The Whitbread (LON: WTB) share price is volatile. Between 21 February and 25 September 2020, the FTSE 100 stock fell 57% to 2,062p, as lockdowns took their toll on the hospitality operator.

It had recovered to 3,595p in March 2021, before falling to 2,837p on 19 July, ‘Freedom Day.’ It then rose to 3,426p in the run up to Bonfire Night on 5 November, as investors and customers alike started to believe that the worst of the covid-19 pandemic had been spent.

But as Omicron broke out and the disease lingered on, Whitbread shares fell to a low of 2,713p by mid-December. However, as hospital admissions fall, they have recovered to 3,135p as investors glimpse a future where coronavirus is placed firmly in the rear window.

Whitbread share price: Q3 FY22 results

Unfortunately for the FTSE 100 operator, yesterday’s trading update saw shares dip 3.7% to 3,135p, as it compared this quarter’s growth with the same period two years ago, due to the pandemic creating an inaccurate comparable.

However, CEO Alison Brittain believes ‘Q3 represented another strong performance in the UK… we will grow through the competitive advantages of having by far the largest network of hotels and operating the number one hotel brand.’

The Premier Inn owner reported ‘continued market outperformance in the UK’ with Premier Inn accommodation sales up 10.6% driven by ‘strong leisure demand and recovering business demand.’ And encouragingly, the company expects hotel like-for-like Revenue Per Available Room (RevPAR) run rates to recover to pre-pandemic levels this year. Moreover, it’s operating on a positive cashflow basis, with net cash of £120.5 million.

And its 32 open German hotels were at 59.9% occupancy, up from 47.5% in the previous quarter. However, the group cited ‘government lockdown restrictions’ in the latter six weeks of the period driving occupancy levels down to 36%. And while the company expects restrictions to last throughout the winter, it still expects ‘significant long-term value creation opportunity for Premier Inn in Germany,’ as 43 more hotels remain in the pipeline.

But as total UK sales rose 3.1%, food and beverage sales fell 11.1% as renewed uncertainty deterred customers from its Beefeater and Brewer’s Fayre offerings.

Where optimism meets inflation

Whitbread is planning for a widespread post-pandemic recovery. It’s not alone in this regard— after excellent results this week, Sainsbury's, Tesco and Marks & Spencer's are all bullish for the future. But these optimistic outlooks may yet collide with inflationary mathematical reality.

Whitbread expects a sector inflation rate in FY23 ‘above average historic levels’ at around 7-8%, impacting £1.4 billion of its cost base. But it admits that ‘visibility remains limited,’ and that ‘this level of inflation may well change.’ And while it expects to be able to ‘largely offset’ inflationary pressures through cost efficiencies, estate growth and raising room rates, inflation may soon spiral further than it estimates.

The UK is experiencing a significant cost-of-living crisis. Gas bills are expected to rise to £2,000 a year, with British Gas CEO Chris O’Shea believing that ‘high gas prices will be here for the next 18 months to two years.’ With taxes rising amid 5% inflation, Whitbread’s customers may be unable to utilise its hotel rooms and restaurant tables, especially if it plans to increase prices.

Moreover, Brittain acknowledged that inflation is hitting the company on multiple fronts, accepting that labour costs are ‘quite a large part of inflation for us, so are energy bills which are highly inflationary…construction costs are higher.’ In the face of a hospitality staffing crisis, it’s already awarded a 5% pay rise to most employees. But so has its competitors; sandwich chain Pret a Manger has raised pay twice in just four months.

And the pandemic is not over. 10% of Whitbread’s 30,000-strong workforce are off work due to Omicron. While the company’s policy to pay 80% of salary through isolation periods is laudable, it’s also expensive. Companies from Ikea to Next have updated their policies to reflect the difficult situation.

Whitbread knows the uncertainty may not resolve in its favour. Citing ‘market-wide supply chain challenges, and potentially softer trading in January and February,’ it has delayed £20 million of refurbishments.

And while food retailers also suffer from inflationary spikes, everybody needs something to eat. But hotels and restaurants are two areas where discretionary spending can be cut back. Of course, if inflation softens and the recovery continues, the Whitbread share price may yet return to its pre-pandemic high.

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Charles Archer | Financial Writer, London
14 January 2022