Mr Kipling cakes-to-Bisto gravy maker Premier Foods (PFD) warns first half profits will be lower than last year, blaming warmer weather in September for 'materially lower sales' in its grocery business.

Investors are blowing raspberries at this weak weather excuse and the share price sours 14.4% (7.5p) to 44.75p accordingly. One minor crumb of comfort is full year profit expectations remain unchanged (for now) 'due to the careful management of costs', though investors should always be wary when a company has lots to do in its second half in order to make up the numbers.

In a downbeat second quarter update, CEO Gavin Darby flags a sharp 5.4% decline in overall sales to £172.5 million for the 13 weeks ended 1 October, dragging first half revenue down by 1.8%. While Premier Foods' sweet treats and international businesses performed well in Q2, branded grocery sales slumped 9.5% year-on-year (dire performers being the gravy and stocks and the desserts categories), a slump blamed on the heat of the second equal warmest September on record.


'We remain very confident in our strategic progress, our customer relationships are strong and we have an extensive new product innovation programme planned for the balance of the year,' insists Darby, whose decision to oversee the rejection of three takeover offers from US spice giant McCormick & Co (MKC:NYSE) this year will now come under additional heavy scrutiny.

'We expect Group sales to grow between 2-4% in the second half of the year and our profit expectations for the full year remain unchanged,' he adds.

Shares has consistently expressed a negative stance on the Ambrosia custard-to-Cadbury cake maker, our primary concern being Premier's plump debt pile. In a scathing note issued this morning, Shore Capital downgrades its rating from 'buy' to 'hold', questioning the strategic wisdom of slashing marketing budgets to hit annual numbers, though the broker sticks with its full year estimates for pre-tax profits of £86.9 million and earnings of 8.4p.

'The group is expected to achieve current market expectations for profitability through a cut in costs, particularly marketing costs, which are now likely to be in-line with the prior year at circa £36m rather than the aspired £42-44m; an aspiration set our most recently at an investor visit to Ambrosia in Devon,' write analysts Clive Black and Darren Shirley.

'For choice, we believe this is absolutely the wrong strategic decision. The market can understand up to a point the impact of a hot September in the UK, albeit in Merseyside it was far from cat on a hot tin roof territory, and so a profit shortfall', they continue.

Premier Foods - OCT 16

'However, to our minds, Premier would have been much better seeing through its marketing plans and giving grounds to believe that an underlying sales growth rate can be achieved through pre-existing plans rather than doing so with less marketing support. As such, we have to question the robustness of the business’ capability to delivery 2-4% sales growth in the medium-term, an aspiration that has to be depleted as marketing support is materially cut.'

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Issue Date: 12 Oct 2016