2 stocks I think will suffer if the government raises the minimum wage

Minimum wage increases could impact the bottom line at discount-focused retailers like Sports Direct International plc (LON: SPD),

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Chancellor Sajid Javid told the Conservative party conference yesterday that the government intends to boost the minimum wage post-Brexit. Within five years, the Johnson administration hopes to raise the hourly wages of millions of British workers from £8.21 to £10.50.

There are plenty of reasons why this is a good idea, in my opinion. The hourly rate offered to minimum wage workers has failed to keep up with living costs for decades. Most people simply cannot provide for a family at the current rate. Also, boosting the minimum salary should increase spending and consumption across the economy at a critical time. 

Most people, including big businesses and average families, will benefit from this move. However, not everyone is a winner. Low-cost retailers are particularly exposed to any change in the minimum wage. Here are two stocks I believe will suffer the most if the basic salary creeps up over the next half-decade.

Sports direct

Sports Direct (LSE: SPD) is already facing an uphill battle. Full-year results published in July caused an uproar that still hasn’t subsided and pushed the stock down by over a fifth within a month. Since then, the stock has recovered some ground, but the business’s outlook remains as murky as ever. 

Two years ago the company, along with two of its staffing agencies, had to pay nearly £1m in compensation to workers for underpaying them. A Guardian report in 2015 had found that the firm had effectively paid its warehouse workers less than statutory rate.

I have no doubt the company is paying its staff correctly now and with salaries accounting for a major chunk of its costs, that’s a big burden on the bottom line. According to the latest annual report, store wages make up 9.1% of UK Sports Retail sales and 16.3% of European Sports Retail sales. 

The company accounts for 3% annual inflation in wages, however a boost from £8.21 to £10.50 implies an annualised growth in wages of 5.1%. In other words, the company is under-prepared for higher minimum wages. 

JD Sports

Sports retailer JD Sports Fashion (LSE:JD) is another firm that is likely to be impacted by expanding minimum wages. Some 45% of the company’s business is based in the UK and roughly 78% of sales are generated from retail stores. 

Sales and distribution staff account for roughly 94.5% of the total payroll. Over the course of last year, the company paid £700m in staff wages, which accounts for nearly 15% of store sales. 

The company was slammed for less-than-ideal working conditions in its warehouses after Channel 4 News investigated one of its facilities in Rochdale, Greater Manchester in 2016. To be sure, JD denies the allegations, but it didn’t deny the fact that many of these workers were on zero-hour contracts and paid the minimum wage. 

If minimum wages for JD’s store assistants and warehouse workers expand by a third by 2024, as the government has promised, JD Sports’ costs will undoubtedly increase. 

Foolish takeaway

A bump in the minimum wage is long overdue, in my opinion. But there’s no denying the fact that a pay rise will have an impact on low-cost retailers and investors should take note of this. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

VisheshR has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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