Whitbread PLC (LON:WTB), which is in the process of selling its Costa Coffee business to The Coca-Cola Co.(NYSE:KO), warned that future profits may be dented by planned investments, Brexit uncertainty and weak consumer confidence.
The group is throwing money at the expansion of its Premier Inn hotel chain after agreeing to sell Costa to Coca-Cola for £3.9bn in August. The deal was approved by shareholders in October and now the two companies are waiting for the green light from regulators in the European Union and China.
READ: From booze to beans and beds - a timeline of Costa Coffee owner Whitbread
"We intend to return a significant majority of the net cash proceeds to shareholders, although the exact amount, timing and method will be determined following discussions with stakeholders, including our shareholders, pension fund and debt providers," Whitbread chief executive Alison Brittain said in the company’s first-half results on Tuesday.
Following the disposal, Whitbread will be a hotel-focused business, with more than 76,000 rooms in more than 800 hotels in the UK, Germany and the Middle East. The company will also keep its 49% investment in Pure, a healthy-eating takeaway restaurant based in London.
Whitbread plans to open 4,000-4,500 rooms in the UK and Germany in fiscal year 2019, funded by some of the proceeds of its Costa deal. It also plans to launch a new budget hotel chain, called Zip, in Cardiff in the first quarter of 2019.
In its first-half results, Costa was treated as a discontinued operation.
Revenue from continuing operations rose 2.6% to £1.08bn and underlying pre-tax profit increased by 2.5% to £270mln.
Total UK accommodation sales increased 4.8% on a reported basis but weak consumer demand led to broadly flat like-for-like sales growth of 0.2% and a 0.9% dip in revenue per available room.
Whitbread cautious on outlook for demand
On the outlook for 2019, Whitbread said there is a “degree of caution on demand” due to inflationary pressures on consumers along with economic and political uncertainty.
"The combination of our commitment to the investment programme and the current UK consumer environment naturally means our near-term profit growth may be lower than in previous years," the firm said.
"However, Whitbread is confident that the ongoing efficiency programme can continue to offset a significant proportion of inflation over the short to medium term."
The interim dividend was raised by 4.0% to 32.7p from 31.4p last year.
Shares fell 2.02% to 4,374p in morning trading.
Real growth potential lies in German hotel expansion, says analyst
"Sales at existing Premier Inn hotels are flat, but that’s not to be sniffed at given the weak consumer environment, and the fact Whitbread has added 14,000 new rooms to its portfolio in the last three years," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
"To lend some perspective, that’s 2.5 times the combined total of rooms added by Travelodge, Holiday Inn Express, and Ibis over the same period."
Khalaf said the real growth potential lies in Germany, where the hotel market is 35% larger than the UK. However, the branded budget hotel sector still only represents a 6% market share in Germany, compared to 24% in the UK.
Whitbread aims to open 6,000 rooms in Germany by 2021.