Premier Inn and Costa owner Whitbread (LSE: WTB) has released a positive update for the first half of the year. However, its shares have fallen by 2.5% after the release. Could this be a buying opportunity?
Whitbread’s sales increase of 8.1% was driven by a rising market share for both Costa and Premier Inn. This allowed the company to record a rise in like-for-like (LFL) sales of 1.9%. Premier Inn’s total sales increased by 8.9% and its LFL sales were up by 2.4%. Costa’s total sales rose by 10.7% and its LFL sales were up 2.3%.
However, Whitbread’s profit growth was perhaps slightly disappointing. It was 2.2% higher due in part to a fall in Costa’s underlying profit of 4%. This was due to higher investments during the first half of the year, while the cost of exiting India and South East Asia also weighed on the company’s reported financial figures.
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Expansion potential
Looking ahead, Whitbread has a clear growth opportunity both within the UK and abroad. In particular, Costa has significant expansion potential outside of the UK and this could transform the company’s size, scale and profitability. Similarly, Premier Inn is likely to benefit from continued high demand for hotel rooms in the UK. It plans to open around 3,700 new rooms this year.
Whitbread also intends to grow through increased innovation. For example, its ‘hub by Premier Inn’ city centre hotels are expanding in number and could open up a new niche for the company. They provide smaller, simpler but very well-located hotel rooms at a budget price. Similarly, Costa will innovate through ‘finer’ coffee concepts as well as a new food range.
Whitbread faces an uncertain future due to a challenging economic outlook. However, Premier Inn could benefit from customers trading down to budget hotel options, while Costa has become a consumer staple for many of its customers. Therefore, just as the company performed well in the credit crunch relative to its peers, Brexit could be a period of further success.
With Whitbread forecast to grow its bottom line by 7% next year, its outlook is more positive than for sector peer Restaurant Group (LSE: RTN). The latter is expected to post a decline in earnings of 11% this year and 1% next year. This shows the challenges the sector is facing. Further uncertainty from Brexit could cause Restaurant Group’s earnings to come under even greater pressure over the medium term.
Therefore, Whitbread’s exposure to budget hotels and what is essentially a consumer staple in Costa make it less risky than Restaurant Group and other pureplay restaurants and/or drinking establishments. Whitbread may have a higher price-to-earnings (P/E) ratio of 15.4 versus 12.9 for Restaurant Group. However, it’s a better business and has brighter prospects. They make it a superior buy at the present time.
