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JD Wetherspoon shares drop sharply as it warns soaring wages will likely dent full-year profits

“As has been widely reported, unemployment is at a record low, putting upward pressure on wages. As a result, Wetherspoon is increasing the pay of our staff starting from this week”
wetherspoon bar
The pub operator won’t immediately pass on the increased costs to its customers

JD Wetherspoon PLC (LON:JDW) saw its shares drop sharply on Wednesday after the pubs operator warned that soaring staff costs will likely dent profits this year, bringing to an end its recent run of record-breaking results.

For the past three years, the value pub chain has achieved record sales and profits, turning a £107.3mln pre-tax profit on revenue of £1.69bn last time around.

READ: Record annual profits for JD Wetherspoon

In the first quarter of the current financial year, like-for-like sales rose 5.5%, while total sales climbed 6.2%.

The FTSE 250 group had previously said that a 4.0% rise in like-for-like sales would be needed to maintain last year’s performance.

But despite the strong top-line performance, chairman and founder Tim Martin said he now expects a “trading outcome slightly below” that achieved in the previous financial year.

“As has been widely reported, unemployment is at a record low, putting upward pressure on wages.  As a result, Wetherspoon is increasing the pay of our staff starting from this week.”

Martin added that ‘Spoons won’t immediately look to pass on these extra costs to consumers in the form of higher prices, although it will review this position later in the year."

Can momentum be kept up?

In a note to clients, analysts at Liberum Capital said: “JDW's margins are the lowest in the sector, buts its LFL run rate is one of the highest, which combined with the freehold reversions, disposals and share buybacks has helped to drive adjusted EPS growth in the past.”

However, they added: “We remain concerned about the company's ability to keep up this momentum (particularly in a higher interest rate and labour cost environment).

“The stock trades on CY19E PE of 16.0x and EV/EBITDA of 9.0x, towards the top end of peer group.”

Liberum repeated a ‘hold’ rating and 1,330p price target on JD Wetherspoon shares with the stock trading at 1,162p in late afternoon trading, down 11.4% on Tuesday’s close.

 -- Adds analyst comment, share price --

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