Whitbread said that it would continue to expand its estate in both the UK and Germany, despite falling like-for-like sales in its domestic market.
The company used its first-quarter results to comment that it was making “good progress in preparing Costa to be demerged from Whitbread”, as activist shareholder Elliott Advisors pressed for a split within six months.
Whitbread CEO Alison Brittain said: “The hotel market was weaker in the first quarter due to strong comparable data this time last year and increased supply, including significant room openings from Premier Inn. Our new capacity has a short-term impact on like-for-likes but delivers good long-term sales growth. Forward bookings have improved recently, supported by the robust business to business market and comparatives ease later in the year. Our F&B sales declined slightly due to lower footfall from adverse weather.
“Both the budget hotel market and the coffee market present long-term structural growth opportunities, and whilst we are cautious of shorter-term trading conditions in the UK, due to well-publicised consumer trends, we are confident that we have the right strategies in place to enhance our UK and international market positions and ensure each business is well-positioned to thrive as a separate entity.”
Within the UK, the company added 413 rooms net and reported growing total accommodation sales ahead of the market at 4.3%, which it attributed in part to business demand. Revpar was down by 1.6% on the year, with like-for-like sales growth down by 0.3%.
The company said that Premier Inn’s flat like-for-like accommodation sales reflected “the continuation of weak market conditions in London as comparatives from last year were very strong driven by inbound tourism. Overall hotel market occupancy in London declined year-on-year, which was compounded through Premier Inn’s capacity growth of 13.8%.
“The regional market was more robust as domestic business travel grows steadily and Premier Inn continues to increase market share. Premier Inn’s position is supported by its strong value for money credentials and recently implemented business booker tool. Total accommodation sales growth in the regions in the first quarter was 3.8%, driven by the addition of 5.1% capacity.”
The group added that forward bookings had improved recently, and Premier Inn still planned to add 4,000 to 4,500 rooms across the UK and Germany this financial year. The organic pipeline to reach 85,000 rooms by 2020 was secured through a mixture of new freehold, new leasehold and extended sites.
Brittain told analysts: “We know that we do cannibalise an existing hotel when we open one nearby. And in London, they’re not too far away from each other. But we know also that in year two, that the original hotel comes back.”
In Germany, the company said that its hotel in Frankfurt had now been open for over two years and was maturing in-line with expectations to reach occupancy levels of c.64%, whilst maintaining 100% direct bookings.
The pipeline in Germany is now 6,000 rooms. This year, the group planned to open three hotels in Germany; two in Munich and one in Hamburg. The company said that it would continue to add to the pipeline through a mixture of organic freehold and leasehold sites, supplemented with suitable bolt-on acquisitions.
Looking ahead, the company said that it expected full-year results to be in line with expectations.
In April the company confirmed that it would demerge Costa. The announcement followed increasing pressure from investors Sachem Head and Elliott Advisors to break up the company, with the former commenting prior to the announcement that it believed a demerger would drive a 50% value uplift. Whitbread said that Costa Coffee would be listed as a separate entity, with its own board and management team, with the separation to take place within the next two years.
The group said: “Constructive early steps have been taken in preparation for the demerger and good progress continues to be made on the core infrastructure and efficiency work that was already underway.”
A further update on the demerger will be provided alongside the interim results in October 2018.
Mark Brumby, analyst, Langton Capital, said that whilst the top line was moving forward, both of its major divisions were in like-for-like decline and that, “given the building, perhaps overbuilding, in both hotels (particularly in London) and coffee shops, this may not be a surprise. Whitbread has an impressive freehold estate, good brands and international ambitions but, with trading uncertain, the shares may remain under some pressure”.
HA Perspective [by Katherine Doggrell]: There is no pleasing some people and the hotel sector is littered with former CEOs – many with Accor on their CVs – who were booted out for either buying, selling or growing at a speed which suited shareholders. Alison Brittain is obviously eager not to become one of those, but Elliott Advisors has, we understand, been gnashing to get the demerger done within six months. And in this heat.
This, while the rumour mill continues to froth over at the thought of Premier Inn being in play. Life-for-likes may be falling as the Brexit boost from the weak pound wanes in influence, but, as Brumby points out, there are some tasty freeholds out there for the picking.
Whitbread itself faced the inevitability in a circular to shareholders about the new executive pay scheme, in which it said that executives would be rewarded under a new performance share plan for the separation of the two brands “whether implemented by way of a demerger or by way of a sale to a third party of all or substantially all of either the Costa business or the Premier Inn business”.
With the oft-quoted wall of money sniffing around the sector, a sale seems like something which could be achieved within Elliott’s six-month time line, with private equity most-tipped on the way to creating a European budget monolith. Would Accor step into to prevent it? And who to roll it in with to create this beast? Whitbread is currently on an efficiency drive. What seems likely is that it will be saving on its demerger budget.
Additional comment [by Andrew Sangster]: When you have 40% of the branded budget hotel market in the UK it starts getting tougher and tougher to avoid cannibalising existing hotels, as CEO Alison Brittain admits.
The secular tailwinds of an accommodation market ripe for the introduction of a consistent, wallet-friendly offer are fading. The worst of the unbranded B&Bs and tired mid-market have been put to the sword and what remain are, largely, more effective operators.
Couple this with increasingly strong cyclical headwinds as the UK economy hits a bumpy patch and you have Whitbread’s challenge: ever tougher like-for-likes and collateral damage from new openings.
The hedge funds have spotted a smash and grab opportunity. As disillusioned long-term shareholders leave, the hot money arrives demanding a quick payout.
Whitbread remains a fundamentally great business but its magic money tree has wilted as its sheer size in the UK means diminishing relative returns. There is no quick fix. While Germany is a smart long-term move it will be neither quick or likely to supply the sort of returns Whitbread’s shareholders enjoyed during the roll-out of the budget hotels in the UK.
In Germany, Whitbread does not have the landbank that gave it a head start in the UK and it faces tougher competition from already established rivals.
Morgan Stanley cited the worst like-for-like sales performance for a decade and the share price being close to the sum-of-the-parts break-up value as reasons for being equal weight. Brittain needs to do something radical to avoid having the break-up imposed on her.