JD Wetherspoon (LSE:JDW) is an underperforming stock from the FTSE 250 index. It’s down 7% year to date and 21% in six months. Over four years, it’s lost more than half its value.

Yet Wetherspoons remains a leading pub chain in the UK. And it has bounced back to profitability since the pandemic, with a restored dividend. Long term, it should be able to take market share as more smaller rivals go under.

Should I buy some ‘Spoons shares on the dip? Here are my thoughts.

Resilient trading

On 21 March, the company reported its first-half covering the 26 weeks to 26 January. Revenue rose 3.9% to just over £1bn, with like-for-like (LFL) sales up 4.8%. This was driven by LFL sales growth across bar (+4.3%), food (+5.4%), and fruit machines (+12.4%).

During the period, two Wetherspoons pubs were opened (the Grand Assembly in Marlow and The Lion and The Unicorn in London’s Waterloo Station) while six were sold. It ended with 796 pubs.

In the seven weeks since the end of the period, LFL sales increased 5%. Considering the tough trading environment across the hospitality sector, I think this performance is strong. 

Unfortunately though, profits are under pressure. In the first half, operating profit decreased 4.3% to £64.8m. The operating margin fell to 6.3% from 6.8%, mainly due to labour and utility costs, which were £30.6m higher. 

Net profit came in at £24.9m, which was less than in the same pre-pandemic period of 2019/20.

Sobering outlook

Looking ahead, the company warns that increases in national insurance and the minimum wage will result in extra costs of approximately £60m per year. That amounts to roughly £1,500 per pub, per week.

Commenting on the results, Chair Tim Martin said, rather bleakly: “The combination of much higher VAT rates for pubs than supermarkets, combined with increased labour costs will weigh heavily on the pub industry.”

I wondered how long it would be before Martin got stuck into the different treatment of supermarkets. It took 59 words of his statement before they were mentioned.

He’s right to repeatedly point out the unfair pricing advantage though, and supermarkets do represent competition. It’s dramatically cheaper to stock up on a couple of crates from Tesco for the back garden than spend an afternoon buying pints in the beer garden of a pub.

Should I buy?

In addition to standard business taxes, Wetherspoons pays alcohol duty, fruit machine duty, the sugar tax, fuel duty, costs for premise, and, in some locations, TV licences. From 1 April, it will also pay higher national insurance and labour costs, as mentioned.

Given all this, I’m not surprised that the number of pubs in England and Wales has fallen below 39,000 for the first time. Clearly, they’re being taxed into oblivion.

But while I have sympathy with this, it doesn’t really get me bullish about investing.

Perhaps I’m missing out on an obvious bargain though. Because the stock is trading cheaply, like a ‘Spoons pint, at just 11 times earnings, while offering a well-supported dividend yield of 2.2%.

Meanwhile, the company’s long-term aim is to operate 1,000 pubs. Again, perhaps that will drive the share price higher.

However, given that costs are set to “weigh heavily” on the industry, I’m not keen to invest.