Mitchells & Butlers (MAB) like for like sales grew by 9.7% in the third quarter, faster than the 8.5% seen at the half year point. Growth was particularly strong in food sales, compared to the drink led growth seen earlier in the year.
The performance was achieved despite public transport strikes during the period, and the Company enjoyed its best ever Father's Day.
Mitchells has continued to expand and upgrade the estate, and last month completed the acquisition of 3Sixty Restaurants in which it previously held a minority stake.
This year's cost headwinds are now expected towards the bottom of the previously announced 10-12% range, with a full year performance now expected at the top end of market forecasts.
The shares were up 5% following the announcement.
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Our view
Investors can take some comfort from Mitchell's and Butlers' sales performance so far this year. We've seen food sales increase despite last year's strong growth, as well as a strong recovery in drinks sales.
The acceleration in growth in the third quarter was particularly encouraging given the absence of tailwinds seen earlier in the year, such as the Coronation bank holiday and the World Cup.
A further return of office working and higher tourist numbers, particularly in London, are being called out as contributing factors to the ongoing upturn. It's worth keeping an eye on the strengthening pound which could dampen overseas enthusiasm to visit the capital.
Food sales were the main driver of recent sales growth, a sharp contrast to earlier in the year where drink sales led the way. We see this as testament to the diversity of the Group's brands which can help it react to market conditions of the day. That said, we don't think it can fully avoid fall out from a weaker economy and it remains to be seen how long the volume recovery will continue.
Whilst the continuing resilience is impressive, further out we think things could get tougher. The Group itself notes the pressures facing consumers. 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.
Rising sales are all well and good, but as the old adage goes, it's revenue for vanity and profit for sanity. The group's falling margins have been a cause for concern and despite some glimmers of hope on that front Mitchells & Butlers is still expecting double digit cost inflation this year. We think its scale and focus on cost efficiencies should mitigate some of this. Management hope this will allow margins to start to rebuild towards pre-covid levels, but that's no easy task.
It's a credit to management that the performance of its pubs and restaurants has allowed the company to be increasingly optimistic about the outcome for the current year. 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 ups and downs in demand.
Mitchells & Butlers key facts
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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.
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