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Mitchells & Butlers - medium term margins under pressure

Like for like sales rose 0.9% in the third quarter, compared to 2019 levels.

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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.''

The shares were down 1.2% following the announcement.

View the latest 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.

Looking at the underlying story, the group has a decent portfolio, with brands including O'Neill's, 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. The group's seen a slight improvement in city areas as more consumers have returned to the office but drink sales have remained a struggle.

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. 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 whilst we'd like to see levels down even further, the group's 82% freehold estate means it can stomach more debt than others. Agreements with lenders mean cash won't be making its way back to shareholders until at least January 2023, which should give the balance sheet time to improve further even if capital expenditure rises.

For now, the focus is rightly on helping restore performance to its pre-pandemic levels. It's unclear how long that'll take, with several hurdles to overcome in the short term - reflected in a valuation that's come under pressure this year.

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.

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.

Free cash flow of £114m was up from an outflow of £165m last year. That helped net debt fall from £2.0bn to £1.7bn, including lease liabilities.

At the end of the period, the total estate was made up of 1,726 sites. 82% of the estate is freehold and 1,641 are directly managed.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 21st July 2022