- Profit warning sends shares 45% lower
- Cost inflation higher than anticipated
- Like-for-like sales slump
Fresh cream cakes specialist Cake Box (CBOX:AIM) has issued a profit warning for the year to 31 March 2023, sending the shares 45% lower to 91.1p on Wednesday.
Cake Box now expects full year profitability to be ‘significantly below’ market expectations. Darren Shirley, food retail analyst at Shore Capital, slashed his full year pre-tax profit estimate by 30% to £5.5 million after cutting his forecast by 7% in late June.
Shirley commented: ‘We do not seek to understate the disappointment that management has in announcing this update. The market will need to digest the new information.’
The company said trading since the end of June has become ‘significantly’ more challenging driven by higher than anticipated inflationary cost pressures.
While some cost increases have been passed on to franchisees, through a recent price increase, full year gross margins will be impacted.
STARK TURNAROUND IN FORTUNES
Additionally, franchisees’ sales have been lower than anticipated through July and August, resulting in a 2.8% decline in like-for-like sales at the half year stage.
The deterioration in trading has been abrupt. In late June the company reported ‘robust’ post year-end trading against tough comparatives. In the 10 months to 31 March like-for-like sales grew 12%.
Cake Box believes the summer heatwave combined with the cost of living crisis has impacted store footfall which seems credible, although the magnitude of the change has clearly caught management and investors by surprise.
SHORE CAPITAL VIEW
Shore Capital’s Shirley said he believes the extra cost pressures are broad-based although he highlights electricity costs, double-digit percentage increases in cream and distribution costs (principally fuel).
On a more positive note Shirley believes it is feasible for the company to return to profit growth in 2024 despite the depth of the current UK recession.
However, the analyst thinks it will take time to rebuild investor confidence given current downgrades and past accounting queries despite management actions to address the issues.
