Image source: Getty Images
If I had reviewed FTSE 250 Index holder JD Wetherspoon (LSE:JDW) as a stock to buy a couple of years ago, I would have run away.
Well, times change and now I think it could be a diamond in the rough after recent events.
I think it's worth taking a closer look at the stock. Here's why.
Pubs galore
Everyone loves going to the pub, right? Well, despite this sentiment, JD Wetherspoon has appeared to be a business in crisis over the past few years. Naturally, the pandemic didn’t help and borrowing to keep the lights on hurt the company’s balance sheet.
The shares are not exactly on the up either: they are up just 2% over a 12-month period from 705p at this time last year to current levels of 722p. Over a five-year period they are down 52% from 1,533p to current levels.
It's fair to say that stocks haven't really recovered from the disaster that the pandemic brought.
Change of course and recovery
A major change in direction in the company's modus operandi could be a money-making venture for the business. It could also be a great way for the stock to recover over the long term and offer great value for shareholders in the years to come.
How? you might ask. Well, JD Wetherspoon has been quietly offloading pubs that it doesn’t wholly own. This is because it can help keep costs down and remain attractive to customers as a value proposition. Reducing rental liabilities is good for the company’s long-term future. To put it into context, the company now owns 71% of its real estate, compared with 47% a decade ago.
I admit that I don’t think this approach alone will help the company regain its former glory. It also needs the hospitality sector to recover. However, there have been signs of this too. A pre-lockdown trading update published in July alluded to this. The update said that the 10 weeks to 7 July had seen a 5.8% rise in like-for-like sales and a 7.7% rise so far this year. This adds to other recent promising updates.
Risks to consider
Even though it seeks to keep costs low as in the case of real estate, it cannot control other expenses such as wage inflation and energy costs. Both aspects could affect profits and could result in price increases. The latter is certainly not good news, as many customers choose to frequent JD Wetherspoon outlets for their attractive food and drink offering.
One short-term risk is the recent economic turmoil. Higher interest rates and inflation have created a cost of living crisis. As consumers struggle with rising essential living costs, going to the pub may not be something many can do as often as they would like. JD Wetherspoon could see its profits hit.
Overall, I think there is a potential opportunity that investors should consider. My view is that it could be a long-term endeavor and that recovery is not a quick process.
Personally, I will be keeping a close eye on developments. The company's next update is scheduled for early October, which might help me decide whether to buy some shares soon.
