How will the National Living Wage impact UK stocks?

By Kit Rees

LONDON, April 1 (Reuters) - Britain's National Living Wage, a higher minimum wage, came into effect on Friday and could hit the earnings of retailers, restaurants, pubs and outsourcing firms in particular.

The National Living Wage starts at 7.20 pounds per hour for workers in the UK aged over 25, set to rise to around 9 pounds by 2020.

Three industries alone - retail, hospitality and admin and support services - employ 46 percent of people affected, with the total wage bill across Britain expected to rise by 4.5 billion pounds as a result, according to think-tank The Resolution Foundation.

Some investors see the gradual increase in wages as a cause for concern in terms of how it will hit companies' results.

"We'll find that this is a feature that is an increasing drag on earnings in these sectors, rather than something that happens on day one. I think some people are apprehensive about it, probably some valuations have come down a bit but I don't think it's all fully priced in," Gervais Williams, managing director at Miton Group, said.

RETAILERS

The British Retail Consortium has estimated that the additional cost to retailers will be between 1-3 billion pounds annually by 2020.

Yet if the apprenticeship levy and projected increases in rates are also taken into account, then the retail industry is looking at 14 billion pounds of costs in the next four years, equivalent to around 20 percent of industry profitability.

The UK's General Retail Index has slid 8.5 percent this year, underperforming the FTSE All-Share Index which is down by only 2.5 percent so far in 2016.

Analysts said that Next (Other OTC: NXGPF - news) and Sports Direct could be hit particularly hard.

Investec (LSE: INVP.L - news) analysts also said Poundland could be affected as the company cannot increase its prices.

Analysts at Jefferies noted that an increase in wages could result in more store closures, another side-effect of more than 60 percent of retail leases coming up for renewal in the next five years.

Analysts expect retailers such as Argos, owned by Home Retail which is set to be acquired by Sainsbury (Amsterdam: SJ6.AS - news) , Debenhams (Other OTC: DBHSF - news) and Tesco (Xetra: 852647 - news) to downsize.

Yet companies with strong online businesses and more flexible labour and retail spaces will do better than legacy names, according to analysts at Credit Suisse (LSE: 0QP5.L - news) .

Additional pressures, such as a price war with the discounters, could hurt food retailers more than clothing retailers.

"It (Other OTC: ITGL - news) cuts across the whole sector. Food retailers are probably going to be more impacted than anyone else simply because their margins are lower and the competitive threat across the food retail sector is very significant at the moment," Simon Irwin, retail analyst at Credit Suisse, said.

PUBS AND RESTAURANT GROUPS

The hospitality sector is set to experience the biggest wage bill increase, of 3.4 percent, as almost half of employees will be affected by the National Living Wage, The Resolution Foundation said.

Groups with low prices and low margins such as JD Wetherspoon will suffer, along with Costa-owner Whitbread (LSE: WTB.L - news) , pub operators Mitchells & Butler, Adnams and Punch Taverns (Other OTC: PCTVF - news) .

JD Wetherspoon's EBIT (earnings before interest and tax) is predicted to fall 38 percent following a 10 percent increase in the average wage, according to data from Liberum.

However within the sector, Marston's should do better given its restructuring, while measures taken by Restaurant Group (Other OTC: RSTGF - news) to reduce the impact have been looked at favourably by investors.

SUPPORT SERVICES

Among some of the companies most likely to be hit by an increase in wage costs are support services firms, according to data by Liberum, including outsourcing companies.

Outsourcer Serco Group would suffer a 295 percent fall in EBIT with a 10 percent increase in the average wage, although analysts pointed out that its work force, along with those of other companies, is not entirely UK-based.

Likewise Mitie Group and Interserve (LSE: IRV.L - news) would take an 80 percent and 74 percent hit to their EBIT respectively. (Reporting by Kit Rees; Editing by Robin Pomeroy)