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Wetherspoon shares swing wildly as profit plunges

Richard Hunter
Wetherspoon shares swing wildly as profit plunges (Source: Getty)

Five times the shares failed to make a break above 1,340p stick. Is it sixth time lucky for Wetherspoon?

Alongside the usual diatribe against the Brexit process and the tax disparity with supermarkets, pub chain JD Wetherspoon (LSE:JDW) has fallen foul of higher costs, especially with regards to labour.

This has impacted the bottom line harshly, with six-month operating profit having fallen by 14% and pre-tax profit dipping 19%. The cost pressures are also likely to spill over into the second half, whilst the continuing spectre of the UK's exit from the European Union has manifested itself in holding back the Wetherspoon share price in recent times.

Opinion remains divided on the viability of the pub sector as a whole, with many choosing to place more reliance on the food offering, and Wetherspoon is no exception, with food sales representing 36% of the total, and bar sales 65%.

Opposing views in the market were demonstrated perfectly by volatility in Wetherspoon's share price during early deals. Down as much as 5.5% at the opening bell, bargain hunters moved in quickly to chase the shares back above 1,300p to trade up 4.2% at their peak.

Source: TradingView (*) Past performance is not a guide to future performance

There are positives within the statement, whereby the value for money model continues its popularity.

Revenues have risen 7%, like-for-like sales have improved by over 6% and the dividend has been maintained, although a current and projected yield of just 1% is hardly cause for celebration.

Some £95.5 million of capex represents further confidence in prospects for the company, and there are some signs that Wetherspoon's lowly valuation could come in for a rerating.

Nonetheless, the figures have not been well received. Despite an 18% spike in the share price over the last three months, this cannot mask a drift of 1.4% over the last year, as compared to a 2.7% decline for the wider FTSE 250 index.

The wafer-thin margins within the industry are susceptible to any spike in costs, which leaves the pubs vulnerable from an investment perspective. As such, the general market view of the shares as a 'sell' is unfortunately likely to remain in place for the time being.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.

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