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In the ever-evolving landscape of FTSE 100 Index Index, few companies can boast the rich history and market presence of White bread (LSE:WTB). Founded in 1742, this hospitality giant has shown remarkable resilience over the centuries. However, recent challenges facing the sector have raised questions about its future. What's next? Let's take a closer look.
A historic FTSE 100 company
The jewel in Whitbread’s crown is undoubtedly Premier Inn, the UK’s largest hotel chain. With over 800 hotels, Premier Inn has become synonymous with affordable, quality accommodation. But Whitbread’s portfolio doesn’t stop there – it also runs popular restaurant chains such as Beefeater and Brewers Fayre.
Last year was a rather disappointing year for investors. The stock fell 17.1% over the past year, underperforming its sector peers and the FTSE 100.
Reasons for optimism
While others might have closed the doors, management has been busy cutting unnecessary expenses and stoking the fires of innovation. In a tough environment, they hope to boost margins through hopes of cost efficiency, which could provide a tasty surprise for the bottom line.
These efforts have already delivered £50m in savings for the 2024 financial year. By optimising its food and drink offering and converting 112 less profitable branded restaurants into new Premier Inn hotel rooms, the company aims to improve its proposition for guests, whilst also increasing efficiency. For the value-hungry investor, the current price-to-earnings (P/E) ratio of 17.1 times (compared to the sector’s more robust 23.4 times) may be quite tempting. An average of analysts is also forecasting potential growth of 33.9%. Obviously, none of these estimates or forecasts ever guarantee profitability, but it does suggest that many are once again feeling optimistic about the future. There’s also a rather generous dividend yield of 3.3% which is sure to whet the appetite of income seekers.
However, a discounted cash flow (DCF) suggests the stock is already overvalued by 7.6%, so the numbers don't make it clear exactly what comes next. I'd also say that even with a 60% payout ratio, the future of the dividend is far from clear. Historically, the dividend yield has varied significantly, falling to 1.3% in 2022.
Challenges of the sector
The decision to exit 126 less profitable branded restaurants highlights the challenges facing the company's food and beverage division. Management has acknowledged that some of its branded restaurants have struggled to achieve expected profitability levels due to lower footfall from non-hotel guests.
The hospitality sector remains a volatile industry, vulnerable to economic fluctuations and shifting consumer tastes. Planned job cuts, while aimed at improving efficiency, could also pose reputational risks and potential operational challenges in the short term.
An uncertain future
I would argue that Whitbread is at a crossroads, a 280-year-old colossus facing the challenges of the 21st century with a new, as yet untested map. Despite the numerous challenges facing the sector, the company's market-leading position, coupled with its aggressive restructuring plans, offer a tantalising glimpse of its potential.
For me, the FTSE 100 company's journey from 18th-century brewer to 21st-century hospitality powerhouse is far from over, and the next chapter could be the most transformative yet. But with the stock already potentially above a fair value estimate, I don't see a huge amount of opportunity. For now, I'm not taking it on board.