M&C Report takes a closer look at the Q2 and H1 update from Whitbread, reports from a presentation for analysts featuring chief executive Andy Harrison and finance director Nicholas Cadbury, and speaks to Cadbury.
Costa: Weather impact
Harrison said that Costa, like Premier Inn, continues to grow market share. However, the “unusual weather comparatives”, with a cold spring followed by a hot summer, had an impact. For Costa, the like-for-like sales growth fell from 8% in Q1 to 3% in Q2, leaving +5.7% over the 24 weeks. Like-for-likes at Costa were flat in July, Harrison said. One third of drinks sold in July were from the Ice Cold range, against an average of 20% in the usual second quarter.
Costa Express: Performance
Harrison said the Costa Express machines do not benefit from an Ice Cold range during the warm spell so are “much more sensitive to year-on-year weather comparatives”. Cadbury told M&C Report that Whitbread is thinking about adding new ranges that would sell better in the hot weather. Harrison said there had been “very, very strong growth in motorway service stations, petrol station; the Shell contract has been a big success”. There were 3,113 machines installed at the period end, against 2,560 at the start of the financial year. Harrison pointed out that the aim when Costa Express was launched in April 2011 was to have 3,000 units in place within five years. “It’s good to have achieved that goal in just two and a half years.” The annual expansion target for Costa Express has been increased by 100 units to 850.
Costa Express: Office
Whitbread is looking to install its new generation self-serve machine under its Costa Express brand into offices from this month. Harrison said it’s “too early” to judge the impact. He dismissed the prospect that sales could be cannibalised, saying that coffee is a “hugely localised market”. “People won’t go very far out of their way for coffee,” he stressed.
Costa: Overseas
International system sales grew 20.7% to £115.6m, with growth of 12.2% in EMEI and 53.2% in Costa Asia, with mid-single digit like for like sales growth in China. In the year to date, internationally Costa has opened 54 net new stores including 30 in China where it now has 283 stores. Cadbury highlighted France as “probably the next one to focus on”. It has two franchise stores in the country that are “doing very well” and will open six corporate stores in Paris - five contracts have already been signed.
Restaurants: Comparatives
Harrison said that the performance of its restaurants were in line with the Coffer Peach Business Tracker, but there were “adverse weather comparatives”. Cadbury said the number of covers declined by c2.5% overall. Total sales in the half-year grew 2.5%, with a greater spend per head aided by changes to the menu mix. Due to the location of sites, the restaurant division did not benefit from the strength of the London economy. Cadbury pointed out that the second quarter was up against a much stronger performance last year, when Q2 like-for-likes grew 4.6%.
Restaurants: Margins
Harrison pointed out that the restaurant business is seeing wage inflation of c2.5%, with food inflation of 3-4%. It means like-for-like sales growth of around 2% is needed to maintain margins. Cadbury said Whitbread has reacted by reducing waste costs and increasing labour efficiencies.
Restaurants: Openings
Whitbread plans to open 10 joint site restaurant/hotels each year and three have opened in the first half. Cadbury told M&C Report: “They’re all are doing well at the moment.”
Restaurants: Initiatives for growth
Cadbury told M&C Report that its new evening takeaway menu has done “very well” although it’s “early days” for the scheme, which was introduced in the previous financial year. Cadbury pointing to the advantages of having joint restaurant and hotel sites, highlighting that 25% of hotel guests have dinner at the adjoining restaurant, and 60% use it for breakfasts. Regarding the restaurant loyalty scheme, Cadbury said: “We’ve had a fantastic take up of the loyalty cards. It’s less than a year on so it’s too early to say what it gives us in terms of growth but it’s giving us some very good customer feedback.” It helped generate 1.4m names on the restaurant database
Premier Inn: Regional variation
Harrison said there had been “tremendous occupancy” in London, with occupancy rates above 90% and REVPAR in Q2 up 3.1% and sales in the capital up 16.1%. Outside of London. Premier Inn sales grew 10.4% with REVPAR up 2.5%. “We shall continue to grow rapidly in London. Outside of London there’s still room to go with occupancy and will be looking at optimising that through dynamic pricing.” Harrison described as “really stark” the differences between London and the regions. The consumer outside London is “still under a lot of pressure”, he said, pointing to the fact that average wages are growing slower than inflation and saying that consumers have “less money to spend” than they did a year ago. More optimistically, Harrison said it’s “possible” that there could be improvements in business confidence outside the regions. But he concluded: “My best guess is the regional hotel market is flat.”
Premier Inn: Lunch
Cadbury said there was a “positive effect” from the decision to stop serving lunches in Q2. The profit impact of this decision has been “minimal”, he added.
