• Whitbread drops but accelerates expansion

Shares in Whitbread were among the biggest fallers in the FTSE 100 last Thursday (April 28), down 57p to £16.80 after the group said that sales growth had slowed since the start of the new financial year as market conditions had become "progressively more challenging".

The comments came as the company reported full-year underlying profit before tax up 20.1% to £287.1m, with revenue up 11.5% to £1.6bn. The group has also accelerated its expansion plans for both Premier Inn and Costa.At Premier Inn occupancy was up 6.6 percentage points on a like-for-like basis to 76.2% and revpar increased by 8.2%, with total revenues up 10.9%.

CEO Andy Harrison told a conference call: "The consumer is under a lot of financial pressure at the moment, people are spending their money more carefully than ever before and our brands offer good value for money."

Harrison said he was confident that the group would "continue to outperform" and would focus on "winning market share and keeping a tight control of costs". Harrison announced that the group would speed up its expansion of Premier Inn, following "a thorough assessment" of its potential, which lead him to believe there was "opportunity to grow faster and further".

Whitbread now intends to increase Premier's room stock by around 9% (4,000 rooms) this financial year, with a new five-year target of "at least 65,000 Premier Inn UK rooms", a 50% increase. The group has a committed pipeline of 10,500 Premier Inn UK rooms including the 4,000, and had previously planned to increase the estate by 55,000 rooms by the end of the 2013/14 financial year.

Harrison said: "We anticipate that around 40% of our growth will come from new catchment areas where Premier Inn is not currently present. A significant proportion of rooms growth will be via the joint site model and therefore we expect to open between 80 and 100 new restaurants over the next five years.

"We feel there's a strong growth opportunity right now. It's easier to get good quality sites at the moment."

The group is currently developing a new smaller format, which is typically between 60 and 80 rooms with smaller public area space, which will give it access to a broader range of locations. The group is also extending the roll-out of automatic check-in machines after initial successes.

John Beaumont, an analyst at Matrix Corporate Capital, said: "The growth is a little lower than perhaps some people were anticipating, costs will be a little bit higher than some were anticipating, and profitability of many of the new openings may not be as great because many of them will be leaseholds."

Harrison added that the group would refinance further during the current financial year, that it would "enter the capital markets" and would undertake at least one more sale and leaseback. Debt was expected to remain around the 3.5x ebitda level.

 

HA Perspective: This was Harrison's first full-year results presentation and his chance, after concerns over the £59.5m acquisition of Coffee Nation, to reassure investors. There were wobbles over the impact of a wary British consumer on revenue and comparatives will only get harder for the group as the year progresses, but he has sought to reassure by saying that the group had benefited from customers seeking cheaper products and services.

There was little, however, on longer-term strategic issues. In particular, about overseas expansion. The fact that 60% of new openings are tapping into existing catchment areas shows that saturation coverage is close. The law of diminishing returns will kick in, particularly with the increasingly smaller sites.

This is not to say that Premier Inn will not remain profitable but margins will come under pressure. How much pressure depends on how long some of its rivals linger on. The biggest question mark is over independent owner-operated properties, most of which are under invested and sometimes even a threat to life safety.

In early April, Hotel Analyst spoke to the head of a guest house and small hotel association in Edinburgh. He said conditions were "the worst we have ever seen" and that "people were going out of business".

And the threat to life safety was highlighted by a report on a small hotel company O&C Holdsworth, owners of the Penhallow in Cornwall. The company was fined this month for safety breaches following a fire in 2007 that killed three people.

Of course, big companies who run well maintained hotels can also have disasters but the businesses struggling with trade are typically a far greater risk to life and limb.

If such businesses go bust quick enough, it is likely to benefit Whitbread directly. As will a clear out of the dire midmarket hotels that are as similarly under invested as the independents.

It is thus possible that this recession will finally see a long overdue clear out of the dross in the market place, particularly as interest rates start to rise.

But previous recessions have always resulted in a triumph of hope over reason. There does not appear any compelling evidence that this will not be the case again.

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