Mitchells & Butlers like-for-like sales were flat in the third quarter. Drinks sales accelerated to 2.6%, helped by the football World Cup. That was completely offset by a decline in food sales where demand for formats like Toby Carvery was impacted by the warm weather. The timing of the Easter weekend was another drag.
The company still expects a full-year result in line with consensus expectations, with underlying operating profits forecast to remain broadly flat at around £329mn.
The shares were down 4.0% in early trading.
Our view
Mitchells & Butlers had a mixed third quarter. Drink sales recovered from the sluggish levels seen in the previous three months, but this was more down to World Cup fever than an underlying improvement in consumer confidence. And with record-breaking temperatures proving unhelpful for the group’s food-led formats, total sales growth came to a halt, disappointing markets on the day.
While costs are still expected to rise by around £120mn, efficiency initiatives and further investment should help to keep profits stable this year. Next year, changes to the business rates regime are welcome, but we don’t think it’s a huge dial mover. There could be more fiscal support to come but ultimately economic conditions and strategic delivery will remain the key drivers of performance.
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.
In recent years, a focus on operational excellence has helped an impressive recovery in profits, but the industry is facing higher costs in areas including food, labour, repair and energy, and the group’s margins have been suffering.
Looking 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. We think the valuation looks relatively attractive compared to the peer group. However, despite some signs of green shoots, consumer confidence is still fragile. Given the sector’s sensitivity to household spending, the risk of disappointment remains elevated.
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
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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 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.
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.