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Whitbread share price: Q1 update points to a weak outlook

Whitbread share price: Q1 update points to a weak outlook

The Whitbread share price has made some decent progress in the last 12 months, and is still above the levels when news broke that a deal had been agreed to sell Costa Coffee to Coca-Cola in August last year. Whitbread shares did briefly trade above the 5,000p level in March and April of this year, but have slipped back sharply since then.

The sharp move lower in Whitbread's share price over the last few days would appear to suggest rising concern that the company might be able to offset concerns about a weaker consumer environment without compromising its margins.

Whitbread Q1 update confirm CEO fears

This morning’s Q1 trading update would appear to confirm these concerns, and the caution of CEO Allison Brittain at the end of the last quarter, when she painted a rather downbeat assessment of the future outlook, on the back of concerns about a weakening UK economy.

In Q4 we saw a decline in sentiment and business confidence, as revenue per room fell 4.4%, with the company blaming Brexit uncertainty. Her caution could have been be a case of merely lowering market expectations, against a backdrop of a 1% decline in total occupancy rates. This caution, in hindsight, now looks remarkably prescient.

Today’s update saw revenue per room decline 6.3% in the UK, while sales growth slowed by 3.7%, with accommodation contributing 4.6% of that decline. Food and beverage sales from its Brewers Fayre and Beefeater restaurants also declined 2.1%. This has seen Whitbread's share price open slightly lower, however the downside appears limited for now, coming as it has on the back of two days of declines.

Management were at pains at the end of the previous quarter to blame business uncertainty for a decline in corporate bookings in the London area, as well as its regional markets, and it appears this has been sustained into Q1. In London the addition of new rooms did see total sales growth of 1%, however on a like-for-like basis we saw a decline of 4.4%.

Forward bookings provide silver lining

The one silver lining is that forward bookings look positive, and you would have to think that at some point, with the plans to add up to 3,500 new rooms in the UK, that as we head into the summer consumers will opt for a staycation type of break. This should help boost those occupancy rates, which currently sit at 74.8%.

This appears to be the area that the Premier Inn needs to work on the most. The business is adding new rooms at a time when they are barely filling 75% of their current capacity, and this needs to change to effectively claw back the investment, not only in the UK, but Germany as well, where the company is looking to add over 2,000 new rooms, when occupancy rates are at similar levels.

As a result of the warning from Allison Brittain at the end of Q4, a note of caution has remained in the wake of this latest update citing difficulty in predicting how business confidence and investment will evolve over the next few months.

Nonetheless the company remains in a good position cash wise, saying it intends to proceed with the return of £2bn of the cash proceeds from the sales of Costa Coffee to Coca-Cola, by way of a tender offer to repurchase shares to that value.

The company still remains on course to boost room capacity by another 3,000 to 4,000 rooms, from the current 76,000, so the future does look promising despite concerns about a slowdown in the UK economy, which suggests that the outlook may be more positive than management appear to be expecting.


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