The market reacted favourably to the first quarter trading update from Whitbread PLC (LON:WTB), despite the lack of like-for-like (LFL) sales growth.
Although there was little new information on the eagerly-awaited (in some quarters) demerger of the Costa Coffee chain, the shares rose 2% as the Premier Inn and Beefeater brands owner said it expected to deliver full-year results in line with expectations.
READ: Whitbread perks up after in-line first quarter
LFL sales may have been down year-on-year but, thanks to Whitbread’s aggressive expansion of its Costa coffee shop business and its Premier Inn hotel chain, the top-line still moved higher.
Whitbread saw total sales grow 3.5% year-on-year in the period, with Premier Inn up 2.5% and Costa up 5.2%. Adding in international sales, saw the group’s sales growth reduce to 3.2% but as the UK market for Whitbread’s offerings shows signs of becoming saturated, a lot of pundits are looking to overseas expansion to make the stock sexy again.
Neil Wilson, the chief market analyst for Markets.com, expects Costa to lose market share to “artisan coffee retailers” in the UK but noted that “growth in China was solid and remains an attractive feature of the brand.
Premier Inn UK’s total accommodation sales growth of 4.3% has been driven by investment in new hotels pic.twitter.com/EYRp49JAmw
— Whitbread plc (@WhitbreadPLC) June 27, 2018
As for the hotels arm, Wilson said there was good progress in Germany “where Premier Inn faces far less competition in the branded hotel market” but in the UK, “the picture seemed to be one of excess capacity and a softer London market versus strong prior year comparatives”.
Wilson was not the only market pundit to have noticed the threat posed to Costa Coffee’s high street dominance by independent craft coffee shops; Russ Mould at AJ Bell makes a similar point but says that, ultimately weak high street footfall is likely to have been the key contributor to lower sales.
“It told analysts on a conference call that afternoon trading had been particularly weak,” Mould revealed.
@skynews nothing to do with the high street decline or brexit it's simply down to costs £3.99 for a coffee at a Costa alot shop or £1.60 at McDonald's or £1.75 at Greggs https://t.co/zVfivXVH5R pic.twitter.com/SryWtgFyVT
— nffc1969 (@nffc1969) June 27, 2018
“The troubles of the high street shouldn’t come as a shock; neither should weakness in Whitbread’s Premier Inn business where London trading was hit by lower occupancy rates. Both Premier Inn and other hotel operators have been expanding in the capital and so there is greater capacity.
“Short-term this may present a challenge if demand doesn’t hold up, but longer term it makes strategic sense to increase capacity as London is likely to remain a major tourist destination for both domestic and foreign travellers,” Mould said.
Premier Inn involved in a pillow fight
Liberum Capital Markets said it had been a challenging (fiscal) first quarter for Whitbread, with the hotels business, in particular, facing stiff comparative figures from a year earlier.
“However, forward bookings have improved and comparatives should ease as the year progresses,” the broker noted.
“The expanded £100mln efficiency programme is progressing, helping to keep profit expectations broadly on track although we expect to make small adjustments downwards for Costa,” it revealed, as it stuck with its ‘hold’ recommendation.
Whitbread said its Costa Express machines were performing well but David Madden, a market analyst at CMC Markets, reckons the machines are cannibalising Costa shop sales.
Costa UK grew total sales by 5.2% due to the strong contribution from new stores and Costa Express machines pic.twitter.com/Y66GvTsjbs
— Whitbread PLC (@WhitbreadPLC) June 27, 2018
Picking up that theme, Graham Spooner at The Share Centre, said: “With fewer shoppers on the high street and a lack of consumer spending, the group has increased its focus on self-service machines and placing its coffee business in more convenient locations with a higher footfall.”
Mark Brumby, meanwhile, at Langton Capital noted that “given the building, perhaps overbuilding, in both hotels (particularly in London) and coffee shops”, the decline in LFL sales “may not be a surprise”.
“WTB has an impressive freehold estate, good brands and international ambitions but, with trading uncertain, the shares may remain under some pressure,” Brumby suggested.
The company is not immune to the high street blues
Laith Khalaf, a senior analyst at Hargreaves Lansdown, said Costa is “clearly suffering from a case of the high street blues”.
“However, Whitbread has been quite savvy about new Costa locations, choosing to position their baristas in service stations and airports, rather than in more traditional shopping locations. A similar strategy has been employed at WH Smith, and in both cases, sales from transport hubs have helped prop up the performance of high street outlets,” he noted.
On the hotels' side, Khalaf reckons the future opportunity for Premier Inn lies in Germany.
“The German hotel market is 35% larger than the UK, but the branded budget hotel sector still only represents a 6% market share, compared to 24% in the UK,” he said.
The general view seems to be that Whitbread is running to keep still in the UK but compared to many other operators on the UK high street that is preferable to flailing around in a whirlpool.
Its hopes of once again becoming a glamorous growth stock – or two glamorous growth stocks, bearing in mind the impending bifurcation of the business – depend on international expansion, particularly in China (for Costa) and Germany (for Premier).