Bakery food-on-the-go retailer Greggs’ (GRG) half year results are disappointing. Yet the bad news was already baked-in to the market’s expectations following a downgrades-inducing profit warning issued in May.
Growing consumer caution combined with extreme cold and then hot weather conditions conspired to crimp retail footfall and constrain Greggs; growth, yet shares in the value sausage rolls, coffees, doughnuts and salads seller stage a relief rally, bid up 10.6% to £10.63p as Greggs leaves full year guidance intact.
For the half to 30 June, Gregg’s underlying operating profit (stripping out property profits and a £1.9m restructuring charge) fell 7% to £25.7m, which is in fact below Shore Capital’s lowered £27.4m estimate. A reliably cash generative business, Greggs increases the interim dividend 3.9% to 10.7p.
‘Top line growth has been the issue for Greggs, with own store like-for-like (LFL) sales up by 1.5% in the period, a material slowdown on recent years,’ explains Shore Capital scribe Darren Shirley, reiterating his ‘hold’ rating on the shares. ‘The weaker LFL performance has resulted in a contraction in underlying margin of 70 basis points to 5.4% reflecting the impact of negative operational gearing in the business,’ he continues.
Yet Greggs’ CEO Roger Whiteside insists the baker ‘has delivered a resilient performance despite challenging market conditions and we have continued to make good progress with our strategic investment programme to transform the business into the customers’ favourite for food-on-the-go.’
Whiteside highlights continued growth in hot drinks, healthier choices, breakfast and hot food options, as well as strong demand for Greggs’ ever-popular value meal deals. Demonstrating how Greggs is moving with the times and consumer tastes, May even saw the launch of its first vegan product, the Mexican Bean Wrap.
COULD SALES BE FEELING THE HEAT?
Turning to the outlook statement, Greggs doesn’t provide a current like-for-like trading performance figure. This could be cause for concern given the prolonged baking conditions in the UK, since the Newcastle Upon Tyne-headquartered baker has traditionally struggled in very hot weather.
However, while Greggs remains ‘cautious in respect of the outlook for sales in the balance of the year given the consumer backdrop’, management expresses confidence ‘in the medium and long-term growth potential for the business, supported by customers’ response to our initiatives, our strong cash generation and the ongoing strategic investments that we are making.’
Crucially for sentiment this morning, ‘over the year as a whole we continue to believe that underlying profits (before exceptional costs) are likely to be at a similar level to 2017’, assures Greggs, although management does also caution on rising energy costs and the potential impact of hot conditions on commodity yields.
THE ANALYST’S TAKE
Kate Heseltine, analyst at Edison Investment Research, comments:
‘Greggs’ revamped summer menu and a wider choice of value meal deals appear to have caught the eye of the cost conscious consumer in the relentless heat. Following on from the heavy snow disruption earlier in the year, the company reported first half like-for-like sales growth of +1.5%, implying a stronger second quarter at around +1.8% compared with +1.3% in the first quarter.’
Heseltine also points out Greggs has ‘nudged downward its guidance for store openings in the current year, from 110-130 to about 100 net new openings. The emphasis for new outlets remains firmly focused on locations that capture work, travel and leisure-related footfall, thus reducing the chain’s high street exposure. To that effect Greggs has continued to branch out into locations such as Westminster Tube station, Birmingham New Street and East Midlands Airport, and its two drive thru sites are trading well.
‘Innovative new product categories such as hot food and drinks and healthier options are helping to expand the brand’s appeal and offers such as the £2 “pizza slice & drink” after 4pm are driving in dayparts outside the traditional lunchtime rush.'
