Is it time for Whitbread plc (LON:WTB) to wake up and smell the coffee following today’s disappointing market reaction to its latest full-year results?
The FTSE 100-listed leisure giant has looked ahead of the curve over the past few years with its focus on coffee shops and budget hotels which have been growing well in austerity Britain.
But with the Costa Coffee to Premier Inns group’s latest results showing a slow-down in growth over the past year, and a cautious outlook statement on consumer confidence, maybe the firm could be about to take a stumble.
READ: Whitbread posts solid growth, but cautious on outlook
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Neil Wilson, senior market analyst at ETX Capital, said: “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.”
He added: “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.”
Whitbread is battling competitors and shifting consumer trends
The blue chip leisure firm's slowing sales growth is a big worry as it battles competitors and shifting consumer trends.
Total group sales growth was 12% in the year to March 3rd 2016, but in the following year this had fallen to 8.2%.
In its main businesses, Premier Inn saw its total sales growth slow from 12.9% to 9.0% over the two years, while Costa saw its total sales growth decline from 15.9% to 10.7%.
Nicholas Hyett, equity analyst, Hargreaves Lansdown, noted: “Tougher conditions are having a particular effect on high street Costa outlets, where like-for-like sales fell by over 1% in the final quarter of 2016.
“With Costa UK accounting for 98% of divisional and 25% of group profits, that’s far from welcome.”
He added: “A downturn in the UK high street would be painful short term, but it’s unlikely to be the end of the world’s love of coffee and Costa is making sure it’s ready with a cup in hand wherever customers find most convenient.”
National Living Wage, business rates, inflation all a worry
Russ Mould, director at AJ Bell also pointed out that: “The National Living Wage, business rates, commodity price inflation and foreign exchange rates are set to outweigh the benefits from the group’s cost efficiency programme and continue to squeeze margins at both its Costa Coffee and Premier Inn arms.”
And Guy Ellison, head of UK Equities at Investec Wealth & Investment echoed some of those concerns noting: “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.”
However, he said: “We were surprised by the negative market reaction this morning to a set of numbers which have marginally exceeded consensus market expectations and contain nothing material in the way of new guidance.”
Share price reaction just profit-taking?
Ellison added: “Having gained 10% over the last month up to last night’s close, short-term profit-taking looks the main motivation for the share price move this morning.”
Richard Hunter, head of research at Wilson King Investment Management also noted that Whitbread shares have “had a reasonable run of late”.
He said: “With its ability to maintain growth in a solid and stubborn manner despite the challenges ahead, the market consensus of the shares, which has long been rooted to a buy, is unlikely to be softened by these numbers - even though the initial share price reaction has been unforgiving in light of the company’s cautious outlook on the year ahead.”
But Hunter added: “From an investment perspective, the dividend yield of around 2.1% is not especially punchy, even after the proposed 6% increase, in the current interest rate setting.”
Maybe Whitbread is starting to look a bit out of step after having led the way ahead for leisure firms.