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Mitchells & Butlers - diners to drive growth in 4th quarter

Fourth quarter like for like sales were up 1.5% compared to the same quarter in 2019...

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Fourth quarter like for like sales were up 1.5% compared to the same quarter in 2019, reflecting a 4.1% increase in food sales somewhat offset by a 1% decline in drinks. It was an improvement on 0.9% total growth in the previous quarter.

On an annual basis like for like food sales are up 5.2%, drinks down 4.1%, equating to total growth of 1.1%. Including the impact of pub disposals and Omicron-related closures, revenue was 1.3% lower compared to 2019.

The trend of rising food sales with drinks in decline persisted for the whole year. The pace of decline in drinks slowed consistently across the financial year from a high of 9.1% in the first quarter.

Mitchells notes that inflation in energy, wages and food has now spread to most other areas of the supply chain. Despite energy price caps it expects energy and utility costs to nearly double to £150m over 2019 levels with worse expected next year in spite of an efficiency drive and forward buying for 20% of next year's energy requirement.

The Company had cash of about £160m on top of undrawn borrowing of £150m, and has upgraded or converted circa 10% of its estate this financial year,

The shares fell nearly 2% following the announcement.

View the Mitchells & Butlers share price and how to deal

Our View

It's certainly not been an easy year for pub operators. Back at the half year mark it looked like the challenges might be starting to ease, with Omicron in the rear-view mirror. But alas, a cost-of-living crisis and worsening inflationary environment has scuppered any plans of a budding recovery. Whilst like for like sales are slightly up over 2019, low single digit revenue growth points to a decline in real terms if we adjust for inflation.

Looking at the underlying story, the group has a decent portfolio, with brands including Harvester, Browns and Miller & Carter. Even though the brands aren't quite in the top tier, they're well diversified across demographics and geographies. That means performance isn't quite as reliant on footfall in any one area.

It's actually the food that has propped up performance, with more expensive orders rather than higher volumes having the greatest impact. That's a slight concern given the cost-of-living crisis arguably hasn't had its full impact on consumer behaviours yet.

Then we have rising costs, a growing concern for the industry. Utilities, wages and food are expected to push costs 11.5% higher than 2019 levels. More concerning, is management's predictions that many of those costs are likely to persist well into next year, potentially at higher levels and across other cost categories. That's a tricky backdrop to navigate and margins in the medium term are expected to come under pressure.

The group's balance sheet is at least in reasonable shape, partially thanks to tapping investors for a £351m lifeline last year and continued investment in the Estate will help MAB's competitive edge. It is a credit to management that its pubs and restaurants have outperformed pre-pandemic levels on a like-for-like revenue basis, but storm clouds continue to loom.

The valuation is well below the long term average but it could still be a bumpy ride ahead for the sector as a whole. With a solid balance sheet, Mitchells & Butlers is better placed than some to ride out the storm and may offer some longer term upside if investors are prepared to tolerate some volatility.

Mitchells & Butlers key facts

All ratios are sourced from Refinitiv. 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.

Third Quarter Update (21 July 2022)

Like for like sales rose 0.9% in the third quarter, compared to 2019 levels. That was driven by a 2.9% increase from Food, which was partially offset by a 1.3% decline in Drink. The quarter started strong, but sales fell back toward the end of the period.

Inflationary cost pressures are presenting a 'major challenge' and are expected to persist into the next financial year, putting pressure on medium term margins. In the short term, the outlook remains unchanged.

Phil Urban, CEO, said: ''The trading environment remains very challenging with inflationary costs squeezing consumer discretionary spending and putting pressure on the industry's margins.''

Half Year Results (18 May 2022)

First half revenue of £1.2bn reflects a 1.0% increase in like-for-like (LFL) sales compared to pre-pandemic levels. Sales benefited from the reduced rate of VAT on food and non-alcoholic drinks, which has now ended. An increase of 6.9% in LFL food sales was accompanied by a similar sized fall in drinks.

Underlying operating profit of £120 was up from a loss of £124m last year. Inflationary pressures from wages, food and energy continue to present a ''major challenge'' to the sector and are expected to impact margins in the short to medium term.

Total revenue increased from £219m to £1.2bn year-on-year as the hospitality sector benefited from the reopening of sites. The VAT reduction boosted sales by £43m over the period, but the full VAT charge was back in place as of the last week of trading. Following a 1.5% drop in like-for like (LFL) sales over the first quarter, the second saw a 3.8% rise as omicron fears eased.

Volumes declined 10-15%, with sales being driven by premiumisation and increased spend per head.

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 Refinitiv. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 29th September 2022