Wetherspoon: expansion and better margins

graeme at 10 a.m. Wed 15 Jul 2009

Pub operator JD Wetherspoon saw a 0.8% drop in like for like growth in the fourth quarter: not drastic but continuing a downward trend in growth (+1.9% in the first half, and +0.5% in the third quarter).

Total sales grew 3.1% as Wetherspoon continued to expand with the chain adding a net 31 new locations so far this year (33 openings, 2 disposals). Lower costs meant that margins have not deteriorated any further, after falling slightly in the first half.

The company has a track record of generating strong cash flows, and free cash flow this year looks likely to beat last year’s 51p a share, putting the shares (currently at 438p) on a free cash flow multiple of about 8×.

Wetherspoon is not currently paying dividends has reduced capital expenditure in order to reduce debt and. This implies some uncertainty on the part of the management. Usually this would be undoubtedly a very negative signal, but under current circumstances it is possible to attribute the uncertainty to the state of capital markets rather than to their own business. The longer cash flow remains strong, the more the positive interpretation seems correct.

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