A third quarter update from Whitbread is very much a case of deja vu, with strong numbers across the piste, yet again. Group sales are up 10.4%, with positive Like-for-like (LFL) sales in all divisions. Premier Inn grew sales by 10.8%, with LFL gains of 4.7%, broadly in line with the first half result of 4.9% LFL. Restaurants grew sales by 3.0%, with a LFL increase of 1.7%, a little better than the 0.6% LFL progress reported at the half year. Costa sales leap 13.8%, largely a function of new stores, with LFL gains of 2.5% a touch below the 3.7% achieved in the first six months.
Premier Inn grew sales almost 15% in London and by almost 10% in the regions. It remains on track to deliver 5,500 new rooms for the year, 1,500 of which come from extensions to existing hotels. Revenue per available room grew at a slower rate than the wider market, which could be taken as a sign of the brand losing traction, or alternatively, as an indication that Premier Inn is increasing its price competitiveness. Time will tell on this score, but with occupancy remaining at 84.5% we err toward the latter.
Costa system sales rose at home and abroad, in owned and franchised stores. The chain expects to add 200 new stores for the year as a whole and during Q3 opened its 2,000th UK store.
Despite the strength reported in these numbers, the stock opened around 3% lower.
Premier Inn is a great product; a clean comfortable room, in a good location at a sensible price. With over 60,000 rooms in the estate, it is the clear market leader in the UK branded budget hotel sector. Costa is omnipresent on UK High Streets and highways, with a rapidly growing overseas presence too. The restaurants business plays a supporting role to the hotels, but struggles to inspire in its own right.
The planned growth of the hotel and coffee estates gives excellent visibility of growth, much of which is independent of the economic cycle. Premier Inn has delivered consistently positive LFL sales growth in a variety of economic conditions, underscoring the strength of its proposition. Costa is busily slaking the nation's never ending thirst for caffeine; think of it as an investment play on the UK's long hours work culture. Both businesses have growth plans that envisage expansion of around 40-50% in their estates over a five year period.
The stock has retreated by over 15% since the spring, and now trades on circa 17x consensus earnings to Jan 2017, which is a little dearer than its longer run average of 16x. But there are not that many stocks out there offering double-digit organic sales growth. Premier Inn has been slow to gain traction overseas, but the UK estate's growth has more than compensated. The balance sheet is strong, with net debt expected to be circa 1.1x earnings before interest, tax, depreciation and amortisation, so Whitbread looks capable of funding its growth, without recourse to shareholders.
The group is asset-rich, with a lot of hotel freeholds on the balance sheet, and it makes net margins, after tax, of around 15%. As we say, there really aren't that many stocks around which offer market leadership, a history of double digit organic growth, strong profit margins earned from a robust balance sheet and which trade on multiples not too far from their longer run average. However please remember past performance should not be seen as a guide to future returns and naturally there are no guarantees.
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