Whitbread’s first quarter sales rose 2% to £0.7bn. Improvements in both price and occupancy helped drive a 3% rise in UK accommodation sales, up from 1.9% in the first eight weeks, which more than offset weaker food and beverage sales.
In Germany, accommodation sales rose 13% before currency moves, accelerating from 9% in the first eight weeks, driven largely by increased capacity and a 5% contribution from organic growth.
Forward bookings in both the UK and Germany are ahead of last year.
The shares were flat in early trading.
Our view
Whitbread’s first quarter showed encouraging sales growth, but it follows criticism of the recently unveiled strategy from some investors pushing for a sale of the business, and a decent trading update has done little to shift sentiment.
Premier Inn remains a powerful brand with an impressive record of market outperformance. It’s already the UK market leader, but structural shifts in the hotel industry still leave room to take share. Targets for new openings have been scaled back. While we support the sharper focus on higher-return locations, there are still concerns about whether planned greenfield investments will pay off.
With net UK cost inflation still running close to 4% after mitigations, profit growth looks hard to come by this year, even if demand holds up. The recent easing of tensions in the Middle East has reduced some of the economic risk, but uncertainty around travel demand hasn’t gone away.
That puts greater pressure on the board to drive further efficiencies. Enter the group’s updated five-year plan that builds on earlier initiatives to integrate its restaurants into Premier Inn, while also doubling down on profitable growth in Germany, where the division has just exited loss-making territory. On first glance, the measures look well thought through, but the benefits won’t be felt for a few years yet, and execution will be critical.
Plans to reduce investment spending and release capital from the real estate portfolio, along with a £250mn increase in planned cost savings, underpin targets to distribute £2bn of free cash flow to investors by 2031.
However, annual capital expenditure is set to remain in the £0.4-0.6bn range. Freehold disposals should provide much of the funding, but we’ll need to see convincing proof that such reallocation of capital can create value for shareholders.
Management is yet to introduce a buyback this year, and no shareholder payouts can be guaranteed. If cash generation weakens, some funds may need redeploying to keep net debt within the target range.
We think Whitbread has an enviable market position, and the current valuation weakness would normally be seen as an attractive entry point. While the revised strategy should further bolster the group’s profitability, there’s a lot for management to deliver, and any benefits will take time to be felt. In the meantime, lingering uncertainty and cost pressures mean the chance of disappointments remains high.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
Whitbread's management of material ESG issues is strong according to Sustainalytics. Human capital management is considered above average with a strong development program in place. The company has appointed a management committee for overseeing ESG issues, but reporting is not in accordance with leading standards. As the owner of the UK's largest hotel chain, we would like to see an improvement in carbon intensity, and clearer targets on reducing its water usage. Further, management of product governance has been called out as average with no evidence that Whitbread's hotels and restaurants have received external quality certifications.
Whitbread key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.