Greggs PLC: announces strong FY-2018 performance

Newcastle upon Tyne / UK. (gs) British Greggs PLC, the leading bakery food-on-the-go retailer in the UK with more than 1’950 retail outlets throughout the country, announced its preliminary results for the 52 weeks ended 29 December 2018. Total sales climbed 7.2 percent to GBP 1,029.3 million (2017: GBP 960.0 million). «2018 was a year that tested the resilience of Greggs’ business model and demonstrated the benefits of our strategic investment programme», Chairman Ian Durant and Chief Executive Roger Whiteside said in their statement as follows.

2018 Financial highlights

  • Total sales up 7.2 percent to GBP 1,029.3 million (2017: GBP 960.0 million)
  • Company-managed shop like-for-like sales* up 2.9 percent (2017: 3.7 percent)
  • Operating profit excluding property profits** and exceptional items*** up 9.1 percent to GBP 89.1 million (2017: GBP 81.7 million)
  • Pre-tax profit excluding exceptional items*** GBP 89.8 million (2017: GBP 81.8 million)
  • Pre-tax profit GBP 82.6 million (2016: GBP 71.9 million)
  • Strong cash generation supporting investment programme and shareholder returns
  • Total ordinary dividend per share up 10.5 percent to 35.7 Pence (2017: 32.3 Pence)
  • Currently expect to declare special dividend with interim results

* like-for-like sales in company-managed shops (excluding franchises) with a calendar year’s trading history
** freehold property disposal gains of GBP 0.7 million in 2018 (2017: GBP 0.5 million)
*** exceptional pre-tax charge of GBP 7.2 million in 2018 (2017: GBP 9.9 million charge)

Strategic progress

  • Shop estate and product offer transformed over the last five years
  • Further developments in growth categories such as healthier options, hot drinks, breakfast and hot food
  • Brand reputation growing, driving reappraisal
  • 149 new shops opened, 50 closures (99 net openings); 1,953 shops trading at 29 December 2018
  • Goo progress investing in consolidated manufacturing operations, building logistics capacity to support around 2,500 shops

Current trading

  • Very strong start to the year
  • Company-managed shop like-for-like sales up by 9.6 percent in the seven weeks to 16 February 2019
  • Exceptional sales performance helped in part by publicity surrounding launch of the vegan-friendly sausage roll

«2018 was a year that tested the resilience of Greggs’ business model and demonstrated the benefits of our strategic investment programme. The first half was significantly impacted by extreme weather but once this returned to normal our underlying strengths helped us recover the lost ground and deliver results for the year that exceeded our expectations.

«Whilst there are significant uncertainties in the months ahead, Greggs has started 2019 in great form, helped in part by the publicity surrounding the launch of our vegan-friendly sausage roll. We hope to continue benefiting from this strong momentum during the first half of 2019 before facing stronger comparatives later in the year.  We have a strong financial position which we plan to use to invest in Greggs’ potential for further growth, whilst also delivering good returns for shareholders.»

Chairman Ian Durant’s statement

In 2018 Greggs once again demonstrated its resilience and capacity for growth, delivering record profits in a challenging retail environment, heavily impacted by extreme weather conditions. Alongside the robust trading performance, we continued to invest in our internal supply chain and systems, laying a strong foundation for further growth and efficiency.  I am proud that Greggs carries out its business in a responsible manner, aiming to deliver sustainable long-term growth for the benefit of all stakeholders.

Overview

Over the year as a whole Greggs performed robustly in 2018.  Sales were well ahead of last year, profit was above our expectations and the Company ended the year with a healthy cash balance.  This was achieved in a very uncertain economic environment with significant cost pressures and challenging trading conditions, whilst managing a major reorganisation and change programme in the internal supply chain. Trading conditions in the first half of the year were negatively affected by extremes of weather.  In the second half our performance picked up and we ended the year very strongly.

Our people and values

The Board recognises that 2018 was a year of significant change for many of Greggs’ employees.  We oversaw and engaged regularly with the exhaustive planning that went into the reorganisation of our manufacturing operations, designed to improve competitiveness and support further growth in the number of shops.  We tested the approach taken by management against our values and were pleased that the changes are being made without a need for compulsory redundancies.  Significant progress was also made on the multi-year project to enhance the systems that support our growing business. I would like to record my personal admiration and the thanks of the Board to our 23,000 colleagues who have coped with the many changes over the course of the year and delivered another great outcome for the Company and its shareholders.

