Mitchells & Butlers like-for-like sales growth slowed from 6.1% in the second quarter to 3.4% in the third. This was impacted by wet weather, Easter falling out of the period, and moderating inflation. Growth remained ahead of the wider market.
The continued sales growth, strong cost control and slowing food inflation has helped management to remain very confident in meeting full year expectations. Consensus forecasts suggest total revenue growth of 4.7% to £2.6bn and a 28.9% increase in operating profit to £291.3bn.
The shares were trading flat following the announcement.
Our view
Mitchells & Butlers is easing its foot off the price increase pedal in its pubs and restaurants while still managing to push sales in the right direction. We see this as the right move and believe it should help the Group gain further market share.
The market-beating sales growth is a testament to the relentless focus on customer satisfaction and the diversity of its brands, which can help it react to the market conditions of the day. The broad portfolio includes family-friendly restaurants like Harvester and Toby Carvery, and more premium offerings such as Miller & Carter steakhouses. There are also popular high street watering holes, including O'Neills and All Bar One.
While revenue growth is slowing, a focus on operational excellence and easing cost pressures is helping profits recover. The Board has expressed confidence in the outlook for this year and beyond, and there are signs that the UK economy and the outlook for the consumer are starting to pick up.
However, inflation is a stubborn beast, and there are still some cost headwinds to be mindful of. The National Living Wage increased by 9.8% in April. Mitchells & Butlers' scale and focus on cost efficiencies should mitigate some of this, as should a reduction in the energy prices paid by the Group. Management hopes this will allow margins to start rebuilding towards pre-covid levels, but there’s still a lot of work to be done.
With this in mind, we see the decision to keep dividend payments on hold as sensible, allowing continued investment into the business. We'd also like to see some more progress on bringing down debt levels.
Whereas competitors have been trimming their estates Mitchells & Butlers has made some modest additions to its footprint. Given the supply that’s come out the market we support this move, as long as site selection is prioritised. Existing sites are also being upgraded, which looks to be an important contributor to the outperformance of its brands.
With a solid balance sheet backed by considerable property assets, Mitchells & Butlers is well placed to grow its market share further.
The valuation at close to the long-term average doesn’t look too demanding, and the company is doing all the right things. However, demand for eating and drinking out can turn quickly, which means investors need to be prepared for ups and downs. And for now, there’s no dividend on the table to help smooth the ride.
Environmental, social and governance (ESG) risk
The food and beverage industry is medium-risk in terms of ESG, though some segments, such as agriculture, tobacco and spirits fall in the high-risk category. Labour relations and supply chain management are key risks in this industry. Product governance is an area of concern industry-wide, particularly for companies operating in markets with strict quality and safety regulations. Other risks can vary by sub-industry, but community relations and resource use tend to impact most companies in this sector either directly or through their supply chains.
According to Sustainalytics, Mitchell's & Butlers management of ESG risks is average. While many of its brands are food led and family friendly there is a strong responsible drinking policy in place. In terms of ingredient sourcing the lack of Supplier Environmental Certification is something we'd like to see addressed. Labour relations is also an area of weakness with no union recognition or working hours policy identified. And there is room for improvement in both the company's whistleblower policy and ESG reporting standards.
Mitchells & Butlers key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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