Whitbread plc (LON:WTB) served up higher profits and revenues in the first half on the back of expansion but shares fell as it reported a slowdown in like-for-like UK sales growth and rising costs at its Costa coffee chain.
The group, which also owns the Premier Inn hotels brand, said underlying profit before tax rose 6.7% to £328mln in the six months to 31 August, compared to the same period a year earlier. Revenue increased 7.4% on the year to £1.6mln, in line with consensus forecasts.
Underlying earnings per share beat analysts’ estimates of 138p, rising 7.4% to 143.7p.
However, shares fell 4.11% to 3,779p in morning trading as like-for-like sales growth in the UK Costa arm eased to 0.6% from 2.3% in the year-ago period.
Analysts also highlighted that profits in the division were hurt by higher costs. Underlying operating profit fell 4.6% to £61mln as result of increase in labour costs, business rates and a weaker pound pushing up the cost of coffee imports. Whitbread said cost increases were largely offset by efficiency savings, which delivered a benefit of 150 basis points to underlying margins.
"Unfortunately rapidly increasing revenues isn’t enough to guarantee CEO Alison Brittain a good night’s sleep, since the group is also having to cope with a whole raft of cost headwinds, from labour to the cost o’coffee and business rates," said Nicolas Hyett, equity analyst at Hargreaves Lansdown.
"The group has done a sterling job of managing those cost pressures in the first half, grinding out efficiencies across both businesses, but they still left Costa profits flat."
Hyett added that the weaker like-for-like sales will "add to worries that customers are feeling the pinch" as inflation outpaces wage growth.
Still, total revenue at Costa rose 9.1% to £622mln, buoyed by ongoing UK and international expansion and the introduction of an improved breakfast food range and a broader range of drinks.
In the Premier Inn business, revenue increased 6.4% to £1.01bn, driven by a strong performance in the core UK business. On a like-for-like basis, UK sales gained 3.6% following a 2.4% rise in the previous year. Underlying operating profit was up 8.9% to £295mln.
Expansion boosts revenues
Chief executive Alison Brittain said the company made progress in its expansion plan, opening 2,000 Premier Inn hotel rooms in the past six months and more than 230 new Costa equity and franchised stores in the past year.
The group also exited less profitable international businesses, including the closure of hotels in India, Thailand, Singapore and Indonesia along with the withdrawal of Costa operations in France.
International business exits were mostly completed during the period, ahead of schedule and at a lower cost than expected, resulting in a £6mln benefit in the period.
In early October, the group announced it is buying out its joint venture partner, Yueda, in south China to support its coffee shop expansion plans. It paid £35mln for the 49% stake in the joint venture, which operates 252 coffee stores in southern China and 93 stores in Shanghai.
Whitbread to meet full year expectations
The company said it expects to meet estimates for the full year despite economic uncertainty surrounding the implications of Brexit.
New hotels in the UK, including about 4,200 room openings this year, are expected to contribute about 5-6% to total sales growth for the full yea. Costa remains on track to open 230-250 new stores and about 1,200 new Costa Express machines in the full year, Whitbread said.
“Although we remain cautious on the current environment, we are confident that ongoing disciplined allocation of capital and focus on executing our plans will deliver sustainable growth in earnings and dividends and a strong return on capital,” Whitbread said.
Whitbread has about £253mln of capital invested for the opening of future Costa cafes and Premier Inn hotels. Net cash flow stood at 338mln, compared to outflows of £78mln last year, while net debt shrank to £825mln from £988mln.
The interim dividend was raised 5% to 31.4p.
"While management state’ on-track’ and ‘no overall change to group expectations’, we feel that investors could be disappointed in the RevPAR progression and would have been hoping for more trickle down from inbound tourist and staycationers," Liberum said as it maintained a 'hold' rating and target price of 4,150p.