Earlier this month, shares in Greggs fell 11% in a day as the company reported weak like-for-like (LFL) sales. And it’s happening again with another FTSE 250 stock.
JD Wetherspoon (LSE:JDW) is the latest company to drop sharply after reporting a slowing in LFL sales growth. But unlike Greggs I’m a buyer of this stock at today’s prices.
Results
During the first half of its financial year, JD Wetherspoon’s sales grew 4% and earnings per share increased 83%. But investors need to take a closer look to see what’s going on here.
One thing it’s important to pay attention to is the fact the company reduced its number of pubs from 800 to 796. This involved selling off six and opening two.
In terms of profit, there were a couple of big distorting factors. One of these was an £11m increase in the value of the interest swaps the firm uses to hedge the debt on its balance sheet.
In the context of just under £25m in net income, that’s a lot. But it isn’t a sign of strong pub sales and it’s not something investors can count on going forward.
Adjusting for this, profits increased by around 5% – roughly in line with sales. One of the big clouds hanging over the business, however, is the prospect of £60m in increased costs.
These are set to come from higher National Living Wage payments and National Insurance Contributions. The big question for investors is how – and whether – the company will cope.
Like-for-like sales
The key to surviving and thriving in a tougher trading environment is being stronger than the competition. And I think there’s good evidence JD Wetherspoon is in this position.
The company’s LFL sales growth for the 26 weeks to 26 Jauary came in at 4.8% – above the rate of overall sales. This was the result of the company reducing its pub count slightly.
That’s lower than it has been in previous years and might be a part of the reason why the stock has been falling. But this has already been reported in previous trading updates.
It’s worth noting that the biggest gains were from fruit machines (+12.5%). By contrast, LFL sales from food (5.4%) and drinks (4.3%) were up more modestly.
Since then, the growth rate has increased to 5%. And at a time when LFL sales across the sector have been up 0.1% (January) and 1.7% (February) I think the result is pretty strong.
I see this as a strong sign that the value proposition JD Wetherspoon offers its customers is relatively resilient. And this puts it in a better position to cope with higher costs than its rivals.
I’m a buyer
The next few months are going to be interesting for the business – and the hospitality sector as a whole. But expectations seem to be very low for the firm at the moment.
Given what I see as the company’s clear strengths and the falling share price, I’ve been a buyer of shares in JD Wetherspoon for some time. That’s why I’m looking to keep buying it.
This post was originally published on Motley Fool
