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Mitchells & Butlers - sales growth continued as margins struggled

Mitchells & Butlers has reported full year revenue of £2.5bn. The like-for-like (LfL) increase of 9.1% was broad-based across...

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Mitchells & Butlers has reported full year revenue of £2.5bn. The like-for-like (LfL) increase of 9.1% was broad-based across all brands, supported by volume growth. For the first eight weeks of the current financial year LfL sales rose 7.2%.

Underlying operating profit fell from £240mn to £221mn. Last year benefited from government support packages, ignore these and there was growth of £33mn.

Free cash fell by 13% to £202mn reflecting an increase in spend on maintenance and infrastructure, as well as pub upgrades. Net debt including lease liabilities was broadly flat at £1.2bn.

Cost pressures are easing, but a further £65m of headwinds are expected this year.

No dividend was declared.

The shares were trading broadly flat following the announcement.

View the latest Mitchells & Butlers share price

Our view

Despite mounting pressure on consumers, Mitchells & Butlers managed to achieve high single-digit growth in like-for-like sales last year, significantly out-performing the wider market. Growth has continued so far this year, albeit at a slightly slower clip.

This is testament to a relentless focus on customer satisfaction as well as the diversity of the Group's brands, which can help it react to market conditions of the day. The broad portfolio includes family friendly restaurants like Harvester and Toby Carvery, as well as more premium offerings such as Miller & Carter steakhouses. There are also popular high street watering holes including O'Neills and All Bar One.

While the continuing resilience is impressive, further out 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, which could weaken 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. Despite some glimmers of hope on that front, challenges remain. Food inflation hasn't gone away, and the National Living Wage will rise by 9.8% from April next year. Mitchells & Butlers' scale and focus on cost efficiencies should mitigate some of this, and management hopes this will allow margins to start to rebuild towards pre-covid levels, but that's no easy task.

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 business. We'd also like to see some more progress on bringing down debt levels.

Whereas competitors have been trimming their estates Mitchells & Butlers has made some modest additions to its footprint. Given the supply coming out of the market we support this move, as long as site selection is prioritised. Existing sites are also being upgraded, which looks to be an important contributor to the outperformance of its brands.

With a solid balance sheet backed by considerable property assets, Mitchells & Butlers is better placed than some to cope with a downturn in consumer sentiment. But the valuation now sits above the long-term average. This leaves the shares sensitive to ups and downs in demand, and also adds pressure for management to deliver on improvements to group profitability.

Environmental, social and governance (ESG) risk

The food and beverage industry is medium-risk in terms of ESG, though some segments, such as agriculture, tobacco and spirits fall in the high-risk category. Labour relations and supply chain management are key risks in this industry. Product governance is an area of concern industry-wide, particularly for companies operating in markets with strict quality and safety regulations. Other risks can vary by sub-industry, but community relations and resource use tend to impact most companies in this sector either directly or through their supply chains.

According to Sustainalytics, Mitchell's & Butlers management of ESG risks is average.

While many of its brands are food led and family friendly there is a strong responsible drinking policy in place. In terms of ingredient sourcing the lack of Supplier Environmental Certification is something we'd like to see addressed. Labour relations is also an area of weakness with no union recognition or working hours policy identified. And there is room for improvement in both the company's whistleblower policy and ESG reporting standards.

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: 30th November 2023