The hospitality industry is currently facing a number of headwinds, including an imminent minimum wage hike, rising food costs and fierce competition.
The Restaurant Group (LSE: RTN) and Whitbread (LSE: WTB) have also made a number of strategic missteps in recent years, a double-whammy that’s seen the shares fall 46% and 28%, respectively, in the last year.
Can these two once-loved companies overcome both industry headwinds and correct past mistakes, or are they destined to slide ever further down the FTSE?
Repairs underway
The Restaurant Group owns and operates a number of restaurant brands, including Franky & Benny’s, Garfunkel’s and Coast to Coast, among others. It also operates a number of concession stores under brands owned by other entities, including Whitbread’s Costa. In all, the group served around 43 million meals in 2015.
For years, the group has rolled out its successful restaurant formats, with revenue growing from £314m in 2005, to £685m in 2015. The company has lost momentum recently, with like-for-like sales falling 3.9% in the first half.
I’ve always felt the group’s brands to be middling at best, so I was pleasantly surprised to read the conclusions of an honest and aggressive investigation into the underlying issues at the group. It revealed a number of strategic missteps, including above-inflation price hikes, the removal of popular dishes from the menu and the abolishment of family-friendly deals.
I believe the review has correctly identified areas of weakness and I have faith in the recent appointment of CEO Andy McCue. Formerly the top dog at Paddy Power, Mr McCue oversaw a period of record revenue and profit growth there, and was the driving force behind the successful merger with Betfair.
Many believe his analytical approach to improving results is well suited to The Restaurant Group, which presumably has many years worth of data from which to draw conclusions about dining habits. At eleven times historical earnings, the shares seem reasonably priced. If like-for-like sales stabilize, a rating of fifteen times would seem fair, representing a possible 34% increase in share price.
Signs Of Life
Perhaps unsurprisingly, Whitbread has been a stock market darling for a number of years now. The company has perfected its Premier Inn and Costa Coffee formats and has successfully replicated them in cookie-cutter style all over the country. Investors had also become accustomed to them hitting growth targets faster than expected, resulting in 160% revenue growth in the last ten years.
A slowdown in like-for-like sales at Costa Coffee last year worried the market and raised questions about the UK coffee shop industry. Many interpreted the news to mean we had reached ‘peak caffeine’, with little runway left in front of Costa. A recent uptick in UK like-for-like sales to 2.3% has eased those fears.
The company has embarked on its next stage of expansion, aiming to open 3,700 new Premier Inn rooms in the UK and 230-250 new coffee shops worldwide.
Revenue grew 8.1% in the first half of the year and — if you ignore the one-off costs associated with exiting India and South Africa — underlying profit increased 5.4%.
Whitbread shares currently change hands at sixteen times historical earnings and yield a not-insignificant 2.6%. Considering the impressive track record and best-in-class brands, I believe this a fair price for a great business.
I believe that both these companies can easily survive the macro headwinds they face, as long as their core businesses can increase performance levels in the next few years.
