Coffee
Whitbread told analysts that it will invest £30m in the Coffee Nation business it acquired this morning for £59.5m. The company investment will include the rebranding of the c.900 Coffee Nation estate under new banner Costa Express.
Chief executive Andy Harrison told analysts that he expected rebranding to Costa Express to be completed in up to a year. He said the company was targeting 3,000 bars operating across the UK under the Costa Express brand over the next five years, capable of quadrupling its profit contribution.
The company is eyeing a wide variety of locations for setting up new outlets, with hospitals, universities, supermarkets, offices, train stations, and airports all being considered, said finance director Chris Rogers.
He said the price point would “vary slightly on location but be similar to in-store prices, maybe a bit lower.”
Rogers said: “We believe there’s a huge market demand for high quality self service coffee. We think that the huge increase in demand for sophistication in coffee in the high street convinced us that the self service market will grow substantially.”
Explaining the greater slowdown in Costa like-for-likes in Q4, Harrison highlighted the poor weather. “Of all of our businesses Costa is the one most affected by the snow and reduced retail footfall,” he said.
Harrison said there are no plans to increase the selling prices for its coffee despite coffee prices being “more or less double of last year”. He said: “We’ve got no plans to increase Costa prices because we feel the consumer is under quite a lot of pressure at the moment. We can do a few things in terms of produce and mix, so we can offset some of the these increases, but the increase is quite large.”
Harrison told M&C Report that the group was happy with the small group of Costa sites that the company had converted to its new look “metropolitan” style, which were “performing well”. The company currently has eight sites operating under the new look including some in the capital and other being trial in major city and town centres, including Edinburgh.
Aimed at a younger customer base, the “metropolitan” coffee shops feature a toned down reference to the Costa brand instead draw inspiration from what Whitbread has described as “found materials”. He said the company would continue to explore other opportunities to trail the sites, especially in large cities and university towns.
Harrison said that the integration of the Coffeeheaven, the European coffee shop operator, which the company acquired at the start of 2010 for £32m, was going well, although a gradual rebranding of the group's sites in Poland had yet to start but was “still on the cards”.
Pub restaurants
Harrison was asked whether the 3.3% like-for-like sales increase against a 5.6% growth in covers across the year showed that more customers are choosing cheaper meals. He replied: “It’s a mixed bag with a slightly higher proportion of customers going for meal deals reflecting the general change among consumers.”
The company plans to open a further 10 sites under its Beefeater, Brewers Fayre and Table Table brands during its current financial year. Harrison said: “our seven Taybarn sites are performing well but at the moment we have no plans to open further sites under the format, although we may review this in time.”
Harrison said its pub restaurant division continued to outperform the market and that despite the investment being made by rivals M&B and Punch Pub Company in their estate, the group's brand “have always been competitive, and we believe they will remain so”.
General economy
On the impact of rising fuel costs on consumer spending, Rogers said: “I think it’s premature to be drawing anything concrete about what’s going on in the economy apart from there’s more negative pressure on the consumer than positive ones.” Harrison continued: “We’ve got wage inflation of 2-3% going through the business and single digit food price inflation.”
Analyst reaction
Reacting to the company's update, Simon French, analyst at Panmure Gordon, put a Hold rating on the company. He said: “Whitbread trades on a current year 2011E P/E of 14.1x and an EV/EBITDA of 8.1x, supported by a 2.8% dividend yield. Whilst not expensive relative to its hotel peers, Whitbread has almost 100% profit exposure to the UK consumer and, on this basis, is trading at a material premium to other freehold backed, UK-focused leisure companies such as Mitchells & Butlers (Hold, TP 393p).
Wyn Ellis at Numis said the acquisition of Coffee Nation “looks a promising strategic move” and placed Whitbread as a Buy. He said: “We have trimmed our FY'12 EBIT forecast from £357.4m to £344.9m (-3.5%) largely to reflect inflationary pressure in margins. These numbers have not yet been adjusted for Coffee Nation, which should marginally enhance EPS. We believe that Whitbread continues to be attractively valued but would expect some near term consolidation in the share price.”
Whitbread's shares fell 2.9% (51.5p) in morning trading to 1,682.50p on the back of the update.
