JD Wetherspoon (LSE: JDW) has been a very good long-term investment. Its strategy of selling good-value food and drink in nice pubs has been a hit with customers, if not with the local competition. However, recently investors have become worried that the company’s profit margins (the amount of sales it turns into profit) will keep falling. Last week’s trading statement did nothing to allay their fears.
Sales growth in Wetherspoon pubs has been slowing, but sales are still up 9.4% so far this year. However, in recent weeks, food sales have grown but drinks sales have not. The company’s outspoken founder and chairman, Tim Martin, blames this on the fact that food sold in supermarkets does not incur VAT, which allows them to sell cut-price alcohol. This puts pressure on profit margins, along with the company’s decision to give its staff above-inflation pay increases.
But should investors be fretting? Yes, Wetherspoon’s profit margins were 10% five years ago, compared with 7.3% now. But the company remains very well run, accounting is prudent, and it’s a phenomenal generator of cash. Wetherspoon’s free cash flow per share is consistently higher than its earnings per share, which is a very good sign. At 812p, the shares trade on 11 times last year’s free cash flow, which should keep on growing.
Verdict: buy