Sales at Costa Coffee owner Whitbread (WTB) have risen 3.2% in its first quarter to 31 May thanks to further expansion at the coffee chain and hotel chain Premier Inn. Yet the business is showing several cracks under the surface and isn’t as healthy as you might think.
Shares in Whitbread gained 2.1% to £39.76 despite declining like-for-like sales at Costa as shoppers shun the high street for online. This offset a 9.6% jump in sales at Express machines and a strong contribution from new stores.
So where is it going wrong? Like-for-like sales at Costa are down 2%, marking a significant decline compared to 1.1% growth at Costa in the same period last year.
‘Costa’s 2% like-for-like sales decline would suggest its high street dominance is being seriously challenged by rising competition including small chains and independent craft coffee shops,’ says Russ Mould, investment director at AJ Bell.
‘But ultimately weak high street footfall is likely to have been the key contributor to lower sales. It told analysts on a conference call that afternoon trading had been particularly weak.’
At Premier Inn, accommodation sales grew ahead of the market at 4.3%, driven by new 4,198 rooms over the last year.
Diving into the like-for numbers, trading does not look that great with sales dipping 0.9%, down from 4.7% growth over the same period in 2017.
Whitbread blames ‘weak market conditions’ in London and strong comparatives to last year, which was positively impacted by inbound tourism.
HEATWAVE AND WORLD CUP RISKS
Langton Capital analyst Mark Brumby says the company is hitting targets but believes there could be ground to be made up.
If these are not achieved, forecasts might need to be adjusted - implying that the business could issue a profit warning if life doesn’t get better.
Brumby argues the current heatwave and the World Cup could impact Costa’s performance.
People may be less willing to pick up a coffee in the heat in favour of going to the pub or staying home to possibly watch the latest World Cup match or sit in the garden.
‘Whitbread has an impressive freehold estate, good brands and international ambitions but, with trading uncertainty, the shares may remain under pressure,’ comments Brumby.
Shore Capital analyst Greg Johnson forecasts pre-tax profit of £613m in the year to 28 February 2019.
He is anticipating a 0.5% improvement in like-for-like sales and is optimistic Whitbread’s efficiency programme has been able to offset cost and trading headwinds so far.
An update on the demerger of Costa is anticipated in October.
