Interim results: Growth and development continue
Greggs has reported good trading progress in the first half year, indicating that its strategy is working successfully.
Total sales of £452.9m grew by 7.3%, which compares well against 2016 full-year growth of 7.0%, and like-for-like sales grew 3.4% against 4.2% in FY16. Management feels that, with the majority of its stores now trading under a food-on-the-go format, underlying sales growth has settled into a range of between 3% and 4%, with external conditions including weather responsible for variations within that.
The company reports continuing development of its chosen market of food-on-the-go, and is progressively less dependent on traditional shopping locations, giving it the potential to decouple from general retail weakness. Greggs reports increasing demand for its hot sandwich range and continued growth in its breakfast and coffee offers, as well as in its traditional ranges of savoury foods.
Operating profit before exceptionals and property gains, at £27.6m, was slightly ahead of last year. This is better than guidance for FY17 as a whole, which was for a flat performance.
Exhibit 1: Group sales and profit
£m |
H117 |
H116 |
Change |
Sales |
452.9 |
422.0 |
7.3% |
Operating profit before property and exceptional items |
27.6 |
27.2 |
1.8% |
Property disposal gains |
0.3 |
2.2 |
|
EBIT before exceptionals |
27.9 |
29.4 |
-5.1% |
Net exceptional charge |
(8.3) |
(4.0) |
|
Finance income |
(0.1) |
0.0 |
|
Profit before taxation |
19.4 |
25.4 |
-23.7% |
Despite that slight over performance, management regards trading as being on expectation and the outlook for the year is unchanged.
Greggs’ continued sales growth suggests that its blend of quality and value is going down well with price-conscious consumers. In addition, gross margin has improved 10bp over a year ago, which reflects some pricing and menu mix action to counteract ingredient costs, which increased 7% in the first half. That increase was driven by dairy and protein products and is likely to be a peak, with forward cover over food costs giving visibility of food inflation for the full year of between 6% and 7%.
Distribution and selling costs as a percentage of sales rose by 70bp, with wage inflation running at 3.3% and the Apprenticeship Levy, introduced in April, adding around a further 0.3% to the wage bill, we estimate. After some reductions in administrative costs, which rose in H116 on systems implementations, EBIT margin before property and exceptionals was down 30bp at 6.1%.
Exhibit 2: Margin analysis
|
H117 |
H116 |
Sales, £m |
452.9 |
422.0 |
Gross margin |
63.3% |
63.2% |
Distribution & selling costs |
-51.5% |
-50.8% |
Admin expenses |
-5.7% |
-6.0% |
EBIT before property and exceptional items |
6.1% |
6.4% |
Property disposal gains |
0.1% |
0.5% |
EBIT pre-exceptional items, £m |
27.9 |
29.4 |
Operating margin |
6.2% |
6.9% |
Property disposal gains of £2.2m in H116, which were abnormally large, were the main reason for pre-exceptional EBIT of £27.9m being 5% lower than last year.
Exceptionals and restructuring
Net exceptionals amounted to £8.3m in the first half. These form part of the previously flagged £100m multi-year change programme to reshape the manufacturing and logistics operations within Greggs. The major element of that consisted of unavoidable redundancy costs of £7.4m with asset-related and other costs and credits forming the balance. The planned closure of the Edinburgh bakery site was completed in April, with production and logistics activities transferred to Glasgow. Greggs has invested in the Glasgow site with additional work being located there, including the first consolidated manufacturing platform for the production of Yum Yums. In the second half a further consolidated manufacturing operation for cakes and muffins is planned to open in Leeds.
Future expansion potential
Greggs is not short of market opportunities. These exist over a number of areas:
•
Geographical: Greggs is opening its first units in areas of the country it has not previously traded in at all, such as Devon and Northern Ireland.
•
The company is progressing in moving its location base off the high street. It now stands at 70:30 high street to non-high street, down from 80:20 against a target of 60:40.
•
As Greggs’ brand shakes off its downmarket image, it is noticing that it is being invited into shopping developments by landlords who would previously have regarded it as unattractive.
•
With early examples of new formats, such as its first drive-through and a presence at airports, the company is expanding the scope of its market.
•
It is clear that Greggs’ initiatives in the breakfast and coffee markets have been a success. Eventually there is no reason why the company should not expand into the evening market, which would represent a major advance in utilising its asset. Not all locations would be suitable, but for example McDonalds already occupies a market in selective locations in the evening market, and similar locations could be suitable for the Greggs brand. The company is already progressing along this road with current menu developments, particularly in hot food. The operating structure can already handle units that trade at non-standard trading hours, for example at airports, or at Victoria Coach Station where it trades to 11pm. There is, however, a bigger job of transition to do in terms of market perceptions, and this should not be seen as a short-term development.
