Whitbread

Costa sales fail to perk up but international growth accelerates

More strong sales and profit growth from Whitbread as anticipated but it’s the same old story by and large – Premier Inn is expanding steadily and accounts for the lion’s share of profits, while slowing like-for-like sales at Costa in the UK are a drag. However there is a bright spot for Costa as international sales are picking up, which might keep any talk of a breakup quiet for the time being.

Group revenues climbed 7.4% to £1,671m, with underlying pre-tax profits up 6.7% to £328m. Efficiency savings are helping - £60m in the last two years - but rising labour costs are eating into the gains.

Premier Inn revenue increased 6.4% to £1,052 million and underlying operating profit growing 8.9% to £295 million as Whitbread added an additional 2,000 new rooms in the last six months in the UK alone.

Like-for-like sales growth at Premier Inn was 3.6%, a big improvement on the 2.4% reported the same period a year before. Although this means Q2 saw a slight slowdown from the 4.7% in Q1. Total sales growth slowed a touch to 8.3% from 8.9% a year before.

Revenue per available room (RevPar) is a mild concern as growth is slowing. In Q1, Whitbread RevPar growth was 3.1%, or 2.9% LFL, which lagged the industry’s 4.1%. UK RevPar growth in H1 was down to 1.8% with occupancy down a shade from last year.

Growth is seen coming from the UK and especially Germany, where the market is a lot bigger than the UK and relatively untapped in terms of the branded budget sector. If Brexit means businesses heading to Frankfurt, Whitbread looks ready to capitalise.

At Costa underlying profits were in line with expectations – which were not high. Profits were flat at £65m.

The key metric that investors will be concerned by is the LFL sales growth in the UK – which as expected slid below 1% to 0.6% in the first half and just 0.1% in the second quarter. Last year LFL sales were running at 2%. Express sales growth also slowed to 17.7% from 21.9% a year ago despite a 25% jump in machines. Nevertheless, Costa remains a growing brand on the UK high street with total revenues in the UK up 8.3%, driven by the addition of 108 net new stores, which means it is still gaining market share.

Another concern is that Costa underlying operating profit in the UK declined by 4.6% to £61 million, which is the result of higher labour costs, business rates and coffee imports due to the weaker pound. These combined to lower underlying profit margins by 180 basis points, but were offset by 150 basis points of efficiency savings. The extra £4m came from overseas and this is where profit growth is likely to stem from going forward.    

The much smaller international segment, which accounts for c12% of revenues, saw sales growth of 15.4% and is likely to accelerate in the coming years as Costa doubles down on the Chinese market.

At £35m for full control of its southern Chinese venture looks a snip given the potential in this market for rapid growth. Whitbread says there are only 4,000 specialist coffee shops in the country and the market will more than double in size by 2020. Express growth in Europe, Middle East and Asia also points to capital-light growth opportunities in emerging markets.

Carpetright

Foot to the floor in the second half

Slowing growth and a slew of profits warnings at retailers and DIY merchants has been pounced upon as a sign that UK discretionary spending is on the brink. In fact, according to EY, the Home Improvement Retailers sub-sector accounts for half of all retail profits warnings in the last six months, which it says is an ‘early warning of falling confidence and pressure on discretionary spend’.

And so to Carpetright, which seems to have borne the brunt of some of the pullback in discretionary spend. Back in June the firm reported a pretty horrid performance as statutory profit before tax dived 93% to £900,000. Even when you stripped out the one-off items, underlying operating profit fell 20% to £16.4m, while net debt ballooned from £1.1m to £9.8m, a result of significant investment in store refurbishment.

From today’s trading update, it looks as though that investment is yet to pay off, but management is adamant that it’s turning things around.

Like-for-like sales growth has weakened to 0.8%, but chief exec Wilf Walsh says this was impacted in the short term by the decision to accelerate the re-ranging activity in the beds business. In this vein management is keen to stress the 2.1% growth in core flooring, which is encouraging. Total group sales rose 1.8%.

Nevertheless with more than half the store estate refurbished the turnaround needs to start working soon. In June management reported LFL sales at stores that have been refurbished were up 5%, which was a very encouraging sign that the programme is working. However today there was no firm figure on how these new stores are doing, only that they continued to ‘deliver sales growth above comparable stores in the rest of the estate’. This poses questions about whether the initial 5% rise in sales is tailing off. It is enjoying better luck in Europe, where LFL sales are up 6.3% in local currency.

All this means a pretty poor first half but management is still guiding full year profit to be within the current range of market expectations between £13.8m and £16.7m. However, management seems to be putting a lot of faith on ‘a significantly stronger second half’ to deliver this. It will need to put its foot to the floor to achieve this given the weaker market environment. Investors aren’t convinced with the shares down over 5% in early trading. After enjoying a bounce in the spring the stock has scrubbed these gains to trade just a sliver above last December’s multi-year lows.

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