My JD Wetherspoon shares have just dropped 12% on the day! Here’s what I do
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You share JD Wetherspoon (LSE:JDW) fell 12% on Friday (March 20). It’s one of my biggest investments, so I’m interested in why.
The company’s half-year results showed a 30% drop in earnings per share. That’s not a good thing, so should I cut my losses and sell?
Results
If the company’s news was an earnings update, things could be looking pretty good. Like-for-like sales were up 4.8%, which is very good.
In fact, it’s better than good. Despite slowing growth in the past few weeks, the business is outperforming the broader industry.
The problem is, it’s not reporting sales and margins are under pressure. The company also said full-year profit could be lower than expected.
This is the risk that the market has been concerned about for a long time with JD Wetherspoon. And it is clearly visible.
A total of £71m in extra costs this year looks to be a big problem. Especially for a business that reported £67m of revenue last year.
My view, however, was that JD Wetherspoon is a better business than showing its numbers. And I still think that after these results.
Competitive strength
High costs throughout the pub industry are a problem. But I think they are less of a problem for JD Wethrspoon than their competitors.
The reason for this is that the scale of the company gives you leverage. And this is still the case as other costs increase.
The counter to this is that JD Wetherspoon cannot raise its prices as much as competitors can. Focusing on customer value limits this ability.
However, I think that seeing this as a negative thing is a mistake. One of the reasons is that it is not clear that some pubs can raise prices – their sales are going backwards.
Another is that the gap between the company’s prices and competitors is large and widening. So it has scope to increase prices while still offering the best value.
I think that means the company is at a competitive disadvantage. But it is impossible to ignore the fact that profits are being beaten.
Investing for the long term
At the end of the day, profit is what matters to investors. But I think that day is long and I am willing to wait for them.
The company’s problems are clearly industry-wide, rather than specific to a particular company. And I think that makes all the difference in this business.
The hospitality industry has seen major challenges in the past. The most recent was the Covid-19 pandemic, which was a disaster.
JD Wetherspoon took advantage of this opportunity in an amazing way. As a result, average weekly sales per pub are 31% higher than before the pandemic.
The company has also widened the gap with its competitors. And I expect it to do it again in another challenging area.
I am not happy at all that the cost is going up. But I think it’s possible that short-term difficulties create long-term opportunities.
What I do
A 12% decrease seems like an appropriate reaction to recent results from a short-term perspective. But that’s not what I’m looking for.
I think the company’s long-term prospects are still very strong. So I see the share price decline as an opportunity.
There’s a lot I want to buy in today’s stock market. But JD Wetherspoon is on the list.
