Whitbread serves up solid profits but warns of tough consumer outlook

Whitbread served up a fairly solid set of full year results and while it reported a good start to 2017, warned of a tougher consumer environment than last year for its Premier Inn hotels and Costs coffee shops.

Revenue in the 52 weeks to 2 March of £3.1bn was up 8.2%, or 6.3% on a 53-week basis as the previous year was a 53-week year, which was in line with consensus forecasts of £3.1bn.

Premier Inn saw revenue per available room (revpar) decline 0.6% and Costa Coffee's UK like-for-like sales grow 2.0%, which was down from the 3% gain after nine months of the year due to a LFL fall of 0.8% in the fourth quarter.

Group underlying profit before tax grew 6.2% to £565.2m, as Premier Inn and the gastro-pubs increased underlying operating profits 7.4% to £468m and Costa by 5.3% to £158m.

Reported PBT climbed less than expected, up 5.7% to £515.4m, with the consensus forecast for the FTSE 100 group to serve up pre-tax profit of £554m.

Underlying basic earnings per share increased 6.0% to 246.48p, marginally ahead of the 245p consensus.

While Premier Inn grew total sales growth 9.0%, and LFL sales 2.3%, its opening programme of 3,816 gross new UK rooms during the year diluted LFL revpar 2%, which was only partially balanced by revpar growth of 1.4% in areas where no capacity was added.

With eight new restaurants opened, this part of the group increased sales 1.2%, though LFL sales shrank 0.3%, though this was said to be slightly ahead of competitors.

Costa, which 255 net new stores worldwide and installed 1,585 Costa Express machines, saw LFL sales decline in the fourth quarter due to the timing of the end of the quarter and saw margins shrink 0.8% points, not quite as bad as its previous guidance due to the phasing of investments into 2017/18.

With £860.1m of cash generated from operations, of which £610m was poured into capital investments and a full year dividend that is proposed to be raised 6.0% to 95.80p a share.

Consumer battle for Brittain

Chief executive Alison Brittain said the group made good progress in delivering on its three strategic priorities: UK and international growth and building the capability and infrastructure to support long-term growth, including November's £150m cost efficiency programme.

In Costa she highlighted innovations to drive sales growth and including an investment to introduce 'finer' coffee concepts, leveraging a new state-of-the-art roastery and delivering fresher food later this year.

For year ahead she said the focus will remain on organic growth and investing in the customer proposition.

"Whilst we are only seven weeks into our new financial year Premier Inn has had a good start to the year and Costa has also seen positive like for like sales growth, although we remain cautious and expect a tougher consumer environment than last year.

"In the longer term we remain confident that, with our significant structural growth opportunities, the power of our brands and the investments we are making, we will continue to deliver strong returns and sustainable long-term growth for our shareholders," she said.

Reaction and analysis

With sales growth was slowing, profit taking saw the shares fall more than 6% to 4,020p in the first half-hour on Tuesday morning, but merely erasing the strong gains in recent weeks.

“Domestic consumer-facing businesses are likely to face a challenging year as discretionary spending becomes squeezed whilst High Street operators are having to absorb cost increases such as business rates and the National Living Wage.”

"The company is growing sales but at a slower pace than in the past as it struggles to fight off consumer trends at its two key businesses – hotels and coffee," said Neil Wilson at ETX Capital, highlighting that a year ago Premier Inn enjoyed total sales growth of 12.9% and LFL sales up 4.2% while Costa total sales growth of 15.9% and UK LFLs of 2.9%.

"One big issue is the growth of artisan coffee – smaller independent outlets are a bit more fashionable these days, which is denting growth prospects at Costa. The other is rise of Airbnb and its ilk, which is crimping growth at the Premier Inns hotel chain."

Investec head of UK equities Guy Ellison said he was surprised by the negative market reaction as he felt the numbers marginally exceeded consensus market expectations and "contain nothing material in the way of new guidance".

Having gained 10% over the last month up to last night’s close, he said short-term profit-taking looked the main motivation for the share price move.

Analyst Stuart Gordon at Berenberg said he continued to like the structural growth opportunity for both of Whitbread’s key businesses and expects the company to deliver solid growth from both businesses into the medium term.

"However, today’s results point to more acute weakness in the UK consumer compared to our current thinking, particularly at
Costa. This will be taken negatively, despite the fact that the company remains comfortable with current expectations for the year."

Richard Hunter at Wilson King saw lots of positives, saying Whitbread’s reputation for financial stability and growth remained intact, despite the uncertainties of the wider environment.

"A number of key metrics have demonstrated strong growth, not least revenues, profit, and earnings per share, whilst the return on capital remains robust and in excess of 15%. Meanwhile, the company is not resting on its laurels as it looks to increase its presence for both the Premier Inn and Costa businesses, which have been the twin drivers of growth for some time."

However from an investment perspective, he said the dividend yield of around 2.1% was "not especially punchy", even after the proposed 6% increase.