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The Whitbread (LSE:WTB) share price fell 10.3% yesterday (16 October) after the Premier Inn owner released its results for the 26 weeks ended 28 August.
Investors didn’t seem to like the reported 2% fall in revenue compared to the same period a year ago. Adjusted earnings per share also dropped by the same percentage. Net debt was also £192m higher.
Since releasing its FY25 results, the group’s slightly downgraded the full-year profit expected from its business in Germany. To counter this, it reckons it’s going to achieve more cost savings. Such a large share price drop is often associated with a profit warning. But this isn’t the case here.
Great value?
Analysts are expecting earnings per share for FY26 of 205.7p. If they are right, it means the stock’s currently trading on 14 times forecast earnings. When considered alongside a figure of 23 for InterContinental Hotels Group — the owner of the Holiday Inn and Crowne Plaza brands — the stock appears to offer excellent value.
Indeed, Whitbread appears to have lots going for it. The group has a UK occupancy rate of 80.8%. This beats the global figure of 69.8% reported by IHG during the six months ended 30 June. At £69.48, Whitbread also does better when it comes to revenue per available room. IHG’s is $84.10 (£62.65 at current exchange rates).
But as good as these figures might be, it’s the lack of growth that appears to be spooking investors. Whitbreads’ results show that although room revenue was broadly flat, food and beverage sales were 11% lower. The group says this reflects the “impact of transitioning around half of our lower-returning branded restaurants to a more efficient, integrated format”.
I’ve stayed in plenty of Premier Inns over the years. The rooms are reasonably priced and comfortable. But I find the food bland and unexciting. Personally, I don’t think efficiency’s the problem. If it spent a bit more on better quality ingredients, I’m sure more of the hotel chain’s guests would eat in its restaurants. After all, it has a captive audience. Nobody really wants to go off site and dine elsewhere if it can be avoided.
Growth challenges
However, the company remains upbeat. It says it’s on track to deliver a “step-change in profitability” and return £2bn to shareholders via dividends and share buybacks by FY30.
In my opinion, nothing stands out as being particular wrong with the business. Okay, it would be better if earnings were increasing but inflation’s proving to be particularly stubborn at the moment. But while I admire its ambition to become the “world’s leading budget hotel brand”, I just don’t see how it’s going to get there.
It already has an impressive occupancy rate. And there’s limited scope for raising room rates further given high levels of competition. Expansion into other countries is a possibility but it takes time to build a brand in a new territory. Its business in Germany is expected to become profitable this year. However, this is nine years after it opened its first hotel in the country.
And although its dividend yield’s pretty much in line with the FTSE 100 average, this isn’t generous enough for me to overlook the concerns I have about its growth prospects.
For these reasons, the stock’s not for me.
