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Whitbread - sales fall, conditions remain tough

George Salmon | 19 June 2019 | A A A
Whitbread - sales fall, conditions remain tough

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Whitbread plc Ordinary 76 122/153p

Sell: 3,259.00 | Buy: 3,261.00 | Change 36.00 (1.12%)
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Whitbread has released a brief trading update to confirm progress remains in line with expectations in this tough climate.

The shares were broadly unmoved following the announcement.

View the latest share price and how to deal

Our view

After starting out in brewing and pubs way back in 1742, Whitbread has reinvented itself more times than David Bowie.

The last 25 years have seen it go around the leisure carousel a few times with ventures into casual dining, cafes and fitness. But the sale of Costa Coffee to Coca Cola means the focus is firmly on Premier Inn.

There were good reasons for selling. The £3.9bn proceeds, most of which is due to be returned to shareholders through a share buyback, are significant, and some investors argued that there was little point in holding a hotel and coffee chain under the same roof anyway.

However, the absence of Costa makes Premier Inn's performance all-important. And unfortunately trading is tough for the discount hotel chain at the moment, with fewer visitors despite lower prices.

A large portion of that could well be down to wider uncertainty. Business and social travel tends to fluctuate with the fortunes of the economy, and with uncertainty looming large, customers are tightening the purse strings.

Longer-term we believe the product is strong. The UK pipeline is not insignificant, but progress is likely to be steady rather than spectacular as it's already a mature market. The German expansion brings growth potential, but there are still only 2 hotels open for business at present.

Most of its hotels are owned rather than leased. That means a lot of money is tied up in the business, but a sizeable property portfolio means the company can shoulder significant quantities of debt.

It looks like the group will carry debts of around 3.5 times adjusted operating cash flows. This should enable the group to leverage returns, but all debts carry risks.

The current prospective yield is 2.4% next year, but in the near term the £2bn remaining in the share buyback makes up the bulk of shareholder return. To put that in context, that represents around 30% of the current shares outstanding.

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First quarter trading update

On a like-for-like (LFL) basis, UK sales dropped 3.7%. Declining occupancy and lower room rates pushed LFL accommodation sales down 4.6%, and LFL revenue per available room down 6% - a worse performance than the wider market. Food & beverages LFL sales fell 2.1%. Including the effect of new openings and the German business, total sales were 1% lower.

CEO Alison Brittain said: "We have delivered a resilient performance in the first quarter despite more challenging market conditions and we continue to make good progress with our efficiency programme, which is helping to partially offset another year of high industry cost inflation."

Another 3,000-3,500 rooms are due to be added in the UK this year, while the roll-out in Germany is described as 'firmly on target'. The hotel in Hamburg performing above expectations and Frankfurt doing well too. Two more sites are due to open this year, and 13 of the 19 hotels acquired through the Foremost Hospitality deal are due to be rebranded as Premier Inns.

The first phase of the planned £2.5bn share buyback has now been completed, with £482m returned to shareholders. Whitbread intends to pursue a Tender Offer to repurchase up to a further £2bn of shares

Find out more about Whitbread shares including how to invest

The non-executive chair of Hargreaves Lansdown is also a non-executive at Whitbread.

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.