JD Wetherspoon PLC (LON:JDW) shares eased lower on Tuesday after JP Morgan Cazenove kicked off its coverage of the no-frills pub chain with an ‘underweight’ rating and bearish 930p price target.
The stock was down 2.6% to 1,119p in mid-morning trade.
‘Spoons is the pub version of Tesco PLC (LON:TSCO), with its ‘stack ‘em high, sell ‘em cheap’ philosophy.
As a result, its margins are among the lowest in the sector, something JP Morgan analysts have an issue with.
READ: ‘Spoons warns soaring wages will dent full-year profits
“Low margins magnify cost pressures and operating leverage, increasing the risk profile of earnings,” they wrote in a note to clients.
“Simultaneously sustaining both strong like-for-likes and margins appears very challenging in this context.”
The number crunchers expect margins, which have been declining in recent years, to fall another 80 basis points this year followed by a further 30bps in 2019.
“As a managed house operator, JDW is fully exposed to surging labour costs and new taxes, compared to peers with tenanted estates/brewing operations.
“In addition, JDW may be unable to pass through higher inventory costs- management does not currently intend to raise prices in FY19, prioritising volume-driven LFLs.”
‘Consensus yet to catch up with profit warning’
One way to drive additional growth would be to open more pubs, but JP Morgan reckons the company has “exhausted its expansion runway”, with ‘Spoons planning to open 5-10 new sites this year.
The FTSE 250 group was forced to raise its staff’s pay earlier this month as it battles to keep hold of its staff in a tight labour market. It said full-year results would likely fall “slightly below” expectations as a result.
The analysts think the market has underestimated what this actually means though, with its pre-tax profit forecast for the current year 14% below consensus at £90mln.