Mitchells & Butlers (LSE:MAB) PLC has returned to profitability but has warned that the fall-out from Brexit is still affecting the hospitality sector.


“Brexit remains an important event for the market and has created risks for the sector, principally around the supply and cost of products and workforce shortages,” the company said in its full-year results.


READ Mitchells & Butlers cheered by lifting of lockdown but rising costs loom after Brexit


Finding decent staff is not the only problem facing the hospitality industry.


The group, which owns the All Bar One, Toby Carvery and Harvester brands, said that before the Covid-19 pandemic the business faced inflationary cost headwinds in the region of GBP60mln to GBP65mln per year but these are expected to be higher in the short-term cost pressures, largely as a result of the recent escalations in energy costs.


“The trading environment remains challenging and cost headwinds continue to put pressure on the sector,” said Phil Urban, the chief executive officer.


Talking of feeling urban, the pubs group said the trading performance was generally stronger in suburban locations than in city centres, with consumers staying local during the pandemic while the continued popularity of working from home also hit city centre outlets.


Footfall within major cities remained well below pre-pandemic levels but has been slowly increasing.


“We believe that the desire to socialise in pubs and restaurants, and to share experiences which cannot easily be replicated at home, remains strong and that there is pent-up demand which has built during closure,” the company said.


Mind you, it has to think that otherwise it might as well pack up and go home to nurse a bottle of lager that costs about a quarter of what it costs in a pub, thanks largely to excise duties.


Having battled through the pandemic, tapped the market for GBP351mln – the company was heavily indebted as it was before the pandemic and has been for years – and survived to tell the story, management would be forgiven for thinking the hospitality sector deserves a break.


Although successive governments have generally regarded pubs as a useful source of tax income, the VAT reduction on food and non-alcoholic drink sales has proved welcome but in order to compete with home drinking and the practice of “pre-loading” – getting tipsy before going down the pub as a means of enjoying the bonhomie of a pub while in the right mood – the sector needs a bit of a leg-up.


According to the British Beer & Pub Association, through the pandemic, pub-owning companies provided GBP285 million in reduced or cancelled rent to tenants. In the same period, they also provided additional support such as refunds on spoilt beer, COVID signage and personal protection equipment at a cost on average of GBP27,000 to each pub.


Despite all of that, Mitchells & Butlers (LSE:MAB) (M&B) made it through, “and there are signs that things are picking back up,” suggested Matt Britzman, an equity analyst at Hargreaves Lansdown.


“Like-for-like sales grew in the final quarter as 98% of pubs and restaurants were open, and that trend has continued in the eight weeks since the end of the financial period,” he said.


“Ultimately investors will need to remain patient. The group’s agreed not to return any cash until at least January 2023, which should mean the balance sheet continues to improve even if capital expenditure rises but there’s a long road ahead, and progress needs to continue over what could be a tough winter period,” Britzman said.


Richard Hunter, the head of markets at interactive investor, said the pandemic led to changes in consumer behaviour that may yet revert to previous practice but “a general trend towards more digital experiences such as table service by app may have changed some habits”.


“Despite the limited progress the company has been able to make, revenues and operating margins are approximately just half of pre-pandemic levels. Inflationary pressures are currently evident in terms of both utilities and employment costs, and wage inflation may not yet have peaked following the impact of Brexit on the availability of temporary staff,” Hunter ventured.


“Previous borrowings will also need to be addressed, although the current net debt figure has been meaningfully reduced. The lack of shareholder returns will also help the situation, although the need for cost reductions via the Ignite programme will be under increasing scrutiny as the company attempts to regain a proper footing,” he concluded.


Shares in M&B were up 2.8% in afternoon trading.

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