Continued strong like-for-like sales growth

Greggs 1 October 2019 Update
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Greggs

Continued strong like-for-like sales growth

Q3 trading update

Retail

1 October 2019

Price

1,870p

Market cap

£1,892m

Net cash at 30 June 2019 (£m)

85.9

Shares in issue

100.7m

Free float

100%

Code

GRG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.8

(9.4)

95.9

Rel (local)

1.3

(10.1)

99.5

52-week high/low

2,476p

1,006p

Business description

With 2,009 shops, eight manufacturing and distribution centres and 23,000 employees, Greggs is the UK’s leading ‘food-on-the-go’ retailer. It uses vertical integration to offer differentiated products at competitive prices.

Next events

Q4 trading update

January 2020

Analysts

Russell Pointon

+44 (0)20 3077 5757

Sara Welford

+44 (0)20 3077 5700

Greggs is a research client of Edison Investment Research Limited

Greggs’ trading continues to be impressive, with better-than-expected like-for-like revenue growth in Q319 of 7.4% (against tougher comparatives) offset by lower-than-expected new space growth. In aggregate, trading is in line with expectations, therefore our forecasts and valuation are unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

960.0

81.8

63.5

32.3

29.4

1.7

12/18

1,029.3

89.8

70.3

35.7

26.6

1.9

12/19e

1,156.9

107.9

84.0

44.4

22.3

2.4

12/20e

1,236.3

115.8

91.7

48.7

20.4

2.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Total revenue growth in line with expectations

Greggs’ Q319 company-managed store like-for-like revenue growth of 7.4% (after 10.5% in H119) is slightly ahead of management’s expectations at the interim results, ie a two-year growth rate of c 10%, which implied growth for Q319 of c 6.5%. This is attributed to ongoing strength in customer numbers due to product innovation. The contribution from new store growth is slightly behind expectations with 56 net new openings year to date, due to slightly slower growth from franchise partners, although this is down to phasing and these openings will happen in FY20. As a result, the company expects around 90 net openings in FY19, versus the 100 expected at the interims.

New initiatives and trials progressing well

Greggs is at the start of trials for extended opening hours with c 60 stores open (from zero at the interims) until 9pm (6pm previously), which will extend to c 100 stores by the year end. The hot food range continues expanding to capitalise on the investment in hot food cabinets, with returning old favourites in the autumn range (spicy chicken and pepperoni bake) complemented by new additions including a hot peri peri chicken baguette. The online delivery trials with JustEat and Deliveroo are described as encouraging and the new distribution centre will be commissioned before the year end, as expected.

Forecasts: Continue to assume moderating growth

Our forecasts for FY19 and FY20 are unchanged with the better-than-expected like-for-like performance offsetting the lower-than-expected new space performance and no changes to input cost inflation assumptions. We continue to assume a moderation in the rate of like-for-like growth to 4% in Q419, against tougher comparatives and a 30bp deterioration in gross margin in H219 given input cost inflation flagged at the interims.

Valuation: No change to our DCF-based valuation

Our DCF-based valuation remains unchanged from 2,028p, which was updated at the interim results. This implies a P/E for FY19 and FY20 of 24.1x and 22.1x.

Exhibit 1: Financial summary

December

£m

2017

2018

2019e

2020e

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

960.0

1,029.3

1,156.9

1,236.3

Cost of Sales

(348.1)

(373.4)

(409.4)

(434.8)

Gross Profit

611.9

655.9

747.6

801.6

EBITDA

 

 

135.7

145.7

226.8

241.0

Operating Profit (before amort. and except.)

 

 

82.2

89.8

114.7

123.7

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

107.7

121.5

Net Interest

(0.4)

(0.0)

(6.8)

(7.9)

Profit Before Tax (norm)

 

 

81.8

89.8

107.9

115.8

Profit Before Tax (FRS 3)

 

 

71.9

82.6

100.9

113.6

Tax

(16.9)

(18.2)

(22.0)

(21.9)

Profit After Tax (norm)

64.9

71.6

85.9

93.8

Profit After Tax (FRS 3)

56.9

65.7

80.2

94.0

Average Number of Shares Outstanding (m)

100.6

100.7

100.7

100.8

EPS - normalised fully diluted (p)

 

 

63.5

70.3

84.0

91.7

EPS - (IFRS) (p)

 

 

56.5

65.3

79.7

93.3

Dividend per share (p)

32.3

35.7

44.4

48.7

Gross Margin (%)

63.7

63.7

64.6

64.8

EBITDA Margin (%)

14.1

14.2

19.6

19.5

Operating Margin (before GW and except.) (%)

8.6

8.7

9.9

10.0

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

120.5

136.0

Stocks

18.7

20.8

22.7

24.8

Debtors

33.4

31.6

38.0

42.3

Cash

54.5

88.2

59.8

68.8

Other

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(127.9)

(145.1)

(201.7)

(204.1)

Creditors

(127.9)

(145.1)

(201.7)

(204.1)

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

342.7

380.8

CASH FLOW

Operating Cash Flow

 

 

134.5

152.2

164.4

174.6

Net Interest

0.2

0.2

0.0

0.0

Tax

(17.6)

(16.1)

(20.7)

(29.9)

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)

(47.7)

Net Cash Flow

8.5

33.7

(28.4)

9.1

Opening net debt/(cash)

 

 

(46.0)

(54.5)

(88.2)

(59.8)

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)

(59.8)

(68.8)

Source: Company data, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Greggs and prepared and issued by Edison, in consideration of a fee payable by Greggs. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Greggs and prepared and issued by Edison, in consideration of a fee payable by Greggs. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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