Mitchells & Butlers reported first half sales of £1.5bn reflecting like-for-like growth of 3.3%. Growth in the second quarter was slower at 1.8%, attributed to tough comparisons, the weather, and weaker discretionary spending.
Underlying operating profit of £0.2bn was unchanged despite ‘significant’ cost inflation. Free cash flow was also stable at £0.2bn. Net debt, including leases, was £1.2bn.
In the first three months of this half, like-for-like sales slowed to 1.1%. Full-year cost headwinds are expected to land at around £120mn, slightly lower than previously guided.
The shares fell 8.5% in early trading.
Our view
Mitchells & Butlers managed to offset inflation in the first half through a combination of strong pricing and cost efficiency. Sales growth slowed in the second quarter, and again in the early part of the second half. While some of that’s down to the weather, macroeconomic clouds have also played a part, and markets reacted nervously on the day.
A slight let-up in cost pressures will go some way to keeping full-year operating profit close to last year’s levels, but a lot will depend on the economic backdrop.
A long track record of market-beating sales growth is testament to the relentless focus on customer satisfaction and the diversity of its brands, which can help it react to the market conditions of the day. The broad portfolio includes family-friendly restaurants like Harvester and Toby Carvery, and more premium offerings such as Miller & Carter steakhouses. There are also popular high-street watering holes, including O'Neill’s and All Bar One.
The pub sector is not one that screams high tech, but we’re impressed with the group’s use of technology which has helped to improve both customer engagement and management of the supply chain.
A focus on operational excellence has helped an impressive recovery in profits, but higher employment costs constrained margin growth last year. This year, cost increases are expected to outpace wider inflation. However, a prudent approach to locking in energy prices, ongoing efficiency initiatives, and the introduction of business rates relief for pubs in April has seen cost growth guidance reined in a little.
Looking further ahead, we believe the group’s focus on customer satisfaction and strong branding means there's scope for margins to rise again should inflation stabilise. With that in mind, we see the decision to keep dividend payments on hold as sensible, allowing continued investment into the business, and scope to bring down debt.
There have been some modest additions to the estate footprint. Given that supply is still 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.
The group looks well-placed to continue growing its market share. And the additional pressure that weaker competitors find themselves under could see those trends accelerate. The current valuation weakness reflects the difficult trading backdrop, and if sales growth picks up again, we see scope for some upside. However, economic uncertainty means the risk of disappointment remains higher than usual.
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, Mitchells & 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
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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 LSEG. 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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