Greggs prides itself on conducting its business in a responsible manner and the Board supports and challenges its agenda in this respect. We continued to support the work of the Greggs Foundation, which celebrated the opening of its 500th primary school Breakfast Club in 2018, and we are building on our environmental management programme with a target to reduce the use of single-use plastic across our operations in the year ahead.

Greggs’ success depends on its ability to attract and engage a talented and diverse workforce that understands the needs of its customers. The Board sets a strong example on gender balance and has encouraged the business in its journey to create a more inclusive workplace. Our Chief Executive Roger Whiteside has shown great personal leadership in this regard and I was delighted that this was recognised in The New Year Honours list, with Roger being awarded the Order of the British Empire for services to Women and Equality.

The Board

Greggs has enjoyed a period of stability on the Board and this has been helpful in ensuring continuity and consistency. We are, nevertheless, planning succession for Board Directors and have embarked on the recruitment of an Audit Committee Chair to succeed Allison Kirkby who will not be offering herself for re-election at the AGM, following her appointment to the Board of BT Group.  Allison has proved to be a warm and enthusiastic colleague over her six years on the Board, and has displayed passion and professionalism in equal measure.  We thank Allison for her contribution and wish her well in her future career.

In 2018 we continued to spend a significant amount of time overseeing the major investments being made in our internal supply chain and the associated change management programme. It was appropriate therefore that the Board held one of its meetings at our Leeds bakery, affording an opportunity for us to see for ourselves the investments being made to create a centre of excellence for small cakes, and also to review our retail operations in the Leeds area. Both visits allowed the Directors to hear directly from staff involved in the programme of organisational change that supports our growth plans.

Outside of such formal arrangements, Directors continue to visit different areas of the business and experience it through the eyes of our colleagues, customers and other stakeholders. This helps to ensure that Non-Executive Directors’ contributions to Board discussions are well informed, supporting open and constructive dialogue with the management team.

Risk management continues to be an important area of focus for the Board, particularly in light of heightened awareness of the risks around allergens, the Company’s ongoing change programme and the uncertainties surrounding the UK’s exit from the European Union. We also spent time during the year understanding management’s approach to ensuring that the culture within Greggs remains one that manages risks well as the business grows further.

Dividend

Our progressive dividend policy targets an ordinary dividend that is two times covered by earnings, with further surplus cash being returned to shareholders as appropriate. Our Finance Director, Richard Hutton, outlines the expected application of the distribution policy in more detail in the financial review.  We currently expect to be in a position to declare a special dividend at the time of our interim results in July.

In line with its progressive ordinary dividend policy, the Board intends to recommend at the Annual General Meeting a final dividend of 25.0 Pence per share (2017: 22.0 Pence), giving a total ordinary dividend for the year of 35.7 Pence (2017: 32.3 Pence), an increase of 10.5 percent.

Looking ahead

It is hard to report on the performance of Greggs without reference to the vegan sausage roll, launched in early 2019 to an enthusiastic reception from our customers. The extraordinary level of social and general media coverage that followed has attracted additional visits to our shops, offering a great opportunity to showcase the many improvements that have been made to our shops and product offering in recent years.

At a time of unprecedented political and economic uncertainty for the food industry and for the UK, Greggs continues to demonstrate its resilience. Whilst we cannot be immune to the impact that this uncertainty may have on the economy as a whole, we are in a strong financial position and are investing for further growth and increased competitiveness in the years ahead.

Consolidated Income Statement

Note 2018 2018 2018 2017 2017 2017
Excluding exceptional items Exceptional items(3) Total Excluding exceptional items Exceptional items(3) Total
GBP’000 GBP’000 GBP’000 GBP’000 GBP’000 GBP’000
Revenue 2 1,029,347 1,029,347 960,005 960,005
Cost of sales (373,487) (5,947) (379,434) (348,098) (10,060) (358,158)
________ ________ ________ ________ ________ ________
Gross profit 655,860 (5,947) 649,913 611,907 (10,060) 601,847
Distribution and selling costs (513,161) 416 (512,745) (476,215) 198 (476,017)
Administrative expenses (52,856) (1,682) (54,538) (53,517) (53,517)
________ ________ ________ ________ ________ ________
Operating profit 89,843 (7,213) 82,630 82,175 (9,862) 72,313
Finance expense (12) (12) (368) (368)
________ ________ ________ ________ ________ ________
Profit before tax 89,831 (7,213) 82,618 81,807 (9,862) 71,945
Income tax 4 (18,201) 1,322 (16,879) (16,923) 1,884 (15,039)
________ ________ ________ ________ ________ ________
Profit for the financial year attributable to equity holders of the Parent 71,630 (5,891) 65,739 64,884 (7,978) 56,906
======= ======= ======= ======= ======= =======
Basic earnings per share 5 71.1p (5.9p) 65.2p 64.5p (7.9p) 56.6p
Diluted earnings per share 5 70.3p (5.8p) 64.5p 63.5p (7.8p) 55.7p

