Thomas Cook issues profit warning over fierce 'lates' market

Tour operator Thomas Cook warned that profits for the full year would be lower than expected after the long, hot UK summer created fiercer than usual industry competition in the 'lates' market.

The FTSE 250 group cut its full year guidance for earnings before interest and tax by around £40-50m to £280m as a result.

Chief executive Peter Fankhauser said the prolonged period of hot summer weather across Europe "meant many customers spent June and July enjoying the sunshine at home and put off booking their holidays abroad, leading to even tougher competition and higher than usual levels of discounting in the 'lates' market of August and September".

In the outlook statement, recent trading was described as "tough", particularly in the tour operating business as the company's ability to drive margins in the 'lates' market was restricted by this excess summer capacity, with the hot summer continuing to be felt in winter bookings.

With the summer 2018 programme now 90% sold, in line with last year, overall average selling prices are down 5% due to a higher mix of short- and medium-haul airline bookings, even though pricing across all segments was higher than last year.

Total group bookings rose 12% compared to this time last year driven by the return in popularity of holidays to Turkey, Egypt, Tunisia and Greece, with UK and continental bookings flat, Northern Europe up 4%. Long haul bookings were down 1%, with short- and medium-haul up 18%.

Winter bookings were 43% sold, with bookings 2% behind last year and average selling prices up 1% as a slow start in the Nordics and Continental Europe saw some knock-on impact from the hot summer weather. Management has decided to trim capacity in the Nordics by 5%.

Airline bookings saw double-digit growth to short- and medium-haul destinations, and good growth in long haul.

Fankhauser said detailed guidance for full-year 2019 will be provided in November, as usual, adding that "despite recent challenges, we continue to make good strategic progress which positions us well to return to profitable growth".

The group also revealed on Monday that chief financial officer Bill Scott has decided to step down after less than a year in the role, leaving on 30 November. Sten Daugaard, currently on the board of the German operating arm, will take part in a handover with Scott until formally taking on an interim-CFO role on 1 December, while a search has begun for a long-term group CFO.

Shares in Thomas Cook lost around a quarter of their value in early trading, falling to just below 60p for the first time in more than two years.

Broker Shore Capital observed that issues were felt across the tour operator segment, with the UK suffering further margin pressure and Northern European and Continental Europe pricing slowing by two percentage points and 1ppt respectively to +2%, with the airline broadly in line with the previous update.

Winter bookings are said to be slower in the Nordics and Continental Europe, with capacity in the former to be trimmed by 5%, with the UK said to made a strong start to demand with the Airline seeing positive trends, with short and mid-haul destinations up double digit and good growth in long-haul.

Analyst Greg Johnson cut his full year forecast for profit before tax by £45m to £150m for earnings per share of 7.4p and pencilled in a similar cut for 2019 with PBT of circa £200m with EPS of 9.8p.

"Looking into next year, the statement highlights the continued strategic progress, which we believe can drive material profit improvement over the medium term. Assuming a more normal trading environment we would expect some of this year’s shortfall to be recovered, although the winter is likely to be tougher," he wrote in a note to clients, expecting greater clarity at the prelims in November.

"The shares are undoubtedly cheap although we lower our recommendation from 'buy' to 'hold' until we get greater clarity over trading for Summer 2019."

Russ Mould at broker AJ Bell said: “Investors might legitimately ask why the firm wasn’t more conservative when it updated on trading at the end of July – surely it could have seen this coming. Worryingly the impact is continuing to be felt into Winter trading and all eyes now are likely to be on the guidance given for 2019 when the company reports its results for the 12 months to 30 September on 29 November.”

Analyst Neil Wilson at Markets.com said the 20%-plus fall in the shares was "perhaps an overreaction".

"The manner of these large share price moves whenever a company misses its numbers appears increasingly excessive, although we must note that profit warnings rarely come alone. We really need to wait to see how summer 2019 looks now to get a clear idea of where the company stands. Further improvements in Egypt and Turkey should help with the tough Spanish market."