A forthcoming 8% starting wage increase for JD Wetherspoon (JDW) employees will cause ongoing margin erosion and hit pre-tax profits at the pub chain.

The group, whose shares are down 5.1% to 731.5p on yet another gloomy trading statement, is continuing its trend of achieving industry-leading like-for-like sales at the cost of lower margins.

Like-for-like sales rose by 2.9% in the 11 weeks to 12 July but the operating margin fell to 7% from 8.3% a year earlier.

It says the full-year operating margin is expected to be around 7.4% and pre-tax profit is ‘unlikely to be higher than last year’.

WETHERSPOON (JD) - Comparison Line Chart (Rebased to first)

Wetherspoon’s margins are suffering a double whammy of food and drink discounts and higher wages.

In October 2014 it raised starting wages by 5% and a further 8% rise will come into effect in August. This was set before the Chancellor’s announcement of a new living wage, which chairman Tim Martin says adds ‘considerable uncertainty to future financial projections in the pub industry’. The group had a wage bill of £400 million in FY2014, equivalent to 29% of turnover.

Earlier this year Wetherspoon introduced a range of large discounts on breakfast, coffee and certain bottled drinks in an attempt to counter supermarket competition, where the average price of a pint is less than £1 compared with £3 at the pub.

Canaccord Genuity has cut has recommendation to ‘sell’ from ‘hold’ and has lowered its pre-tax profit forecast for FY2016 to £76 million from £82.4 million. It is forecasting pre-tax profit of £75.5 million for FY2015, a fall of 4.9% from FY2014.

It has also cut its target price from 750p to 720p.

Issue Date: 15 Jul 2015