Greggs PLC: announces H1-2018 trading update

Newcastle upon Tyne / UK. (gs) British Greggs PLC, the leading bakery food-on-the-go retailer in the UK with almost 1+900 retail outlets throughout the country, provided an update on its business for the 26 weeks to 30 June 2018. The company announces resilient trading with good strategic progress.

First half financial highlights

  • Total sales up 5.2 percent to 476 million GBP
  • Company-managed shop like-for-like sales* up 1.5 percent
  • Underlying operating profit excluding property profits** and exceptional charge*** 25.7 million GBP (H1 2017: 27.6 million GBP)
  • Reported pre-tax profit including property profits and exceptional charge 24.1 million GBP (H1 2017: 19.4 million GBP)
  • Continued strong cash generation: 39.0 million GBP net inflow from operating activities (H1 2017: 34.0 million GBP)
  • Ordinary interim dividend per share up 3.9 percent to 10.7p

* like-for-like sales in company-managed shops (excluding franchises) with a calendar year’s trading history
** freehold property disposal profits of 0.3 million GBP in 2018 (H1 2017: 0.3 million GBP)
*** exceptional pre-tax charge of 1.9 million GBP in 2018 (H1 2017: 8.3 million GBP) in relation to previously-announced restructuring

Chief Executive Roger Whiteside: “Greggs has delivered a resilient performance despite challenging market conditions and we have continued to make good progress with our strategic investment programme to transform the business into the customers’ favourite for food-on-the-go. While we remain cautious in respect of the outlook for sales in the balance of the year given the consumer backdrop, we are confident in the medium and long-term growth potential for the business, supported by customers’ response to our initiatives, our strong cash generation and the ongoing strategic investments that we are making. Over the year as a whole we continue to believe that underlying profits (before exceptional costs) are likely to be at a similar level to 2017».

Greggs once again demonstrated its resilience by delivering sales growth in a tough operating environment in the first half of the year. Total sales for the 26 weeks to 30 June 2018 grew by 5.2 percent to 476 million GBP, with like-for-like sales in company-managed shops up by 1.5 percent in a period that was significantly affected by extremes of weather and increased consumer caution. At the same time we made further good progress in delivering the investment programme that will complete the transformation of the business into a food-on-the-go specialist and provide the platform for further growth over the years ahead.

Operational review

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 the business on those areas which will provide a platform for continued long-term growth in a rapidly changing retail environment.

Our shop estate has been transformed to create an attractive food-on-the-go experience with relevant products, extended trading hours and seating, and a wide variety of location types offering convenient access wherever our customers are. We continue to grow and relocate our shop estate alongside investing in capacity in our internal supply chain. In the first half of 2018 we opened 59 new shops (including 19 franchised units) and closed 25 shops, giving a total of 1,888 shops (of which 219 are franchise units) trading at 30 June 2018.

We opened our second ‘Drive-Thru’ shop at Ashby-de-la-Zouch and our first London Underground shop in Westminster Tube station, along with openings in other transport locations such as Birmingham New Street station, Glasgow Buchanan bus terminal and East Midlands Airport. All are performing well and contributing to the ongoing rebalancing of the Greggs estate. In 2013 only 20 percent of our shops served catchments outside of traditional shopping locations; today that figure is 35 percent and we anticipate that it will continue to grow to more than 50 percent in the longer term. Our pipeline of new shop opportunities remains strong and we expect around 100 net openings in the year as a whole, of which around 60 are anticipated to be with franchise partners.

In recent years new product categories have been developed alongside traditional bakery favourites, providing more reasons to choose Greggs. We have continued to see strong growth in sales of hot drinks, breakfast, healthier choices and hot food, which increases the range of options for customers across the day. These ‘growth categories’ now account for 30 percent of sales (2013: 15 percent). Alongside product development our reputation for great value has been reinforced by providing market-leading meal deals across the range and day. Recently we expanded our longstanding 2 GBP breakfast deal to include a broader offer, adding yoghurts and fruit pots, and have also introduced a new 2 GBP ‘pizza slice + drink’ offer after 4pm. In May we launched our first vegan product, the Mexican Bean Wrap, and are well positioned to compete for sales in the months ahead with the launch of our autumn menu which will include a number of new hot sandwich options.

