M&C Report takes an in-depth look at this morning's full-year results update from Whitbread. Coffee Andy Harrison, chief executive, said the company was focusing on three key factors to drive its Costa brand, “investment in environments, network growth and product development”. Costa had experienced a trebling of system sales over the last four years, with 2,000 customers visiting each outlet a month. Harrison said that Costa would grow its number of stores by approximately 15% (around 300 new stores) during the next financial year. He said: “Costa will double to 3,500 stores worldwide and £1.3 billion system sales in the next five years, with Costa Express to be expanded to 3,000 units during that time. We expect to have 500 Costa Express in the field by the end of its current financial year.” Harrison said the integration of Coffeeheaven, the Central European business it acquired last year, had gone well and the performance in the key Polish market “is ahead of the group’s expectations with like-for-like sales up by 6.1%”. It now has 73 stores in Poland and expects to have approximately 100 stores in 2012/13. Harrison said the company’s new 'Metro' design is achieving strong results across six stores in central London. The first Metro store outside London will open in Leeds in Summer 2011 and a further seven stores are planned to open in the UK in 2011/12. He said that a new 'provincial' format was also set to open in Nottingham and Oxford, with plans to roll out elements of the design across the estate. Harrison said that the 78 sites refurbished by the company had experienced double-digit like-for-like growth, with a further 130 refurbishments planned for this year. 10% of its Costa estate to be drive-thru. Harrison said competition for drive-thru sites was becoming increasingly fierce. First drive-thru to open next month in Nottingham and has a further six sites in the pipeline for the coming year. Costa opened its first energy efficient store in Basingstoke in October, which we anticipate will reduce energy consumption by 30%. Harrison said that the company’s new breakfast range had generated a 11% increase in like-for-like sales. Costa's loyalty programme, the Coffee Club card, provides data on over 1.2 million active cardholders. The card is now used in 41% of all transactions, with cardholders' average spend 6% above non card holders. Pub restaurants Harrison said the company continued to focus on value for money offers, including 2 for £10 in Brewers Fayre, 2 for £11 in Table Table and meal deals at Beefeater. Value offers now account for more than 30% of covers. There are plans to open 14 pub restaurants in 2011/2012, and the value-driven Buffet Plate offer at Brewers Fayre will be rolled out to a further 50 over the next year. In addition, 80-100 restaurants will be opened alongside Premier Inn hotels. Harrison said: “Our value-led offers have helped drive market outperformance during challenging economic times. Last year these value offers saw a growth of 10.9% and accounted for over 30% of all covers. “We have had good success in value for money food promotions in our restaurant brands. We will apply the same strategy to drink and continue innovating our food and drink offers to attract more customers and encourage greater spend.” Harrison said the company believed its restaurants had the potential to be ‘best in class’. Paul Flaum, an internal appointment, has been named managing director of restaurants “to achieve this objective”. The company completed the refurbishment of 130 restaurants last year, with return on capital in its hotels and restaurants business in 2010/11 standing at 12.3%, up from 10.9% in 2009/10. Premier Inn Harrison said that the company would grow the number of UK rooms by approximately 9% (around 4,000 additional rooms and 14 new restaurants) over the next year. He said: “Over the next five years Premier Inn will accelerate growth and increase its UK capacity by 50% to at least 65,000 rooms, with a committed pipeline of 10,500 rooms.” Its current UK portfolio stands at 590 hotels and 43,219 rooms. He said the company was “on track to achieve our occupancy target of 80% and have driven an increase in like-for-like occupancy both midweek, by 4.5 percentage points, and at the weekend, by 9.7 percentage points”. Harrison said the company’s drive to improve leisure performance had resulted in a mix change with increased like-for-like occupancy at the weekend (now 69.4%), “which has slightly reduced our average room rate by 1.2% to £54.19”. He said that Premier Inn's 'Premier Offers', with rates from £29, sold over one million room nights in 2010/11 which is more than double 2009/10. Harrison: “We have also successfully trialled a £19 price point to drive occupancy and secure incremental revenue in periods of low demand.” He continued: “The increased occupancy in our hotels has also had a positive impact on restaurant sales, enhanced by our Premier Inn £22 Meal Deal, which accounted for over £10m of sales in our hotels and restaurants.” General points Harrison said the consumer environment remaining challenging. He said: “Consumers continue to be impacted by a reduction in disposable income and confidence levels are currently at a low level. Harrison said that the company remained in a strong competitive position and that it was easier to obtain good quality sites in the current market.” He said: “Despite a more challenging consumer economy, we are confident that we will continue to outperform, based on the strength of our brands and our customer propositions. Chairman Anthony Hapgood said plans to ramp up expansion across its three formats would be funded from existing cash flow. Although the company’s estate would stay predominantly freehold, Harrison expects the percentage of freeholds in the estate to drop, with mix of freeholds and leaseholds moving more toward 80/20 as it takes on further leasehold sites in city centres. Questioned on the plan for a £50m sale and leaseback programme for later in the year, Harrison said that it was part of the company’s strategy to churn its estate and that the market “understands the strength of the Whitbread covenant”. Analyst reaction Wyn Ellis at Numis said: “Growth in lfls thus far in FY'12, whilst "firmly positive", are at a lower level than the 3.9% achieved in the Q4 FY'11 and it seems clear that the more difficult macro economic environment is having an impact. We would expect consensus PBT numbers (currently c. £320m) to be trimmed by c.5%. We have cut our PBT forecast from £318.4m to c. £308m, although lower guidance on the tax charge (expected to be 27%) means that EPS forecasts are little changed. “Given the weak growth apparent in the UK economy it should come as little surprise that Whitbread should experience tougher trading. Nevertheless, we believe that the business model is sound and investors should be encouraged by Whitbread's confidence in the medium to long-term outlook and the acceleration of its growth plans. In the near term, however, whilst uncertainty about the consumer outlook remains, we would expect some consolidation in the share price.” Nick Batram at Peel Hunt said: “Whitbread continues to demonstrate the strength of its core brands in Premier Inn and Costa Coffee. Like-for-like growth will be more challenging in the current year, while cost inflation will be an increasing factor. Despite this we expect further continued outperformance, helped by the positioning of the brands and a balance sheet able to support significant investment in expansion capital. We recommend a Buy.” Whitbread’s shares fell 63.00p (-3.63%) to 1,674p on the back of the full year update.