As the year end approaches, like-for-like (LFL) sales are up 2.1% with fourth quarter sales rising 1.4% after a flat prior period, supported by favourable weather and robust Bank Holiday trading.
Management remains confident of meeting market expectations, with underlying operating profits forecast to remain broadly flat at around £329mn.
Cost headwinds are expected to ease by £25mn to £95mn next year, with management initiatives supporting expectations for further operating profit growth.
The shares rose 1% in early trading.
Our view
Mitchells & Butlers’ full-year update showed improving sales momentum, helped by sunny weather filling pub gardens and strong Bank Holiday trading. But with food sales still broadly flat, questions remain over the strength of underlying consumer demand. That makes efficiency measures and investment across the estate increasingly important drivers of further profit growth.
Cost pressures remain significant. Around £120mn of cost headwinds are expected to ease to £95mn next year. Management is relying on efficiency initiatives, including productivity and procurement savings, alongside benefits from refreshed pubs and restaurants to offset the pressure and support further operating profit growth.
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. Market forecasts point to around 3% growth in revenue and underlying operating profit in the new financial year. That’s not a step-change but still requires disciplined execution while underlying demand remains subdued.
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.
Looking ahead, we believe the group's focus on customer satisfaction and strong branding means that there's scope for margins to improve if inflation continues to moderate. 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.
Investment remains a key part of the strategy. The group completed 222 conversions and remodels during the year and added 11 new sites. With supply continuing to leave the market, we support this disciplined approach to expanding and upgrading the estate, provided investment returns remain attractive.
The group looks well-placed to continue growing its market share as weaker competitors struggle with higher costs and the challenging backdrop. We think the valuation looks relatively attractive compared to the peer group. However, with the sector still exposed to fragile consumer confidence, delivery of cost savings and continued investment across the estate will be critical if momentum is to build from here.
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.
Although 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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