Deutsche Bank has cut its rating on JD Wetherspoon PLC (LSE:JDW) from 'hold' to 'sell', slashing its target price from 600p to 450p, warning that the pub group is heading into a “new era” of rising costs that it will struggle to absorb.
The bank’s leisure analyst Tim Barrett described the Labour-inspired tax and staff cost hikes as “an exogenous event comparable to the smoking ban and the global financial crisis” for the sector.
From next month, employers face higher National Insurance contributions, while the National Living Wage is set to rise by 7%. The minimum wage for under-21s will jump by 16%.
These cost pressures, Barrett argues, come at a time when many labour-heavy businesses such as Wetherspoons are already under strain. The company reported a fall in interim pre-tax profit of 8%, despite a 5% rise in like-for-like sales - and before the full impact of the budget measures takes effect.
Deutsche Bank’s own forecasts for Wetherspoons are 11% below current market expectations.
“Current sales momentum implies a material shortfall versus the 7% cost growth we forecast for the sector,” Barrett wrote, citing CGA data showing UK pub and bar sales up just 1.7% in February.
Retailers with higher labour productivity, such as supermarkets, are managing better, passing on less cost to consumers. In contrast, Barrett warned that thin-margin, labour-intensive businesses are particularly exposed.
Alongside Wetherspoons, the bank reiterated its Sell rating on Greggs, with a target price of 1,330p.
The shares fell 1.2% to 563.2p.