Mitchells and Butlers 16 wks LFL sales up 4 pct, future demand uncertain UPDATE

LONDON (AFX) – Pub group Mitchells & Butlers PLC (M&B;) said like-for-like sales for the 16 weeks to Jan 20 were up 4 pct, in line with company expectations, but warned on the potential ‘dampening effect’ of recent interest rate rises.

The company said like-for-like sales were up 2.4 pct on an un-invested basis. It added pubs in residential areas continued to trade strongly, with like-for-like sales growth of 4.6 pct for the first 16 weeks. Local pubs traded well, while High Street pubs registered like-for-like sales growth of 2.7 pct, with London performing particularly well.

The operator of the Harvester and All Bar One chains said food sales were up 7.2 pct within that period and drinks sales up 2.9 pct, against an on-trade market which saw drinks decline 4.1 pct in the quarter to December. Food and drinks prices were 3 pct higher than the previous year.

Total retail sales were 12 pct ahead of last year but M&B; said, given the recent interest rate rise, that it is uncertain whether consumer demand will continue at current levels.

In an interview with AFX News, chief executive Tim Clarke said it was too early to say if rises have made an impact on sales.

He added: ‘We are watching out very closely for the implications of three rapid increases in quick succession of interest rates. It would be surprising if it didn’t have some dampening effect.’

However, Clarke said the introduction of the smoking ban in Scotland has, thus far, ‘had a less severe negative impact than we might have expected’.

In Scotland, which represents 5 pct of the estate, M&B; said overall like-for-like sales were up 0.4 pct for the 16 weeks, with food up 5 pct, but drinks down 2 pct. Sales in the 10 months since the imposition of the ban are up 1.3 pct, with Clarke hopeful the company will go through a full year with positive growth.

Clarke said: ‘The extent to which we have been able to attract new food customers, to allow for the fact that some of our drinking customers are coming out a little bit later and drinking a little bit less, I think has been very pleasing.’

The company said it is well placed to attract new customers who do not currently use pubs to eat out when the English smoking ban comes in this July, calling the strong food sales growth in the first 16 weeks of the year have ry encouraging’.

However, Clarke was ‘cautious’ that England and Wales will perform better than Scotland in the face of a smoking ban, calling the Scottish experience ‘a hopeful indicator, but no more than that’.

The company added it is making ‘excellent progress’ on the conversion of former Whitbread pubs, with 56 pubs already re-opened under M&B; brands. It said sales uplifts are in line with expectations and on target to be at least 30 pct above the level at which the 239 sites were acquired.

Clarke said M&B; expected to have over half the new estate, around 120 pubs, converted by the time of the interim results. The company indicated at the time of the acquisition in August that it would take two years to work through the conversion, with the 30 pct sales increase forecast to be achieved in the 2008-09 financial year.

‘Obviously we are indicating today that we are going somewhat faster than that,’ said Clarke, adding the company now expects the bulk of the conversions, except those held up by planning permission and other issues, to be complete by Christmas.

The company revealed last Friday Iranian-born entrepreneur Robert Tchenguiz has taken a 15 pct interest in M&B;, made up of a 3 pct stake with voting rights and around 12 pct acquired through contracts for differences.

However, Clarke refused to be drawn on whether the company is concerned Tchenguiz could use his holding to pressure for conversion to the tax-efficient Real Estate Investment Trust structure or to mount another takeover bid for the company.

The company fought off a 550 pence a share takeover bid from Tchenguiz’s R20 investment company in May last year.

‘We very much look to discuss things, as we do on a regular basis, with major shareholders like Robert Tchenguiz,’ he said.

M&B; confirmed the board is still ‘rigorously evaluating the risks and rewards of a REIT structure’ and will update shareholders by the interim results announcement in May.

In a review of the pub sector published this morning, ABN Amro upgraded M&B; to ‘buy’ from ‘hold’.

It said valuations across the sector have fallen some 5 pct in the year-to-date, following a re-rating in the second half of 2006, as REITs appear to be ‘neither imminent nor inevitable’. However, it added demergers were not necessary to release value in property and it sees a potential average upside of 17 pct across the sector in 2007.

Maintaining its ‘buy’ rating and full-year forecasts, Investec Securities noted the performance of the acquired Whitbread pub restaurants and said it expects upgrades at the company’s interims if current trends persist.

At 10.23 am, shares were up 5 pence at 701 pence.

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