The J D Wetherspoon (LSE:JDW) share price is rising after the company’s latest trading update. And I think it could be one of the best stocks for UK investors to consider buying now.
The closure of up to 35 outlets might not seem encouraging. But beneath the surface, the FTSE 250 pub chain is making investments that could generate huge long-term value for investors.
Pub closures
According to its latest update, J D Wetherspoon has disposed of 18 pubs since the start of the year, with a further 17 up for sale. On the face of it, that’s not a sign of a growing business.
It’s natural to attribute this to unusually difficult conditions. The company has been upfront about the fact that it – along with the rest of the sector – has been battling increased costs.
A couple of things are worth noting though. The first is that Wetherspoon’s has been reducing its pub count since 2015 – well before inflation reached significant levels.
Another is that sales are still growing – revenues are up 29% since 2015, 10% over the last year, and increased further since the start of the year. There’s more going on here than meets the eye.
Strategy
Disposing of pubs isn’t desperation – it’s a strategic decision. Wetherspoon’s is known for low prices and this means the company has to keep its own costs low.
Lease liabilities are a key part of this. Buying the freehold for some of its pubs and closing others where this isn’t possible is a key way for the business to reduce its rent payments.
The effect of this hasn’t been showing up in the short term – lease liabilities were higher at the start of 2024 than they were a year ago. But the outlook for the long term is much more positive.
J D Wetherspoon Liabilities
Source: J.D. Wetherspoon Annual Report 2023
Non-current lease obligations have fell by 9% in 2023, from £406.5m to £369.9m. Over time, this should have a positive effect on both margins and profits.
Risks
It has been doing a good job of managing its expenses. But not all of its costs are under the company’s control.
One of the most obvious examples is tax. The business has to pay VAT on its food and alcohol duty on its beers wines and spirits. Any increase in rates (with alcoholic drinks a key focus of tax-raising efforts for decades), could dent profits.
While this doesn’t put the company at a disadvantage compared to other operators in the sector, there’s nothing it can do about these. With its USP being low prices, it’s a risk.
There might not be any sign of an immediate danger here. But it’s something investors should be mindful of, especially in an election year.
Long-term value
J D Wetherspoon is positioning itself for long-term value creation. Management estimates the business has potential for around 1,000 pubs, which implies scope for future growth.
More important though, is the company’s ability to maintain its value proposition to customers. In the short term, that means reducing costs by investing in freeholds and disposing of leases.
With sales continuing to grow, I expect a significant boost to profitability over the long term. That’s why I’m looking to buy the stock at today’s prices.
The post Is the J D Wetherspoon share price a bargain after the company’s latest trading update? appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
With no savings, I’d listen to Warren Buffett to aim for long-term wealth
I’d put £800 each month in a SIPP to retire as a millionaire!
5 stocks that Fools think are overvalued
2 high-quality FTSE 250 stocks to consider buying
Stephen Wright has positions in J D Wetherspoon Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
