not strike me as a bargain. I also thought running a pub was hardly a great business model (high fixed costs, hard to differentiate, high penetration, mature market). The stock is down since 2017. It was around 850p and now at 693p. However, it did rise to 1,734p, so I could have more than doubled my money if I could time my sale well.
Despite operating in a dull industry, the company’s performance up to COVID was spectacular, leaving many hot tech companies in the dust. It was founded in 1979 by Tim Martin, who decided to call the company after a geography teacher with the surname Wetherspoon (the teacher told Tim that he thought he would never amount to much).
By 1984, JDW had just one pub. In 1990, the company ran 19 pubs with £7mn in sales, earning 0.4p in EPS and FCF per share. By 2019, there were 879 pubs (46x growth), while sales hit £1.8bn (258x growth). The company’s earnings and FCF per share reached 75.5p and 92p, respectively, increasing 189x and 230x, accordingly.
Wetherspoon has been focused on providing quality service and below-market prices. While efficiency is at the heart of its operations, it is also intensely focused on employee retention. An average pub manager has been with the company for over 14 years in H1 ’23, up from just nine years in 2013. Kitchen managers have also seen their average length increase from 6 years in 2013 to 10.6 in H1 ’23.
99.1% of its pubs received the highest hygiene rating (5), higher than any other operator. Two hundred of its pubs were listed in CAMRA’s Good Beer Guide in 2023.
A recent survey by market researchers CGA indicates that the average income of Wetherspoon customers is 7% above that of the average ‘high street pub consumer’, which is contrary to a widespread perception of Wetherspoon pubs selling ‘cheap’ beer for customers outside of high-income groups.
Using financials for the last year before COVID (2019), JDW is currently valued at 13.2% FCF yield and 9.2x PE ratio.
COVID forced the company to close its pubs for about 100 days in FY-20 and 19 weeks in FY-21 (ended on 31 July 2021). As a result, JDW saw declining sales and reported net losses for both years. The immediate risk to JDW from COVID was remaining solvent. It was an immense risk but reasonably short-term, and it has passed.
Two other consequences of COVID still affect business performance. First, its inflation and labour shortage. The second issue is the changing pattern of consumer behaviour as more people have started to drink at home rather than in pubs. While inflation and labour shortage can be fixed in a market economy (although probably not as fast this time), the behaviour changes can be long-lasting.
But even despite those challenges, the company’s performance has been steadily improving, with H1 ’23 sales reaching £916mn (on track to exceed 2019 levels). Like-for-like sales grew 5.0% in H1 ’23 and accelerated by approx. 7.4%. in H2 ’23 (up 11% in Q4 ’23). Weekly sales per pub increased to £50.1k during H1 ’23, which exceeded the previous record of £48.0k in FY-19.
Importantly, Wetherspoon is increasing the share of food and other non-alcohol sales in its revenue mix. Since 2000, bar sales have declined from 76% of total revenue to 57% in 1H23, while the share of food has increased from 18% to 38% over the same period. Since 2009, the company has been growing hotel operations and now operates 57 hotels across the UK and Ireland. Most of its hotels are complimentary to its pub operations and often share the same property and infrastructure.
As of 9 July 2023, net debt was £688mn, approximately £114mn lower than at the start of 2020, immediately before the pandemic. After the start of COVID, the company has invested £116mn in new pubs, £82mn in freehold reversions, and raised equity of £240mn.
Price: £6.93
Mkt Cap: £0.9bn
EV: £1.6bn
Despite visiting Wetherspoon’s pubs countless times, I have not focused on its stock for long. I only realised it was a public company in May 2017, when its founder, chairman and largest shareholder (23.9%), Tim Martin, spoke at the London Value Investor Conference. I have attended all the conferences since except for 2020, when it was cancelled due to COVID.
I was lucky that when I looked at it in 2017, it did not strike me as a bargain. I also thought running a pub was hardly a great business model (high fixed costs, hard to differentiate, high penetration, mature market). The stock is down since 2017. It was around 850p and now at 693p. However, it did rise to 1,734p, so I could have more than doubled my money if I could time my sale well.
Despite operating in a dull industry, the company’s performance up to COVID was spectacular, leaving many hot tech companies in the dust. It was founded in 1979 by Tim Martin, who decided to call the company after a geography teacher with the surname Wetherspoon (the teacher told Tim that he thought he would never amount to much).
By 1984, JDW had just one pub. In 1990, the company ran 19 pubs with £7mn in sales, earning 0.4p in EPS and FCF per share. By 2019, there were 879 pubs (46x growth), while sales hit £1.8bn (258x growth). The company’s earnings and FCF per share reached 75.5p and 92p, respectively, increasing 189x and 230x, accordingly.
