Whitbread story could have much further to run after Q1 results

Whitbread (LSE:WTB) may not have fully recovered from the ravages wrought by the pandemic, but progress is continuing apace as the group continues to build on its position as the UK’s largest hotel chain.

Accommodation sales through its Premier Inn brand are by far the biggest contributor to revenues at 74%, with the balance coming from its food and beverage outlets, such as the Beefeater restaurant chain. Within accommodation, the UK accounts for the lion’s share of revenues, with Germany beginning to benefit from both room growth and a maturing estate, and now contributing 7% of overall group sales.

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It has been a testing few years for the group. The sale of its jewel in the crown, Costa Coffee, to Coca-Cola in 2019 left some wondering how the remainder of the business would perform on a standalone basis. The pandemic then drove a stake through its operational and expansionary plans, particularly in its new target market in Germany.

However, the latter has also proved to be something of a blessing in disguise. The subsequent demise of many independent hotels and a constrained growth supply has played into Whitbread’s hands, and in its own part of the market, the midscale and economy segment, the group is currently a major player.

Also underpinning balance sheet strength is the fact that the majority of the group’s estate is freehold, which provides extra flexibility on a number of fronts. In addition, the group has seen a spike in demand to levels which now exceed those experienced pre-pandemic (Premier Inn UK sales have since risen by 55%), with a return to travel boosting international demand for rooms, especially in London. The current economic backdrop has also enabled growth in midweek business as well as peak leisure demand. 

Germany is still an interesting expansion opportunity, and while the unit has yet to turn any sort of meaningful profit, it is expected to breakeven for the first time this financial year. Brand awareness is beginning to take hold, helped by the more recent launch of an online-focused campaign and in the 13 weeks to 30 May 2024 accommodation sales rose by 15%. Elsewhere, the food and beverage unit saw sales dip by 1%, as stronger revenues resulting from breakfast sales in its hotels was offset by weaker trading in its branded restaurants.

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Challenges inevitably remain, not least the fact that heightened borrowing costs and pressure on disposable customer incomes are real headwinds, both in the UK and Germany. In addition, while the shares are now 44% higher than when Covid first hit, they remain down by 29% to the level just prior to the pandemic. In addition, some of the competitors in the sector benefit from geographical diversification, whereas Whitbread’s footprint is more confined. 

However, a clear recovery from the pandemic is ongoing, with cost inflation and efficiencies adding to the positive mix. Its asset-backed balance sheet also allows for financial flexibility, which has led to a dividend yield of 3.3%, as well as a number of share buybacks, including the current £150 million programme which is on track.

Alongside this, the immediate outlook remains robust, with management confident that the forward-booked position and the general environment will result in an encouraging full-year performance. The group has also pointed to Germany’s likely breakeven performance representing an important milestone for the group, with a longer-term aim of a return on capital of between 10% and 14%. 

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More recently, question marks on the consumer capacity to spend have been overhanging the sector as a whole, and Whitbread is no exception.

Over the last year, the shares have fallen by 16%, as compared to a gain of 6.5% for the wider FTSE 100, with most of that weakness coming over the last six months. Even so, the market consensus of the shares as a ‘buy’ is also an indication that investors have bought into a story which could have much further to run, especially if growth in Germany comes through as is hoped.