Weather-sensitive bakery retailer Greggs (GRG) feels the heat this morning, with shares 7.2% softer at 410p on weaker-than-expected interims and further downgrades triggered by the July heatwave. However new chief executive officer Roger Whiteside has used the interim statement to outline strategic changes to reshape the business and revive growth.


Web chart - Greggs - Aug 2013


Greggs continues to struggle against low footfall on the structurally-challenged High Street, with negative operational gearing from weak like-for-like sales weighing on profits. Today's half-year results to end-June from the value sandwiches-to-sausage rolls seller are disappointing, with taxable profits down 29% to £11.4 million due to a 2.9% fall in like-for-like revenues. This partly reflects cold weather at the start of the year as well as deteriorating operating margins.


While the £448 million cap's second-quarter performance showed signs of improvement with the rate of like-for-like sales decline moderating to 1.3%, trading over the first five weeks of the third-quarter to 3 August has not been as good. Like-for-like sales were down 3.2% in the period. Though retailers selling sandals, sun cream and barbecue foods benefited from a balmy July, punters avoided Greggs' stores and when they did pop in, opted for lower margin cold drinks rather than hot pasties and sausage rolls.


Whiteside, who hopped into the hot seat in March, has announced a number of initiatives to refocus the business and reinvigorate organic sales growth. Greggs will focus on its core 'food on the go' customers, where it hopes to grab a greater slice of a £6 billion market growing at 9% per annum by leveraging its heritage in fresh bakery.


Furthermore its two separate shop formats – 'Local bakery' and 'Food on the go' – are to be unified into one new format called 'Bakery food on the go' which will serve as the template for refurbishments going forwards. With new markets no longer a priority, Whiteside says the wholesale 'bake at home' business with Iceland won't be expanded to other customers, while the coffee shop concept 'Greggs Moment' will no longer be rolled out. The retailer's partnership with Moto, which sees 21 of Greggs' 1,690 shops operated under licence in motorway service stations, continues to progress well however and the CEO says 'we intend to work together to extend the Greggs offer to more Moto locations in the coming months’.


Full-year profits are now likely to be £3 million lower than market expectations which were already lowered following a severe profits warning at the end of April blamed on poor weather and heavy promotions. N+1 Singer slashes its 2013 profits estimate by a further £4.5 million to £40.1 million, a result which will see profits dropping by £10.8 million year-on-year.


'Given the next 2-3 years will be spent reshaping the business and upgrading processes/systems (at a cost), we have opted to aggressively low-ball our FY14-FY15 numbers also (13/17% downgrades) to effectively assume flat 3-year profitability', writes the broker, also paring profit estimates to £40.3 million and £41 million for 2014 and 2015 respectively.


N+1 Singer does however note that this aggressive cut 'should represent the end of the downgrade cycle' while based on its expectations of a maintained 19.5p dividend, Greggs does offer an attractive dividend yield of 4.8%.

Issue Date: 06 Aug 2013