Promising performance, strengthened proposition

Greggs 22 May 2017 Update
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Greggs

Promising performance, strengthened proposition

AGM trading statement

Retail

22 May 2017

Price

1,072.00p

Market cap

£1,084m

Net cash (£m) at 31 December 2016

46.0

Shares in issue

101.2m

Free float

100%

Code

GRG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.8)

4.5

(2.5)

Rel (local)

(6.0)

1.5

(20.4)

52-week high/low

1139.0p

884.0p

Business description

With over 1,790 shops, nine regional bakeries and 19,500 employees, Greggs is the UK’s leading ‘bakery food-on-the-go’ retailer. It utilises vertical integration to offer differentiated products at competitive prices.

Next events

Interim results

August 2017

Interim management statement

September 2017

Analysts

Paul Hickman

+44 (0)20 3681 2501

Neil Shah

+44 (0)20 3077 5715

Greggs is a research client of Edison Investment Research Limited

Greggs has traded strongly for the first 19 weeks, and self-help measures such as refurbishments, openings, manufacturing rationalisation and product development continue to offer potential. Whether switching customers would be a net benefit in a consumer squeeze is uncertain, but the proposition is considerably stronger than when real wages were last negative. We retain our forecasts and valuation.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

835.7

73.0

57.3

28.6

18.7

2.7

12/16

894.2

80.3

62.0

31.0

17.3

2.9

12/17e

944.2

80.8

63.4

32.2

16.9

3.0

12/18e

1,000.9

83.9

66.6

34.2

16.1

3.2

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

Trading statement: Promising results at 19 weeks

Trading progress for the first 19 weeks was promising with buoyant like-for-like sales growth of 3.6%. The good performance was attributable to favourable conditions, a late Easter, the c 50% adoption of the central stock forecasting and replenishment system, and the continuing success of the value product offer.

Estate improvements and strategic rationalisation

There was substantial estate development, with 87 refurbishments and net openings of 28 stores, which management regards as on track for the planned 100 for the year. The consultation process for the proposed rationalisation of manufacturing sites has concluded, while investment in the supply chain is continuing on plan.

First-half cost bias

Management estimates food cost inflation at 6-7%, while the new stock forecasting and replenishment system is temporarily increasing training and wastage costs. These factors are likely to add c £1m to first-half costs, which could take interim PBT lower than in 2016. However, in the second half there is forward cover over c 50% of food and energy costs, and initial costs of the stock system should fall away, while savings are extended. Savings on the manufacturing rationalisation should also start to flow within the year. As a result, we hold our forecasts.

Negative real wages for the March quarter confirms our lacklustre view of the retail environment in 2017. If the trend continues, we do not assume that Greggs will derive a net benefit from customers trading down from higher-priced offers. However, further progress on refurbishments and product development has strengthened the prospects.

Valuation: No change

As our valuation is based on a DCF projection, extending our forecasts, which are unchanged, we make no change to our existing valuation of 1,226p per share.

AGM trading statement: Good progress at 19 weeks

In its first trading statement of the year, Greggs has reported promising progress for the initial 19 weeks. Total sales grew by 7.5%, stronger than at the same stage last year (5.7%), and like-for-like sales growth was comparable at a buoyant 3.6% (2016: 3.7%). Given that the first eight weeks (reported with prelims) saw like-for-like sales growth of 2.0%, this implies growth in the following 11 weeks of close to 5%.

Factors behind the good performance were:

Favourable conditions: the generally calm and dry weather in March and April resulted in more customer footfall than at the same stage in 2016.

Date of Easter: the relatively late date of Easter in mid-April also meant that more people were out and about in warmer temperatures with time to shop. In fact, Easter 2016 also corresponded with some unusually wet weather.

Forecasting and replenishment system: Greggs is progressing on the introduction of its central order replenishment system driven by store stock counts, which now operates in c 50% of stores. This is proving to be more effective than the previous procedure at store level, resulting in greater availability of product lines at the right times, and is therefore driving sales.

