Whitbread PLC executives remain optimistic about long-term plans, efficiency programs and expansion, both in the United Kingdom and Germany, as the company braces itself for a brewing economic storm.
DUNSTABLE, England—A country enters recession when there are two consecutive quarters of negative growth in gross domestic product.
And hotel companies? Whitbread PLC, the parent of Premier Inn and the United Kingdom’s largest domestic hotel company by number of assets, is moving in the direction of that definition with its first-quarter 2019 results showing a 4.6% year-over-year drop in U.K. like-for-like room sales.
In its full-year 2018 results, published on 30 April, Whitbread saw only a 0.6% increase in that metric compared with full-year 2017 numbers.
The company blames “weak trading conditions” in the U.K. as the cause, but it is continuing its expansion plans, both in its principal U.K. market and in Germany, its planned second market of scale, with a tender offer to return up to £2 billion ($2.5 billion) due to be launched Thursday.
In a 30 April news release announcing preliminary results, Whitbread CEO Alison Brittain said “despite the short-term market challenges, our strong competitive position, ongoing disciplined allocation of capital and focus on executing our strategic plan will ensure we continue to win market share from the declining independent hotel sector in the U.K. and Germany.”
Brittain told analysts that up to £2.5 billion ($3.1 billion) of the £3.9 billion ($4.9 billion) raised when it sold its coffee business Costa Coffee to Coca-Cola in January will be returned to shareholders.
On the call with analysts, Whitbread executives said they remain optimistic but are keeping a close eye on macroeconomics.
“We are remaining cautious on the U.K. business environment this year and the impact that can have on hotel demand, and we are closely monitoring business and leisure confidence as we go into the summer,” Brittain said.
She said business travel is especially soft in the regions, leading to a reduction in short lead-time business bookings, which usually generate the firm’s highest average daily rates, but she added she did not expect that weakness to continue through the end of full-year 2019 numbers.
Less foreign tailwind
Whitbread also does not enjoy the current advantages stemming from a weakened pound sterling, as its exposure to international customers is a great deal smaller than that of other U.K. hotel companies, such as InterContinental Hotels Group.
The exception for Whitbread is London, a market in which the company posted a 1% increase in sales.
Overall occupancy for the quarter was 74.8%, a growth of 230 basis points, while both overall ADR and revenue per available room dropped, the former by 3.4% to £61.45 ($77.32), the latter by 6.3% to £45.98 ($57.86).
Company-wide, underlying profit before tax increased 1.2% to £438 million ($551 million), which Nicholas Cadbury, group finance director, attributed to stringent cost controls and the company’s ongoing efficiency program.
“The U.K. hotel market, we are very confident in terms of the medium- and long-term attractive opportunity, and we continue to win market share from the independent market through delivering high-quality, new hotels at good value for money,” Brittain said.
She said that is what gives the company the impetus to continue to invest, despite the subdued market conditions.
Whitbread’s committed pipeline in Germany is 7,000 rooms and across the entire portfolio 20,000, which Brittain said is probably the highest that metric has even been. Approximately 3,000 new rooms are expected to be added this year in the U.K. and 2000 in Germany.
Inflationary pressure is expected to cost the company £70 million ($88 million) in 2019, a figure she said had not changed from previous guidance. Efficiency programs would offset around £40 million ($50 million) to £50 million ($62.9million) of that figure.
“We’ve historically always correlated hotel performance with GDP, and of course we’ve seen a decline in GDP in the U.K., but it is still positive, it is still about 1% or a little over, and quite a lot of the other economic indicators in the U.K. are reasonably strong. … We still have low unemployment and reasonable inflation,” Brittain said, adding that leisure demand has remained buoyant.
Whitbread executives said this would not mean more rooms being delivered to online travel agencies as their experience is that such a tactic merely cannibalizes existing demand.
As of press time, Whitbread’s stock was trading on the London Stock Exchange at £4,635 ($5,832.39) per share, up 0.7% year to date. The Baird/STR Hotel Stock Index was up 16.3% for the same time period.