Pubs operator JD Wetherspoon Plc suffered a margin squeeze in the past three months and warned it would come under more pressure through the rest of its financial year, citing rising costs which could threaten its expansion plans.

Wetherspoon, whose cut-price drinks and offers such as curry and beer for 5.49 pounds have made it one of the stronger performing pub chains through the economic downturn, said operating margin had declined and could shrink further.

Operating profit margin in its first half to January 22 would be slightly below the 9.3 percent recorded in its first quarter, with the potential for a further decline in the second half due to continuing cost pressures, the company said on Wednesday.

Wetherspoon, which operates more than 830 pubs, said it was facing cost increases resulting from legislation, including further increases to excise duty, business rates and carbon tax.

We know that costs are increasing. It is difficult to say at this point to what extent there will be a decline, chairman and founder Tim Martin told Reuters in an interview.

Martin told Reuters last week the company was ready to scale back expansion plans, blaming a tough tax regime for exacerbating harsh trading conditions. He said it is now aiming for between 1,400 and 1,500 pubs in the long term, down from 1,600.

Wetherspoon said it still intended to open 50 more pubs this year, in line with previous guidance.

Citigroup analyst James Ainley said he expected the rate of expansion to slow thereafter, forecasting 30 new openings in 2013 and none in 2014. The market may take such news favourably if it increases the potential for cash returns, he said.

Martin said Wetherspoon could use funds saved by cutting back expansion to repay debt, raising dividends and increasing investments in the existing estate. He said the company had no plan to buy back shares but did not rule out such a move in future.

REASONABLE OUTCOME

Analyst Patrick Coffey at brokerage Liberum Capital said he saw potential benefits from scaling back the expansion. We would be in favour of alternative uses of capital, such as a share buy-back, investment in the core estate and astute disposal of the tail of the estate.

Martin said Wetherspoon had no current plans to embark upon a disposal programme.

Despite the cost pressures, Martin said the company was aiming for a reasonable outcome in the current financial year.

I couldn't be more precise than that at this point because of the number of variables that there are, he said.

Market expectations range between 65.1 million pounds and 71.3 million, with the average forecast standing at 68.6 million, according to Thomson Reuters I/B/E/S data. I am comfortable with the range, Martin said.

Wetherspoon said sales at its pubs open more than a year were up 3.6 percent in the 12 weeks to January 15 compared with a year before, an acceleration on growth of 1.1 percent in the first quarter reflecting a weak comparative period when snow affected sales.

Martin said food now accounted for about 30 percent of sales and food-led sales, which include drinks bought with a meal, made up more than half the company's revenue.

Shares in Wetherspoon, which have outperformed the FTSE All Share Travel & Leisure Index <.FTASX5750> by 10 percent over the last year, were down 2.8 percent at 405.2 pence by 09:20 a.m. BT.

(Editing by David Holmes)