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Whitbread - Growth, but like-for-likes stagnant

George Salmon | 18 January 2018 | A A A
Whitbread - Growth, but like-for-likes stagnant

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Whitbread plc Ordinary 76 122/153p

Sell: 2,682.00 | Buy: 2,685.00 | Change 21.00 (0.79%)
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Third quarter results from Whitbread show total sales growth was 5.6%. With the UK like-for-likes up 0.3%, this was driven largely by the addition of new sales space.

The shares rose 2.3% on the news.

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Our View

20 years ago over 50% of Whitbread revenues came from brewing and pubs. Today, pubs are off the menu (bar those supporting the hotel estate), while brewing is long gone. In their place are more than 2,300 UK coffee shops, and a 70,000 room hotel estate. Quite the transformation.

Costa revenues grew from £143m in 2005 to £1.1bn in 2015, compound annual growth of 23% a year, while Premier Inn checked in growth of 12%. However, while more recent performances remains respectable, there's been a notable slowdown in growth.

There are several short-term reasons for that, ranging from weakness in the London hotel market to lower city centre footfall hitting Costa's high street shops. New products, including self-service coffee machines and the stripped down 'hub' city centre hotels, may go some way to alleviate those pressures.

With less than 10% market share in key segments such as London hotels, there's still room for both brands to grow domestically in some areas. However, on the whole Whitbread is running out of new places to pitch up. That has inevitable consequences for the pace of future growth.

Major cost headwinds in the UK business are adding to the pain, and even the group's impressive cost control has failed to keep margins heading in the right direction.

Overseas expansion seems a reasonable response. So far Premier Inn's international expansion has focussed on Germany. Costa is further down the international road, and already turns a small profit. Especially positive noises are coming out of China.

We see no reason why both couldn't sell as well internationally as they do at home, but building international brands from scratch takes time. In the immediate future the challenge will be guiding a more mature UK business through less favourable economic conditions

Whitbread shares trade on a prospective yield of 2.8% and a price to earnings ratio of 14.3 times (a slight discount to its ten year average).

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Third quarter trading details

Premier Inn saw total sales grow 4.7%, largely through the addition of almost 5,000 new UK rooms over the last 12 months. Occupancy rates fell from 84.5% to 83.3%, with revenue per available room also falling 1.6% to £53.30.

During the third quarter, there were signs of market weakness, most notably in London, where both occupancy and average room rate saw year-on-year declines. However, early indications are that Q4 has started better.

Another hotel in Dortmund has been added to the committed pipeline. This brings the total to 10 hotels, which will deliver a further 2,200 rooms.

Costa sales rose 6.9%, again driven by the addition of new capacity. The group added of 221 new stores in the UK and 1,560 new machines around the world.

UK total revenue growth was 7.2%, but sales from existing outlets dipped 0.1%. The group says this is a function of declining footfall on the High Street.

Growth in the smaller international business moderated to 4.2% in the quarter, with closures in France and China. However, the group continues to see opportunities for growth, so expects to increase investment over the next year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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