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Whitbread - Costa Coffee profits fall

Whitbread, the parent company of Premier Inn and Costa Coffee, has reported a 5.4% rise in first half profits to £307 million.

However Costa’s profits dipped 4% to £64.6 million, as margins fell by 1.8% percentage points, partly due to the introduction of the National Living Wage driving up staffing costs.

Sales at both Premier Inn and Costa Coffee were boosted by store expansion, but like-for-like sales also increased in both chains, up 2.7% for Premier Inn and 2.0% for Costa.

Whitbread announced a 4.9% rise in the interim dividend to 29.9 pence per share.

The pension deficit saw a big jump thanks to falling bond yields in the wake of the EU referendum, rising from £288.1 million in March to £403.5 million on 1st September.

Shares fell 3% in early morning trading.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

"Whitbread has two very successful franchises which are leaders in their field, though both have relatively modest market shares, which offers them ample room for expansion.

The strength of Premier Inn and Costa is being tested however, not least by the National Living Wage, which has raised staffing costs.

Looking forward there are challenges too. If Brexit does precipitate an economic slowdown next year, that will damage the appetite of businesses and consumers to spend money on hotel rooms.

Costa also has to contend with a big jump in the price of coffee, which has risen by more than 50% in sterling terms this year. That means customers are going to have to pay much more for their morning hit, or Costa is going to have to absorb some of the costs.

Like many companies with defined benefits scheme, Whitbread’s pension deficit has also widened as bond yields have fallen, thanks to interest expectations going into reverse. This is a purely a problem on paper at the moment, but with its triennial pension review due next year, it could crystallise into a cash call on the company if yields stay low.

Whitbread continues to expand in the UK and overseas, and its long term growth potential still looks promising, but in the short term there could be a rocky patch ahead."


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