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Chief Executive Roger Whiteside’s report

2018 was a year that tested the resilience of Greggs’ business model and demonstrated the benefits of our strategic investment programme. The first half was significantly impacted by extreme weather but our multi-year investment in food-on-the-go products, customer experience and new shop locations allowed us to maintain positive sales growth in relatively difficult market conditions.

Once weather conditions returned to normal these underlying strengths were revealed in a strong second-half performance that saw us recover all of the lost ground and deliver results for the year that exceeded our expectations. At the same time, we continued to make good progress with the remaining elements of our business transformation programme, including the significant supply chain investment that will deliver increased efficiency and capacity for further growth in shop numbers.

Financial performance

Total sales grew 7.2 percent to GBP 1,029.3 million in 2018, the first time in its history that the business has generated turnover of more than a billion pounds in a year. Within this, company-managed shop like-for-like sales (defined in Note 9) grew by 2.9 percent.

Underlying operating profit, excluding property profits and exceptional items, grew by 9.1 percent to GBP 89.1 million (2018: GBP 81.7 million). Pre-tax profit (including exceptional items) grew by 14.8 percent to GBP 82.6 million.

Market background

Economic conditions remained challenging in 2018. Although inflationary pressures on consumers eased and they saw a return to growth in disposable incomes, confidence levels were low due to continued uncertainty regarding the economic outlook. The general retail sector saw continued declines in high street footfall as traditional business models struggled to adapt to the new dynamics in customer behaviour, whilst dealing with continued rising costs, particularly relating to labour.

The weather had a significant impact on trading in 2018. After a good start to the year the severe wintry conditions in early March hit sales badly and a more subdued trading period followed. In June and July the prolonged heatwave also affected sales, with strong demand for cold drinks, but less for bakery items. As soon as temperatures reverted to the seasonal norm, we saw a pick-up in sales growth, and this strengthened further through the fourth quarter.

In contrast to the general retail environment, the food-on-the-go sector overall continues to grow, though it remains highly competitive. We have worked hard over the last five years to redevelop our shop estate in order to be less dependent on shopping locations, and to refocus our product range on growth categories and extended day-parts which have been key to our success. These strategic initiatives have been underpinned by fast and friendly service, further driving genuine consumer affection for the Greggs brand.

Delivering the strategy

Greggs draws on its heritage in fresh bakery to compete successfully in the food-on-the-go market. Our purpose is to make good, freshly prepared food accessible to everyone with the aim of becoming the customers’ favourite for food-on-the-go.

We are also committed to conducting our business in a responsible manner and, in doing so, having a positive impact on people’s lives.

In the five years since we launched our strategic plan to focus on the growing food-on-the-go market we have radically reshaped the business making it better balanced and more efficient whilst focusing it on those areas that will provide a platform for continued long-term growth in a rapidly changing retail environment.

We are now a significant way through our transformation programme, which is on plan and scheduled to complete in 2021. This has required a significant level of capital investment and business change, but we have already seen resulting benefits and these investments are positioning the business to succeed over the long term. When the programme has completed, we will have the capacity to grow the estate to around 2,500 shops, as well as having a materially more efficient and flexible platform and infrastructure (…).

Outlook for 2019

There are significant uncertainties in the months ahead, not least as the UK negotiates its exit terms from the European Union and the potential impact that a disorderly exit might have on supply chains, tariffs, exchange rates and consumer demand. However, Greggs has started 2019 in great form, with company-managed shop like-for-like sales in the seven weeks to 16 February 2019 up 9.6 percent, and total sales up 14.1 percent.  We have enjoyed strong sales growth, particularly in January, helped in part by the publicity surrounding the launch of our vegan-friendly sausage roll.  We hope to continue benefiting from this strong momentum during the first half of 2019 before facing stronger comparatives later in the year.

2019 will be another significant year for investment in our supply chain as we create the capacity and platforms for further growth. We have a strong financial position which we plan to use to invest in Greggs’ potential for further growth, whilst also delivering good returns for shareholders.

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