Bakery retailer Greggs (GRG) softened by 6% to 492.5p today as the iconic British brand posted downbeat figures for 2012 and served up news of a poor start to 2013. Sentiment towards the value sandwiches-to-sausage rolls seller soured further after the company warned investment would hold back profits growth this year, prompting analysts to downgrade their numbers.


Unveiling his first set of results, recently-appointed (24 Jan) chief executive officer (CEO) Roger Whiteside, the former Punch Taverns (PUB) boss who took over the reins from Ken McMeikan in February, said like-for-like sales (stripping out the effect of new stores) were down 4% over the first 11 weeks of the current fiscal year.


Consumer incomes remain under pressure, while a snow-impacted January proved unhelpful in terms of the retailer's same-store performance metrics. Whiteside also warned a ramp up in investment in store refits across the core estate, where Greggs is investing in new formats such as 'food on the go' and 'local bakery', would hit like-for-like performance 'in the short term due to increased shop closure periods.'


Results for the year to 29 December, a testing period in which Greggs faced 'pasty-tax' concerns and received numerous downgrades, had already been flagged in the 9 January trading update and as such contained no major surprises. Total sales grew 4.8% to a record £735 million driven by new shop openings and new business channels, notably wholesaling but also franchising. Like-for-like sales were down 2.7%, impacted by declining High Street footfall and the effect of persistent downpours on the weather-sensitive retailer's revenues.


Taxable profits fell 2.2% to £51.9 million, with margins under pressure as Greggs absorbed commodity cost and wage inflation and invested in promotions. Copiously cash-generative Greggs raised the twice-covered dividend by just 1% to 19.5p, relatively disappointing given last year's 6% hike, yet representing a 28th consecutive year of dividend growth nonetheless.


Greggs' strategy for 2013 has been tweaked by Whiteside, with investment behind the core estate rising and lower rates of new openings. Yet the absence of any dramatic overhaul by the new boss suggests Greggs' traditionally resilient model isn't fundamentally flawed, while its strong balance sheet and cash-generation mean it can invest in growing like-for-like sales and margins long-term.


Last year, the £531.1 million cap delivered a net increase of 100 shops, taking the year-end total to 1,671 outlets. As well as investing in its existing store chain, the retailer is pushing into new growth markets in partnership with Iceland and Moto Hospitality. Through the former, Greggs is now successfully competing in the 'bake at home' market through the sale of frozen sausage rolls, pasties, pies and desserts.


Last year's openings included 10 franchised shops in motorway service stations in partnership with Moto. Significantly, almost half of the net new openings were away from the troubled high street in locations ranging from retail and industrial parks to motorway service and railway stations.


City reaction to Greggs' results is somewhat mixed. 'We expect a fall back following today's outlook statement', writes Sanjay Vidyarthi at Espirito Santo, who maintains his 'neutral' stance and 450p fair value target. 'The balance sheet is strong (2.1x fixed charge cover) and we think that Greggs has a sensible strategy in place, albeit it will take time to return to an earnings growth trajectory, given the headwinds on the high street.'


Patrick Coffey at Liberum Capital has a 'sell' rating on the shares, as he continues 'to see limited good news on the horizon.' The analyst also notes that 'the bulls were hoping for a strategic review from Mr Whiteside this morning but we understand there will be no major review until the H1 13 results later this year.'

Issue Date: 20 Mar 2013