Product offer: increasingly, the food-on-the-go focus of Greggs’ offer is resonating with customers interested in value. The attraction to workers, as opposed to shoppers, is evident from the fact that sales before 9am are growing in double digits year-on-year. Costa has recently introduced an offer of a £1 bacon roll with a coffee, but given that its coffee is typically priced at c £2.50, this package does not compete on price with Greggs’ £2 breakfast package offer.

While there was inevitably a price component to the like-for-like performance, we understand that volume growth remains a significant element of the total.

Estate investment: Continuing on course

There were 87 store refurbishments in the first 19 weeks. The company opened 22 managed stores, which suggests later phasing of the balance of the 110 planned for the year. However, with 20 franchised openings and 14 closures, management is confident of reaching its planned 100 net openings for the year.

Strategic changes show good progress

Good progress has been made, with the conclusion of the consultation process involving staff affected by the proposed rationalisation of manufacturing sites. When complete, these will see the number of bakeries reduce from nine to two. Investment in the supply chain is continuing on plan: for example, all Greggs’ Yum Yums are now distributed from Glasgow, and similar manufacturing platforms will be rolled out for other products.

Cost management

In common with all food retail operations, Greggs faces input cost pressures, in part currency driven. In February management guided these at 6-7% of food cost for 2017, driven mainly by dairy, meat and fish, with c 3% wage inflation.

In addition, the introduction of the new stock forecasting and replenishment system is having two one-off effects in the first half:

there is a disproportionate training cost, which we expect to reduce as sites using the system accelerate to 100%; and

introduction of the system, while driving higher sales through better planned stocking, has increased end-of-day wastage. It should be possible to fine-tune stock management to achieve the best of both elements.

In total, we estimate that these factors are likely to add c £1m to first-half costs, which could mean that first-half PBT is lower than in 2016. However, in the second half there is contractual cover extending to c 50% of food and energy costs, and additional costs relating to the stock forecasting and replenishment system should fall away, while resulting cost savings are extended. With the good progress on bakery closures, we can also expect resulting cost savings to begin to come through within the year.

Forecasts: No change, but value proposition could do well

As a result of the above, we are not changing our profit forecasts. However, we remain vigilant on disposable income given that average wages in the UK for the three months to March were up 2.1%, less than UK inflation of 2.7% in April (source: ONS), meaning that real wage inflation is negative for the first time since 2014.

Whether the continuation of such a trend is likely to be negative for Greggs’ revenue line is a moot question. On the downside, the pyramidal shape of markets means that any consumer multi-site operation whose market becomes challenged logically has more customers trading down from it than to it. Customer reactions could be to visit the stores less frequently, relying for instance on home-prepared sandwiches, or to spend less during each visit, foregoing treats such as desserts or drinks.

On the other hand, the progress of transforming the estate is now much further advanced than the last period when real wages were negative, which spanned the years 2009-14. During the years 2012-14, around 30% of the stores were refurbished using food-on-the-go templates, and like-for-like managed store sales turned round from 0.8% negative in 2013 to 4.5% positive in 2014.

Up to the present, approaching 60% of the estate has been refurbished on those lines, excluding new openings, which have also been on the contemporary formats. In addition, significant progress has been made on making customer choices more attractive, including the development of the Balanced Choice range with healthy wraps and salads, cold-pressed juice drinks and the breakfast offer. Therefore we believe that the proposition as a whole represents a much more attractive offer to the cost-conscious customer than it did three to four years ago.

Valuation: No change

Our valuation of Greggs’ shares is based on a DCF projection, the basis of which was fully explained in our March 2017 note Successful strategy offers further potential. Since currently our forecasts are unchanged, we make no change to our existing valuation of 1,226p per share.

Exhibit 1: Financial summary

£m

2013

2014

2015

2016

2017e

2018e

Dec

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

762.4

806.1

835.7

894.2

944.2

1,000.9

Cost of Sales

(305.9)

(304.8)

(305.1)

(324.3)

(346.2)

(367.0)

Gross Profit

456.5

501.3

530.6

569.9

598.0

633.9

EBITDA

 

 

74.9

95.6

113.3

125.9

131.4

138.3

Operating Profit (before amort. and except.)

