Investors in Whitbread PLC (LON:WTB) were needing some strong coffee on Tuesday as shares in the blue chip leisure giant took a tumble following first half results, unsettled by worries over its Costa Coffee arm as concerns over rising costs in the UK offset soaring international sales.
Nicholas Hyett, equity analyst at Hargreaves Lansdown commented: “There’s clearly plenty of buzz around what Whitbread has to offer. Costa sales are soaring, with the UK only just falling short of double digit growth this half, and a combination of new rooms and increased prices are fuelling growth at Premier Inn.”
READ: Whitbread shares fall as higher costs weigh and like-for-like sales growth slows at Costa
But, Hyett added: “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. 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.”
The analyst concluded: “Many of the factors driving those cost increases have now been lapped, so input inflation should ease from here. However, having pushed through price increases itself, Whitbread will be well aware of the pressures facing the purses of UK consumers. Weaker like-for-like numbers this time round will add to worries that customers are feeling the pinch.”
Neil Wilson, senior market analyst at ETX Capital also pointed out that the “key metric that investors will be concerned by is the LFL sales growth in the UK”
He noted that, as expected, Costa Coffee’s like-for-like slid below 1% to just 0.6% growth in the first half and just 0.1% in the second quarter - last year LFL sales were running at 2%.
Nevertheless, Wilson, added, Costa remains a growing brand on the UK high street with total revenues in the UK up 8.3%, driven by the addition of 108 net new stores, which means it is still gaining market share.
The analyst said another concern is that Costa’s underlying operating profit in the UK declined by 4.6% to £61mln as a result of higher labour costs, business rates and coffee imports due to the weaker pound.
International sales boost at Costa
But he pointed out that the much smaller international segment, which accounts for around 12% of Costa’s revenues, saw sales growth of 15.4% and said this is likely to accelerate in the coming years as Costa “doubles down on the Chinese market” by taking full control of its southern Chinese venture.
Wilson concluded that with Costa’s international sales picking up, this might keep any talk of a break-up of the group quiet for the time being.
In late morning trading, the FTSE 100-listed stock was still 5.1%, or 201p lower at 3.741p.
On a technicals basis, David Madden, market analyst at CMC Markets UK noted that Whitbread’s share price was previously receiving support from its 200-day moving average at 3,934p, but it has now fallen below that metric, and he said “if it fails to retake that level, it could target the September low of 3,593p.”