Whitbread wilts as sweeter dividend masks Costa concerns

Whitbread sprinkled a 5% dividend hike on a strong set of interim results, but investors overlooked acceleration at the Premier Inn hotels arm to focus on a dip in profits from Costa coffee shops.

Operating profits at Costa were down 4.0% due to investments in the stores and IT and the early introduction of the National Living Wage, and not helped by rising coffee prices and a decline in the nascent China operation.

For the whole year the plan is to open 230-250 new coffee shops worldwide, with 14 net new stores opened in China in the first half despite the market management said was "tough" but that remains "a good opportunity".

However, the report was mostly positive, with the FTSE 100 group confirming it remained confident in hitting its full year targets and pointing to bigger market share in both Premier Inn and Costa, with LFL sales of 2.4% and 2.3%.

Total group sales rose 8.1% to £1.6bn in the six months to 1 September, up from 8% in the first quarter, with group like-for-like sales growth improving to 1.9% from 1.8%.

LFL growth at Premier Inn improved to 2.1% in the second quarter from 1.8%, though after opening 1,171 new UK rooms it only expects to open around 3,700 new UK rooms for the full year, short of guidance as chief executive Alison Brittain "smooths" the phasing plans, before growing this to over 4,000 openings next year.

Although still fairly flat, restaurants marginally outperformed the eating out market, with LFLs up to 0.5% from 0.3%.

Together, operating profit from Premier Inn and restaurants was up 8.9% to enable group to lift underlying profit before tax 5.4% to £307m, beating consensus forecasts, with earnings per share up 2.2% to 111.42p.

A healthy £431m of cash was generated, helping fund £329m of investment in growth and enabling the board to confidently lift the interim dividend 5% to 29.9p. Net debt still grew to £988.2m, up from £910m six months before.

Brittain was happy with the initial results of her long term strategic plans: "In April this year, I identified three strategic priorities to develop our business: to grow and innovate in our core UK businesses; to focus on our strengths to grow internationally; and to build the capability and infrastructure to support long-term growth. This strategy will enable us to deliver continued growth, maintain good returns on capital and create sustainable value for our shareholders."

Whitbread shares were down 2.4% to 3,745.43p by 0930 BST on Tuesday, as investors and analysts picked through the numbers.

Analyst Laith Khalaf at Hargreaves Lansdown noted that although Whitbread has two very successful franchises, which are leaders in their field but with relatively modest market shares that offer ample room for expansion, there were being "tested", not least by the National Living Wage, which has raised staffing costs.

"Looking forward there are challenges too. If Brexit does precipitate an economic slowdown next year, that will damage the appetite of businesses and consumers to spend money on hotel rooms," Khalaf said. "Costa also has to contend with a big jump in the price of coffee, which has risen by more than 50% in sterling terms this year. That means customers are going to have to pay much more for their morning hit, or Costa is going to have to absorb some of the costs."

Analysts at Numis said PBT of £307m was circa 2% ahead of its forecasts and a good amount above the market consensus of £301.7m, but that while Premier Inn and restaurants grew profit margins as cost savings were delivered ahead of expectations, Costa margins fell 180 basis points, more than guidance had indicated.

Broker Canaccord Genuity remained positive, given Whitbread's excellent underlying free cash flow and strong balance sheet, but did not expect much from the stock: "Whitbread's share price has lacked direction this year, following its 30% fall from last year's high-point, instead taking its cue from macro-events rather than any company-inspired progress and we expect the stock to remain range-bound."