Whitbread and Associated British Foods

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“UK markets take a small step back with weakness in consumer-facing stocks dragging down the FTSE 250 and banks, insurers, pharma and tobacco weighing on the FTSE 100. The pound reverses recent strength with falls against the US dollar and the euro on Thursday, while oil prices were also weak. “The scale of declines are only minor across the board and it seems like investors are merely taking stock of myriad political and economic events rather than voicing new concerns,” says Russ Mould, Investment Director at AJ Bell.

Whitbread

Whitbread isn’t exactly all singing and dancing now that Costa has finally taken flight to its new owner, Coca-Cola. Third quarter results show 0.6% like-for-like sales decline.

“The pace of decline with food and drinks isn’t as bad as it was at the half year stage yet the strength of the business should really be measured by accommodation as Premier Inn is the core of the company.

“Accommodation is limping along with 0.2% decline in like-for-like sales during the third quarter.

“A gloomy outlook for the UK and ongoing spending in Germany means the company has guided for zero profit growth in its next financial year.

“That raises the question of whether Whitbread shareholders will really want to stick around once they get their share of the proceeds from the sale of Costa. Tahey are left with a business that is lacking earnings momentum, at least in the short term.

“On the one hand Premier Inn is a strong brand and there is certainly demand for slightly upmarket affordable accommodation. On the other, it operates in an industry that continues to expand despite there already being significant supply.

“Whitbread is pinning its hopes on Germany being its next big growth region. However, the German economy has just had its worst year since 2013 according to preliminary government data. Various economic forecasts suggest weak growth in 2019, meaning Whitbread’s expansion plans face a series of headwinds.

“As such, it does seem highly likely that many shareholders will want to check out once the Costa rewards are paid out.”

Associated British Foods

“In recent times the main contributor to growth at conglomerate Associated British Foods has been budget fashion chain Primark.

“That’s why December’s disappointing update on Primark’s performance caused such a jolt to the share price. Today’s statement helps repair some of the damage with total sales up 4% year-on-year for the 14 weeks to 5 January.

“A significant chunk of this growth is achieved through new openings. Like-for-like sales declined modestly although there were some bright spots with Christmas sales exceeding expectations after a very tough November and strong trading reported in the US.

“Ultimately Primark, while cheap, does not really sell that many essential items; for the most part it represents a discretionary spend for consumers.

“So if shoppers react to the current uncertain economic backdrop by cutting back their spending, Primark is likely to suffer. Lacking a material online operation, it is also reliant on high street footfall which is in clear decline.

“That said, Primark remains Associated British Foods’ jewel in the crown and given the continued pressure on its sugar division, in particular, there could be renewed calls for a break-up of what is something of curiosity of a business in a world where conglomerates are now few and far between.”

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