Wetherspoon slumps as it warns labour costs could dent profit

Wetherspoon shares slumped after the pub chain said its operating margin has fallen in the past few weeks and warned that increased labour costs could dent annual profits.

For the 13 weeks to 25 October, the operating margin fell to 6.2% from 7.7% in the same period last year due to increases in the starting rates for hourly paid staff in October 2014 and August 2015, which totalled around 13%.

Still, like-for-like sales rose 2.4% and total sales were up 6.1%, with sales in the last six weeks benefiting from the Rugby World Cup.

Wetherspoon said it has opened three new pubs since the start of the financial year and has sold one. It intends to open approximately 15 pubs in the current financial year.

Following a review of its pubs, as previously reported, the company offered 20 leasehold pubs for sale and is now considering a small number of freehold disposals in the course of the year.

Wetherspoon said it remains in a “sound financial position”, with net debt at the end of this year currently expected to be slightly above the 26 July 2015 total of £601.1m.

Chairman Tim Martin said: “As we indicated in September, it is difficult to quantify exactly the factors which will influence our trading performance in the early stages of a financial year.

“Increased labour costs are clearly an important factor for all pub and restaurant companies and may result in our annual profits being slightly lower than the last financial year.”

Shore Capital, which rates the stock at ‘holdl’, said that while sales were better than expected, margins weakened more than feared to 6.2%, compared with Shore’s estimate of around 7%.

“We see downside risk to our pre-tax profit estimate of around £80m (EPS: 51p) to around £70m should low-to-mid 6% margins persist for the full year.

“The continued curtailment of the opening program to around 15 pubs this year should free up further cash flow for buybacks although the balance sheet is starting to look a little stretched,” it said.

At 1048 GMT, Wetherspoon shares were down 4.5% at 741p.