Pub chain JD Wetherspoon (JDW) says an increase in labour costs could result in a fall in its annual profits, sending shares in the £926 million cap tumbling 4.5% to 741p.

The group has increased the starting rates for hourly paid staff by a 13% in the past year, causing its operating margin to fall from 7.7% to 6.2% in the 13 weeks to 25 October.

True to form, today’s trading update shows how Wetherspoon is achieving decent sales growth but at the cost of margin erosion.

JDW - Comparison Line Chart (Rebased to first)

Like-for-like sales are up by 2.4% with sales in the last six weeks boosted by the Rugby World Cup.

The 150 basis points margin drop is likely to hit full year profits by around £24 million, according to Canaccord Genuity.

It looks like Wetherspoon will end the year with fewer pubs than the prior year for the first time in its history, and it also plans to sell a few freeholds.

We’ve been bearish on the stock for some time given the margin erosion caused by its focus on price discounting. This took an estimated £12 million off pre-tax profit in 2015.

Canaccord Genuity’s target price is 720p, 2.8% lower than today’s 741p.

Issue Date: 04 Nov 2015