Life is getting much hard for coffee shops-to-hotels business Whitbread (WTB) with yet another gloomy trading update. So why have its shares risen nearly 2% following bad news?
The answer is simple. Investors are once again speculating that the business could be broken up into two and that the separate parts are worth more than the combined entity.
We’ll explain the catalyst behind the renewed break-up in talk in a second. First, let’s look at the bad news in the trading update.
COSTA IS STRUGGLING
Like-for-like sales at Whitbread’s Costa Coffee chain dipped 0.1%. It has blamed a reduction in the number of people visiting high street shops - and expects the trend to continue ‘for some time’.
In a bid to drive sales at Costa, Whitbread is investing in new coffee blends, express machines and expanding in China.
Langton Capital analyst Mark Brumby argues like-for-like sales growth may remain under pressure as the firm will absorb price increases at Costa in February.
January’s performance has been better at Costa, according to feedback from Whitbread’s analyst conference call.
PREMIER INN ISN’T DOING MUCH BETTER
Sales at Whitbread’s Premier Inn hotel chain have also disappointed with a mere 0.5% like-for-like sales growth in the third quarter.
This represents a significant slowdown in growth from 1.8% over a similar period in 2016.
The company has blamed market weakness, particularly in London, highlighting year-on-year declines in both occupancy and average room rate.
SO WHY ARE THE SHARES UP?
Against this bad news, you’d be right to question why Whitbread’s shares are rising - up 1.8% today to £39.26.
It’s all down to a report by Reuters last night that activist investor Sachem Head has asked Whitbread to consider splitting Costa from its remaining hotel and restaurant businesses.
Sachem appeared on Whitbread’s share register in December 2017 with a 3.4% stake in the business.
The hedge fund has a history of applying pressure on firms to re-jig their operations to improve performance.
Whitbread has had to contend for years with people asking when it would spin off Costa. The old answer used to be ‘when international operations have gained more scale’.
Perhaps the stalling sales growth will force the board to think more seriously about ways in which to revive the business - otherwise Sachem may not be the only investor to put pressure on the company to make changes.
After all, the shares have gone nowhere for the past two years.
