Whitbread’s first quarter revenues were up 1% to £739mn, recovering from a 1% fall in the first seven weeks of the year.
On a like-for-like basis UK accommodation fell 2%, reflecting both lower occupancy and room rates, particularly in London. Food and beverage sales fell 1%, with strong in-hotel breakfast sales offset by softer trading at some of its branded restaurants.
Sales in German were up 5%, helped by a 3.6% increase in average room rates. The division is on track to break even later in the year.
Whitbread remains confident in the full-year outlook and has recently seen more encouraging trading in the UK.
The shares were up 3.1% following the announcement.
Our view
Whitbread had a rocky start to the year, so markets were encouraged to hear performance recovered at the end of the first quarter. Still, growth is hardly shooting the lights out.
The UK's largest hotel chain continues to enjoy an enviable brand position in the value and mid-range hotel sector. That helped improve the profitability of its rooms and drive record levels of profits and cash flows last year, but that does also makes comparatives more challenging moving forward.
Signs are emerging that indicate increased pressure on the UK hospitality sector, particularly impacting standalone pubs and restaurants. Whitbread’s plans to reduce its involvement in this segment, shifting focus towards integrated restaurants within its hotels would seem a shrewd move. Over a quarter of the 12,000 or so room openings planned over the next 4 years are expected to come from restaurant conversions. Too much additional supply could hurt profits if demand doesn't keep pace. But given the supply that's come out of the market since the pandemic, we're not too concerned. The plan should generate an annual increase in underlying pre-tax profits of £80mn-£90mn, although in the short term it’s expected to be a drag on profits. On the costs front, expectations for 3-4% inflation on the UK cost-base remain in place for the current financial year. A further £150mn of cost savings have also been identified to be delivered over the next three years. This should give some flexibility to adjust prices in the face of a downturn.
If Whitbread can reproduce Premier Inn's success in Germany, this is potentially a bigger growth opportunity. It has a much smaller footprint here and is yet to turn a profit. About 60% of rooms in Germany are run by private hotels - we think there's opportunity for an experienced hotelier like Premier Inn to establish a foothold. But it could be a while before Germany makes meaningful profits.
The balance sheet is also in reasonable shape. That's helped by the fact the group owns over half its hotels, rather than leasing them. What's more, its considerable re-investment plans of around £0.6bn for the current year should be fully funded by cash flows and disposals of non-core assets. This also helps feed into the group's ability to pay a dividend and supports ongoing share buybacks. As ever no pay-outs to shareholders are guaranteed.
We're impressed with Whitbread's continued progress and see long-term potential for both organic growth and further consolidation. The valuation sits below the long-term average and in our view, isn't overly demanding. However, the near-term challenges of an economic slowdown remain very real. Investors should be prepared for some ups and downs.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
Whitbread's management of material ESG issues is strong according to Sustainalytics.
Human capital management is considered above average with a strong development program in place. The company has appointed a management committee for overseeing ESG issues, but reporting is not in accordance with leading standards. As the owner of the UK's largest hotel chain, we would like to see an improvement in carbon intensity, and clearer targets on reducing its water usage. Further, management of product governance has been called out as average with no evidence that Whitbread's hotels and restaurants have received external quality certifications.
Whitbread 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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