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Mitchells & Butlers - festive period boosts 1st quarter sales

Mitchell's & Butlers saw like-for-like (LFL) sales growth accelerate to 19% in the five weeks to 7 January...

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Mitchells & Butlers saw like-for-like (LFL) sales growth accelerate to 19% in the five weeks to 7 January, covering the important festive period. This helped drive growth of 10.4% for the first 15 weeks of the financial year.

The figures reflect a bounce back from the comparative period, where the festive season was impacted by the emergence of Omicron. Nonetheless, LFL sales were 8.9% ahead of pre-pandemic levels.

Both food and drink sales made a positive contribution, with drink sales growth leading the way up 15.5%.

Mitchells & Butlers cautioned that the trading environment for the hospitality sector remains ''very challenging''', with inflationary costs putting sustained pressure both on the industry's margins and disposable income. To mitigate this, it continues to focus on upgrading its estate by premiumising its pubs and restaurants where possible.

The shares were up 4.4% following the announcement.

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Our View

Investors can take some comfort from the start to the current financial year. We've seen food sales increase despite last year's strong growth, as well as a strong recovery in drinks sales.

But the first quarter benefitted from a number of tailwinds that won't be there for the rest of the year. Omicron emerged in late November 2021, and the first quarter this year we had the World Cup. Both factors are likely to have flattered sales reported so far this year.

Further out, we think things could get tougher. The Group itself notes that the trading environment is very challenging. We think the true impact of the cost-of-living crisis is yet to bite consumer demand for non-essentials such as a trip to the pub.

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 food that's propped up performance, with more expensive orders rather than higher volumes having the greatest impact. The premium brands in the portfolio have been the best performers of late, but the Group also has a significant number of more value-orientated venues. We don't think it can fully avoid fall out from a weaker economy and it remains to be seen if early signs of volume recovery will continue.

Then we have rising costs, a growing concern for the industry. Guidance on cost inflation suggests the impact could be almost as high as last year's total underlying operating profit, unless bold cost cutting measures are taken.

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. With this in mind, we see the decision to keep dividend payments on hold as a sensible one, which will allow continued investment into the estate.

With a solid balance sheet backed by considerable property assets, Mitchells & Butlers is better placed than some to ride out the storm. But the valuation now sits above the long-term average, meaning shares are likely to be sensitive to any earnings shocks. Forecasts are already expecting sales to moderate for the rest of the year. Given the uncertain economic outlook and group's guidance on costs, we think it still has its work cut out to achieve market expectations.

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.

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: 12th January 2023