A £5,000 investment in Whitbread (LSE:WTB) shares five years ago would now be worth £4,400. That’s a loss of 12%. During the same period, the FTSE 100 has risen by 5%.
Although this is a disappointing performance, it should be acknowledged that the period covers the pandemic. And the business has recovered strongly after being severely impacted by Covid.
The company’s shares are now 60% higher than they were in March 2020, when Boris Johnson told everyone to stay at home. And for its 2023 financial year it reported a 27% increase in revenue, compared to pre-Covid (2020).
Hard graft
Anyone who’s worked in the hospitality industry will know how tough it is. Demanding customers, intense competition and seasonal trade are problems that need to be overcome. But Whitbread appears to be coping well with all three challenges.
In January 2023, readers of Which? magazine voted its Premier Inn as the best large hotel chain in the UK, as well as the top budget brand. YouGov‘s Brand Index has the chain comfortably beating its rivals for value, and being second only to Hilton for quality.
Whitbread seeks to differentiate itself from its competitors through its budget offering. Also, it locates many of its hotels on the outskirts of towns and cities, seeking to appeal to both leisure and business customers. The latter are particularly important as they provide year-round revenue, supplementing the more sporadic tourist income.
But the company isn’t all about rooms. Last year, it generated 28% of its turnover from its pubs and restaurants, most of which are located next to its hotels.
Financial performance
The pandemic resulted in a £1bn loss for the company in its 2021 financial year.
| Financial year to | Revenue (£m) | Operating profit/(loss) (£m) | Profit/(loss) before tax (£m) |
| March 2018 | 2,007 | 467 | 427 |
| February 2019 | 2,049 | 366 | 218 |
| February 2020 | 2,072 | 409 | 280 |
| February 2021 | 589 | (839) | (1,007) |
| March 2022 | 1,703 | 227 | 58 |
| March 2023 | 2,625 | 503 | 375 |
Its 2023 results, which were released last week, exceeded the average forecasts of the 11 analysts covering the stock. I’m sure they’ll now be revising upwards their expectations for 2024.
Bigger footprint
What appeals to me most about the company is its expansion plans.
It currently has an 11% UK market share, with 83,576 rooms in 847 hotels. Over the ‘long term’ (not defined) the ambition is to have 125,000 rooms and 17% of the domestic market.
In Germany, the company has 51 hotels (9,042 rooms) and a 1% market share. The plan is to grow this to 60,000 rooms — equivalent to 6% of the market.
I see no reason why Whitbread can’t replicate its business model elsewhere, particularly in Europe.
However, one area of concern I have is whether the company will have to borrow heavily to fund its growth. Its debt is presently under control but buying and refurbishing hotels doesn’t come cheap. The company’s German operation is still loss-making — it recorded a £50m pre-tax loss in FY23 — which will put pressure on its cash.
Also the company’s dividend is tiny compared to some of its FTSE 100 peers.
Tuck in
I’m confident that Whitbread’s share price will perform much better over the next five years, however.
The company has a strong brand and its plans for expansion in the UK and Germany are ambitious.
If funds permitted, I’d be happy to include the stock in my portfolio. And if I were to buy at least 64 shares, I’d be entitled to a free breakfast whenever I stay at a Premier Inn!
