Whitbread’s share price is as whippy as they come and 1% to 2% moves aren’t unusual, but anything bigger is. Despite Whitbread’s most recent earnings (released on 26 April) exceeding expectations, the share price has nosedived to 3,872p just 6% shy of its 52-week low over the past week.
Obviously, I’m not one to advocate any sort of bottom fishing. However, what makes the recent earnings report more significant than usual is that it was only a month ago that Whitbread warned Costa Coffee sales would slow down as the mild weather could limit high street footfall and thus restrict Costa’s sales volume.
This added ammunition to the naysayers who have urged the company to spin off and cash in on Costa Coffee on the argument that the UK market has reached a ‘coffee peak’.
Coffee to continue energising Whitbread
Not so according to CEO Alison Brittain, the UK coffee market isn’t close to saturation as coffee consumption per head is lower in the UK than some other European markets, she says. Moreover, demand for caffeinated drinks looks solid as the UK workforce continues to turn to caffeinated beverages to cope with longer working hours.
However, healthy demand is a double-edged sword as it attracts new entrants into the market, hoping to steal away market share by undercutting the price of coffee. And this is exactly what a resurgent Greggs has decided to do, undercutting Costa’s price for a flat white by almost 30%.
In the face of competitive pressures, Whitbread has announced that it will increase its expansion efforts and plans to open 200 new stores internationally this year and a further 230 in 2017.
There’s still room for more…
Whitbread’s other main income stream, Premier Inn continues to open its doors to hotel-goers at an ever increasing rate with revenues at the firm’s hotels and restaurants branch up nearly 10% from a year ago. The traction it has with families and business viistors who are looking to travel on a budget is of utmost importance as the firm is targeting 85,000 new hotel rooms by 2020.
Whitbread’s strategy is clear: more coffee shops, more restaurants and more hotel rooms. While this has taken its toll on the firm’s balance sheet as net debt crept up 56% over the year, investors will be hoping that demand meets current expansion plans. They can take solace as Whitbread hiked its divided by 10%, representing a yield of around 1.6%. It may not mean winning big but the growth story promises plenty for long-term investors.
Emerging markets
So Whitbread shares may be down but the rewards are still coming from the firm. A bigger dividend winner though is Unilever (LSE: ULVR). The consumer goods firm has heavy exposure to emerging markets (where it gets more than half its sales) and continues to deliver. That’s despite what has been a tough market for packaged goods as falling commodity and energy prices have stymied growth in those emerging markets. Even though it has strong top-line growth of 8.3% in such markets, the company expects the regional woes to persist throughout the year.
This has spooked investors and they appear to be playing a wait and see game as to whether further turbulence is ahead, which has softened Unilever’s share price by almost 10% in the last two weeks.
Yet Unilever is a long-term investment opportunity and the global giant has announced plans to offset any slowing growth in packaged goods by targeting annual cost savings of €1bn by 2018, which should firm up earnings and pave the way for impressive capital gains.