41.5

58.1

73.1

80.3

81.4

84.0

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(8.1)

(8.5)

0.0

(5.2)

(12.0)

(6.6)

Other

0.0

0.0

0.0

0.0

0.0

0.0

Operating Profit

33.4

49.6

73.1

75.2

69.4

77.4

Net Interest

(0.2)

0.2

(0.1)

(0.0)

(0.6)

(0.0)

Profit Before Tax (norm)

 

 

41.3

58.3

73.0

80.3

80.8

83.9

Profit Before Tax (FRS 3)

 

 

33.2

49.7

73.0

75.1

68.8

77.3

Tax

(10.3)

(14.0)

(15.4)

(18.1)

(17.2)

(17.0)

Profit After Tax (norm)

30.9

44.3

57.6

62.3

63.6

66.9

Profit After Tax (FRS 3)

24.2

37.6

57.6

58.0

54.2

61.7

Average Number of Shares Outstanding (m)

100.4

100.5

100.6

100.4

100.4

100.4

EPS - normalised (p)

 

 

30.8

44.0

57.3

62.0

63.4

66.6

EPS - normalised and fully diluted (p)

 

30.5

43.4

55.8

60.8

62.2

65.4

EPS - (IFRS) (p)

 

 

24.1

37.4

57.3

57.7

54.0

61.4

Dividend per share (p)

19.5

22.0

28.6

31.0

32.2

34.2

Gross Margin (%)

59.9

62.2

63.5

63.7

63.3

63.3

EBITDA Margin (%)

9.8

11.9

13.6

14.1

13.9

13.8

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

5.4

7.2

8.7

9.0

8.6

8.4

BALANCE SHEET

Fixed Assets

 

 

268.9

267.4

298.2

323.4

358.4

374.1

Intangible Assets

1.0

4.7

10.2

14.3

17.5

20.5

Tangible Assets

267.8

262.7

284.2

307.4

339.2

351.8

Investments

0.1

0.0

3.8

1.8

1.8

1.8

Current Assets

 

 

65.0

101.5

86.0

92.6

88.3

108.9

Stocks

15.4

15.3

15.4

15.9

17.0

18.0

Debtors

25.0

26.1

27.6

30.7

30.1

31.9

Cash

21.6

43.6

42.9

46.0

41.2

58.9

Other

3.0

16.5

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(80.7)

(102.1)

(106.0)

(121.4)

(128.8)

(134.4)

Creditors

(80.7)

(102.1)

(106.0)

(121.4)

(128.8)

(134.4)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(17.0)

(20.1)

(11.9)

(29.9)

(29.1)

(28.7)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(17.0)

(20.1)

(11.9)

(29.9)

(29.1)

(28.7)

Net Assets

 

 

236.2

246.7

266.3

264.7

288.9

319.8

CASH FLOW

Operating Cash Flow

 

 

82.5

108.6

119.6

133.8

127.4

136.2

Net Interest

(0.0)

0.2

0.2

0.1

(0.6)

(0.0)

Tax

(13.2)

(11.5)

(15.9)

(16.2)

(14.6)

(15.7)

Capex

(48.6)

(48.3)

(71.8)

(80.1)

(85.0)

(70.0)

Acquisitions/disposals

0.2

(4.8)

18.1

4.7

0.0

0.0

Financing

0.9

(2.6)

(7.2)

(8.3)

0.0

0.0

Dividends

(19.6)

(19.6)

(43.7)

(30.9)

(32.0)

(32.7)

Net Cash Flow

2.2

22.0

(0.7)

3.0

(4.8)

17.7

Opening net debt/(cash)

 

 

(19.4)

(21.6)

(43.6)

(42.9)

(46.0)

(41.2)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.0)

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(21.6)

(43.6)

(42.9)

(46.0)

(41.2)

(58.9)

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Greggs and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Greggs and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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