Wetherspoon has been focused on providing quality service and below-market prices. While efficiency is at the heart of its operations, it is also intensely focused on employee retention. An average pub manager has been with the company for over 14 years in H1 ’23, up from just nine years in 2013. Kitchen managers have also seen their average length increase from 6 years in 2013 to 10.6 in H1 ’23.
99.1% of its pubs received the highest hygiene rating (5), higher than any other operator. Two hundred of its pubs were listed in CAMRA’s Good Beer Guide in 2023.
A recent survey by market researchers CGA indicates that the average income of Wetherspoon customers is 7% above that of the average ‘high street pub consumer’, which is contrary to a widespread perception of Wetherspoon pubs selling ‘cheap’ beer for customers outside of high-income groups.
Using financials for the last year before COVID (2019), JDW is currently valued at 13.2% FCF yield and 9.2x PE ratio.
COVID forced the company to close its pubs for about 100 days in FY-20 and 19 weeks in FY-21 (ended on 31 July 2021). As a result, JDW saw declining sales and reported net losses for both years. The immediate risk to JDW from COVID was remaining solvent. It was an immense risk but reasonably short-term, and it has passed.
Two other consequences of COVID still affect business performance. First, its inflation and labour shortage. The second issue is the changing pattern of consumer behaviour as more people have started to drink at home rather than in pubs. While inflation and labour shortage can be fixed in a market economy (although probably not as fast this time), the behaviour changes can be long-lasting.
But even despite those challenges, the company’s performance has been steadily improving, with H1 ’23 sales reaching £916mn (on track to exceed 2019 levels). Like-for-like sales grew 5.0% in H1 ’23 and accelerated by approx. 7.4%. in H2 ’23 (up 11% in Q4 ’23). Weekly sales per pub increased to £50.1k during H1 ’23, which exceeded the previous record of £48.0k in FY-19.
Importantly, Wetherspoon is increasing the share of food and other non-alcohol sales in its revenue mix. Since 2000, bar sales have declined from 76% of total revenue to 57% in 1H23, while the share of food has increased from 18% to 38% over the same period. Since 2009, the company has been growing hotel operations and now operates 57 hotels across the UK and Ireland. Most of its hotels are complimentary to its pub operations and often share the same property and infrastructure.
As of 9 July 2023, net debt was £688mn, approximately £114mn lower than at the start of 2020, immediately before the pandemic. After the start of COVID, the company has invested £116mn in new pubs, £82mn in freehold reversions, and raised equity of £240mn.
It is also relatively rare to see key executives working for a company for 20-30 years. The current CEO, John Hutson, joined JD Wetherspoon in 1991 and has been a board member since 1996. Ben Whitley, CFO, has been with the company since 1999. Personnel and retail audit director, James Ullman, joined the company in 1994.
It is encouraging that on 1 February 2023, Tim Martin increased his stake in the company by buying 2.6mn shares on the market for £4.57 a share. Other directors also bought shares this year, including non-exec Harry Morley (5,500 shares for £5.33 a share).
On 12 May 2023, the company’s CEO, John Hutson, sold 18,000 shares for £7.8 a share. This is, of course, less encouraging, but generally, an insider buy sends a stronger positive message about the company’s prospects than an insider’s sell. There are many reasons a manager may want to sell his shares (pay taxes, settle a divorce, support a quality lifestyle), but usually just one reason for buying shares.
In 1996, JDW launched a share ownership plan for thousands of its employees to encourage them to think more like business owners. Since then, 23.4 million shares have been awarded, which equates to 18.2% of all the shares in existence today. 14,000 employees were awarded free shares in March 2023.
The company stopped paying dividends during COVID. During 2011-19, JDW used to pay a 12p full-year dividend. Management also spent over £140mn on buyback from FY-12 until FY-18.
It is encouraging that on 1 February 2023, Tim Martin increased his stake in the company by buying 2.6mn shares on the market for £4.57 a share. Other directors also bought shares this year, including non-exec Harry Morley (5,500 shares for £5.33 a share).
On 12 May 2023, the company’s CEO, John Hutson, sold 18,000 shares for £7.8 a share. This is, of course, less encouraging, but generally, an insider buy sends a stronger positive message about the company’s prospects than an insider’s sell. There are many reasons a manager may want to sell his shares (pay taxes, settle a divorce, support a quality lifestyle), but usually just one reason for buying shares.
In 1996, JDW launched a share ownership plan for thousands of its employees to encourage them to think more like business owners. Since then, 23.4 million shares have been awarded, which equates to 18.2% of all the shares in existence today. 14,000 employees were awarded free shares in March 2023.
The company stopped paying dividends during COVID. During 2011-19, JDW used to pay a 12p full-year dividend. Management also spent over £140mn on buyback from FY-12 until FY-18.
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