Premier Inn: Normalisation
Harrison highlighted the “return of the normal customer compensating for the absence of the Olympics”.
Premier Inn: Travel Lodge comparatives
Harrison said: “I think the comparatives are definitely depressed and distorted by what was happening with Travel Lodge last year and it’s really tough to quantify that precisely. I think it’s fair to say their period of greatest under performance was during their period of greatest uncertainty.”
Premier Inn: Weather impact
Like-for-like sales at Premier Inn hardly changed in Q2, with like-for-likes at +3% against +2.9% across the half-year. Harrison said: “Unless there are extreme variations in weather like the roads being blocked with ice and snow it has less of an impact in Premier Inn.” In the Hotels and Restaurants arm, like-for-likes were +1.8% in both Q2 and H1.
Targets for the year
Harrison reiterated its investment plan for the year, which is to spend c£350m opening around 4,000 Premier Inn rooms. 10 joint-site restaurants and 300 Costas worldwide. It expects to create 3,000 new UK jobs.
Analysts’ reactions
Geof Collyer at Deutsche Bank raised his Target Price from 3,325p to 3,350p.
“We have increased our full year RevPAR assumptions for Premier Inn from +1.2% to +2.1%, now that we have two of the three main quarters in the bank.
“We have adjusted up our Costa UK lfls from +3% to +4% but taken our China lfls down from +8% top +5%; we have also reduced EMEI lfls from 0% to -5%, to reflect the Polish situation. This results in a nudging up of our group sales, EBITA and PBT forecasts for FY’14E, FY’15E & FY’16E by 1%. This has driven a modest uplift to our price target.”
Reiterating his Buy recommendation, Collyer said “everything in line at the top level”.
“Group lfls were +2.1% for Q2 and +2.6% for H1, with total sales +10.8% and +12.4%, demonstrating the success of the self-help rollout programme.
“Management has retained its cautiously optimistic outlook on H2, and we do not get the sense that the statement is suggesting any real upgrades to consensus. This still means that we expect Whitbread to generate c.+10%-to-+12% growth at all the key levels of the P&L this year.
“Whitbread remains on track for its ambitious five-year growth milestones - which we forecast to deliver double-digit growth per annum, creating significant value for investors.”
Simon French at Panmure Gordon reiterated his Sell recommendation at 2,644p Target Price.
He said: “Whitbread has announced a resilient trading update reporting group LFL sales growth of 2.1% compared to our forecast of 2.5% and 3.1% in Q1. Of most interest total RevPar in UK regions (c85% of rooms) underperformed the peer group with 2.5% growth against 6.4% respectively.
“The group comments that it is on track with its annual plan and therefore we expect no change to consensus expectations of c£393m PBT (c164p EPS). On our modestly below consensus forecasts the stock trades on a 2014E P/E of 18.7x which is too high, in our view, for the three-year 7.4% CAGR in EPS we forecast. We reiterate our Sell recommendation and 2644p Target Price implying c18% potential downside.”
Douglas Jack at Numis raised his Target Price from £29 to £31 and maintained his Hold recommendation.
Jack said: “Trading was strong over the 11 weeks to 15 August, with total sales growth of 10.8% and LFL sales growth of 2.1%. Premier Inn has performed well against tough comps and, as expected, there is a slowdown at Costa. We believe the 3% LFL sales growth at Costa is an encouraging performance given that it was the seventh sunniest summer in the UK since 1929.”
A note from Barclays, which issued a Target Price of 3,420p, said Whitbread remains its “top pick”.
“Whitbread has delivered a Q2 IMS in line with consensus. We do not expect to see FY consensus move on the back of this. Whitbread remains our top pick in the sector and we continue to expect upgrades to Thomson One consensus for next year where we are 6% ahead (vs. in line this year). Should there be any weakness on an ‘in line’ trading update we would consider that a further buying opportunity.
“We see nothing in the release that will get anyone too excited given the negative effect of weather in the quarter. However we remain very positive on Whitbread and should there be any weakness we would consider that a further buying opportunity as we expect the RevPAR recovery to continue to benefit this group and trigger upgrades to consensus from next year (we are in line this yr and 6% ahead next year).
JP Morgan reiterated its Overweight recommendation with a Target Price of 3,400p.
“Whitbread reported trading for the 11 weeks to 15th August 2013 in line with our expectations for Premier Inn (PI) and Restaurants but below for Costa on warmer weather in Q2. Premier Inn continued to outperform its UK midscale and economy competitors in London but underperformed in the regions.
“Costa Express annual expansion target has been increased by 100 units to 850 while the remaining full year expansion targets are maintained. The company remains on track to meet its medium term guidance. WTB currently trades on a CY14E PE of 17.4x versus the sector on 17.7x. We retain our OW recommendation.”
