British pub chain operator J. D. Wetherspoon offered the market a trading update on Monday.
Trading is Creeping Back to Normal Levels
The company now has 844 of its 873 pubs. It has not yet reopened all of its sites at airports or stations, where footfall remains severely diminished as fewer passengers travel.
Like for like bar and food sales are at 83.1% of their previous year rate for the 44 days to 16 August 2020. That is a big fall, still, but I regard it as excellent news.
First, it provides some evidence that the restoration of normal trading levels on the high street continues. A few weeks ago, when Greggs (OTC:GGGSF) and W. H. Smith (OTC:WHSTY) reported on reopened trading, it was in the 70s as a percentage of prior year comparison, moving up each month. Spoons reporting a number in the mid-80s suggests albeit on one data point a continued upward trend.
Secondly, there has been a bigger cloud around pub chains, for example, than some other high street operators, due to the discretionary nature of many pub visits and the health risk profile of their customer base, which includes a lot of older men who are in the higher risk categories for COVID-19.
So 83% is an impressive performance in the circumstances, in my view, and bodes well for future recovery.
Trading Has Been Helped by a Socialist Food Subsidy Scheme
The group noted a “rapid acceleration (in sales) recently, largely due to subsidised food, coffee and soft drinks in the early part of the week.” That correlates to the U.K. government’s scheme to subsidise people who eat out, Monday to Wednesday.
This scheme is a woeful socialist contraption, in my view, which channels taxpayer money inefficiently towards just one sector of the economy, and is riddled with flaws (I know a very ill man who ate at the local chip shop last week – he wanted a takeaway but that would not qualify for the subsidy, so he ate in instead). However, anecdotally it has been a huge hit. One middling restaurant local to me is booked solid for lunch until the end of this month, when the scheme is due to end. So whatever the politics of the scheme, it certainly seems to have driven demand for eating out in the short-term. Wetherspoons’ update underlines that.
Not only will the government scheme likely have helped food sales (customers can get up to ten pound per visit or matching spend Mondays to Wednesdays, possibly both at breakfast and lunch if they are that way inclined), it will also have driven footfall which will benefit ancillary sales like alcohol, excluded from the scheme (fast food and sugary drinks are included, though, reminding us of why the nanny state is poorly placed to make personal decisions for people).
Given Spoons’ strong political posture in its update – there is a long section rebutting various stories about the company’s position on lockdown – its implication that the government scheme have been important in driving the recent sales uplift may be about lobbying as well as about updating shareholders. However, they do sound credible and it is reasonable to assume that, after the end of the scheme, trading may move around a bit rather than continue its recent upward trajectory.
I am not concerned by that as the figures show that people are getting out and into pubs again. The boom in staycations will also be good for the chain’s hotel business, I expect, although as only 1.0% of revenue in its most recent annual report, hotel sales aren’t critical to the company’s performance.
The Company is Showing Resilience
The company has opened two new pubs in the past couple of months. I take this as a good sign. In April, the company announced that its pub opening programme had been stopped and ii was not expected to restart until FY22, from which point it intended to open approximately five pubs each year.
So to have the opening programme back on already is a sign of business confidence. It also shows the quality of Spoons’ management, in my view, that while managing massive short-term challenges in mothballing then reopening most of its estate, it has also been able to work at a more strategic, forward-looking level.
Spoons Remains a Solid Choice
The company did not guide on revenue, ahead of its prelim results which are scheduled for release on 9 October. Its chairman did say in the results that the company expects to make a loss for the year ending 26 July 2020, both before and after exceptional items. Some such exceptional items will be related to the COVID-19 pandemic.
That is exceptional for the company, which has not made a loss in decades.
Chart compiled by author using data from company annual reports
However, the current relative strength in trading, rapid adoption to a COVID-19 world and quality management mean that it is one of the best ways to invest in the U.K. away from home leisure sector long-term.
Conclusion: Signs of Recovery Support Buy Case
After a slight fillip from today’s update to 987p, shares are still down 12% from where they stood on June 9 when Seeking Alpha published my piece Further Upside In Post-Lockdown Britain: J. D. Wetherspoon. They continue to offer good value and I think the relatively upbeat trading statement reinforces the long-term bull case.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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