Greggs |
‘A very strong finish to a spectacular year’ |
Q419 trading update |
Retail |
8 January 2020 |
Share price performance
Business description
Next events
Analysts
Greggs is a research client of Edison Investment Research Limited |
Greggs finished 2019 with accelerating revenue growth. It continues to benefit from increasing customer growth as the brand strengthens and it takes share in the ‘food-on-the-go’ market. With increased cost pressures, management remains confident of mitigating these through ongoing business efficiencies and select price increases, where possible, and some one-off benefits. Our forecasts, which are at the high end of consensus, are broadly unchanged. Our DCF-based valuation is 2,096p.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
960.0 |
81.8 |
63.5 |
32.3 |
38.0 |
1.3 |
12/18 |
1,029.3 |
89.8 |
70.3 |
35.7 |
34.3 |
1.5 |
12/19e |
1,171.6 |
112.7 |
87.7 |
46.4 |
27.5 |
1.9 |
12/20e |
1,251.2 |
119.1 |
94.4 |
50.2 |
25.5 |
2.1 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Q4 revenue growth accelerated again
The trading update for Q419 indicated an acceleration in revenue growth through the period against comparatives that became tougher. The reported l-f-l revenue growth for Q419 of 8.7%, in company-managed stores, follows 8.3% for the first six weeks of the quarter, and is against a comparative of 5.2% in Q418. The drivers of growth continue to be increased numbers of customers who are attracted to the stores given the product innovations and increased convenience. To celebrate the very strong growth, management has announced a one-off bonus for staff of £7m, c £300 per employee. Given the strong FY19 revenue performance, management expects FY19 underlying profit to be slightly higher than previous expectations.
Outlook for FY20
As expected, management highlights the cost headwinds from the National Living Wage increase from 1 April 2020 and the cost of pork, which has risen significantly and has been a headwind through H219. The National Living Wage increase of 6.2%, mainly for store staff, represents total staff cost inflation of c 4.5% in FY20 versus c 4% in a typical year. Further guidance on the outlook for pork inflation will be given at the preliminary results in March as the market is volatile, making it difficult to fix prices. The company is operating with price visibility of roughly three months versus 4-6 months typically. Management remains confident of mitigating cost inflation through business efficiencies and selective price inflation, as in previous years, as well as c £10m of benefits from costs for initiatives in FY19, including the £7m bonus above, that will not recur or will start to contribute revenue.
Valuation: Forecasts and valuation unchanged
Our profit forecasts for FY19 and FY20, at the high end of consensus, remain broadly unchanged. For FY19, the revenue uplift from the better revenue performance in Q4 is offset by the new bonus. For FY20, we lower our gross margin assumption by 40bp to a decline of 30bp y-o-y, offset by the higher revenue and cost mitigation. Our DCF-based valuation of 2,096p is broadly unchanged.
Exhibit 1: Financial summary
£m |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
960.0 |
1,029.3 |
1,171.6 |
1,251.2 |
Cost of Sales |
(348.1) |
(373.4) |
(414.6) |
(447.0) |
||
Gross Profit |
611.9 |
655.9 |
756.9 |
804.2 |
||
EBITDA |
|
|
135.7 |
145.7 |
231.5 |
244.3 |
Operating Profit (before amort. and except.) |
|
|
82.2 |
89.8 |
119.5 |
127.0 |
Intangible Amortisation |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
(9.9) |
(7.2) |
(7.0) |
(2.2) |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Operating Profit |
72.3 |
82.6 |
112.5 |
124.8 |
||
Net Interest |
(0.4) |
(0.0) |
(6.8) |
(7.9) |
||
Profit Before Tax (norm) |
|
|
81.8 |
89.8 |
112.7 |
119.1 |
Profit Before Tax (FRS 3) |
|
|
71.9 |
82.6 |
105.7 |
116.9 |
Tax |
(16.9) |
(18.2) |
(23.0) |
(22.6) |
||
Profit After Tax (norm) |
64.9 |
71.6 |
89.7 |
96.5 |
||
Profit After Tax (FRS 3) |
56.9 |
65.7 |
84.0 |
96.8 |
||
Average Number of Shares Outstanding (m) |
100.6 |
100.7 |
100.7 |
100.8 |
||
EPS - normalised fully diluted (p) |
|
|
63.5 |
70.3 |
87.7 |
94.4 |
EPS - (IFRS) (p) |
|
|
56.5 |
65.3 |
83.4 |
96.1 |
Dividend per share (p) |
32.3 |
35.7 |
46.4 |
50.2 |
||
Gross Margin (%) |
63.7 |
63.7 |
64.6 |
64.3 |
||
EBITDA Margin (%) |
14.1 |
14.2 |
19.8 |
19.5 |
||
Operating Margin (before GW and except.) (%) |
8.6 |
8.7 |
10.2 |
10.1 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
334.7 |
347.5 |
661.6 |
706.1 |
Intangible Assets |
14.7 |
16.9 |
18.1 |
18.7 |
||
Tangible Assets |
319.2 |
330.5 |
643.4 |
687.2 |
||
Investments |
0.8 |
0.2 |
0.2 |
0.2 |
||
Current Assets |
|
|
106.6 |
140.6 |
126.0 |
143.2 |
Stocks |
18.7 |
20.8 |
23.0 |
25.5 |
||
Debtors |
33.4 |
31.6 |
38.5 |
42.8 |
||
Cash |
54.5 |
88.2 |
64.4 |
74.8 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Liabilities |
|
|
(127.9) |
(145.1) |
(203.4) |
(207.8) |
Creditors |
(127.9) |
(145.1) |
(203.4) |
(207.8) |
||
Short term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(14.0) |
(13.8) |
(237.8) |
(257.3) |
Long term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other long term liabilities |
(14.0) |
(13.8) |
(237.8) |
(257.3) |
||
Net Assets |
|
|
299.4 |
329.2 |
346.5 |
384.2 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
134.5 |
152.2 |
170.0 |
179.6 |
Net Interest |
0.2 |
0.2 |
0.0 |
0.0 |
||
Tax |
(17.6) |
(16.1) |
(21.7) |
(30.9) |
||
Capex |
(72.6) |
(66.6) |
(100.0) |
(88.0) |
||
Acquisitions/disposals |
2.2 |
1.7 |
0.0 |
0.0 |
||
Financing |
(6.0) |
(4.7) |
0.0 |
0.0 |
||
Dividends |
(32.2) |
(33.1) |
(72.1) |
(50.3) |
||
Net Cash Flow |
8.5 |
33.7 |
(23.8) |
10.4 |
||
Opening net debt/(cash) |
|
|
(46.0) |
(54.5) |
(88.2) |
(64.4) |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
0.0 |
0.0 |
0.0 |
(0.0) |
||
Closing net debt/(cash) |
|
|
(54.5) |
(88.2) |
(64.4) |
(74.8) |
Source: Company accounts, Edison Investment Research
|
|