Our investment programmes in improved systems and expansion of our internal supply chain are providing capacity for further growth whilst improving product quality and making the business more efficient. Recent activity has focused on the installation of a new manufacturing platform for doughnuts, internal relocation of our pizza production and the adaptation of our distribution capability to handle the transfer of products around the network. In addition, we are advancing plans for the additional distribution centre that we plan to build at Amesbury in Wiltshire in 2019.

Alongside this we continue to progress the investment programme to upgrade our processes and systems. Preparations are well advanced for the replacement of our human resource and payroll systems, along with the implementation of a new system for estate management that will support the changes to lease accounting in 2019.

Strategic development

We are now a significant way through our transformation programme, which is on plan and scheduled to complete in 2020. This has required an exceptional level of capital investment and business change, but we have seen significant resulting benefits and it is positioning the business to succeed over the long term. When the programme has completed, we will have the capacity to grow the estate to circa 2,500 shops, as well as having a materially more efficient and flexible platform and infrastructure.

We currently expect that the capital requirements of the business will revert to lower maintenance levels in 2021 and thereafter, although we continue to review a number of investment opportunities to drive our business forward and will provide more details around longer-term strategic developments in due course.

Financial performance

Operating profit excluding property gains and exceptional charges was 25.7 million GBP in the first half of 2018 (2017: 27.6 million GBP), giving an underlying margin of 5.4 percent (2017: 6.1 percent). As previously reported, the impact of extreme weather conditions on customer footfall was the most significant factor affecting the first-half performance. Food input cost inflation continues to moderate as expected, however the current hot weather is affecting agricultural yields and higher energy prices have provided an additional cost headwind. We are seeing reductions in shop rents at the point of lease renewal and, overall, cost pressures currently remain in line with our expectations for the year.

Non-exceptional freehold property disposals realised profits of 0.3 million GBP in the period (2017: 0.3 million GBP) and we incurred a net exceptional charge of 1.9 million GBP (2017: 8.3 million GBP) as described below. Pre-tax profit including all property profits and exceptional charges was 24.1 million GBP (2017: 19.4 million GBP). Diluted earnings per share (including exceptional items) were 18.6 GBPence (2017: 14.9 GBPence); excluding the exceptional items diluted earnings per share were 20.1 GBPence (2017: 21.4 GBPence)

Exceptional items

Exceptional charges relate to the one-off costs of implementing our 100 million GBP investment programme to reshape our manufacturing and distribution operationsfor future growth. The peak charge was incurred in 2017 when we recognised 10 million GBP of net costs and the overall cost and exceptional charges expected to arise from the plan remain in line with previous guidance. 1.9 million GBP of exceptional costs have been recognised in the first half of the year and we expect a total charge in 2018 of circa 6 million GBP as a result of the changes required to consolidate our manufacturing operations across the country. To date 19 million GBP has been charged in respect of exceptional costs and a further 11 million GBP is expected through to 2020 (total expected charge 30 million GBP). Cash expended to date is 9 million GBP, with a further 16 million GBP to come (total expected outlay 25 million GBP).

Dividend

In setting the interim ordinary dividend the Board applies a formula so that the interim payment is the equivalent of approximately one third of the total ordinary dividend for the previous year. On this basis the Board has declared an interim dividend of 10.7 GBPence per share (2017: 10.3 GBPence). The overall ordinary dividend for the year will be declared in line with our progressive dividend policy, which targets a full year ordinary dividend that is two times covered by underlying earnings. The interim dividend will be paid on 4 October 2018 to those shareholders on the register at the close of business on 7 September 2018.

Capital expenditure and financial position

Capital expenditure during the first half was 33.1 million GBP (2017: 36.4 million GBP) as we progressed the investment in the transformation of our manufacturing and logistics capacity alongside new shop growth and estate refurbishment. Our overall plans for investment remain unchanged and, based on the latest anticipated phasing of our supply chain investment, we now expect total capital expenditure in 2018 to be in the range 85 to 90 million GBP (2017: 70.4 million GBP). Total capital expenditure plans through to programme completion in 2020 remain unchanged although phasing may shift between years as the operational roll out unfolds.

The Group continues to generate strong cash flows and remains in a robust financial position. Net cash inflow from operating activities in the period was 39.0 million GBP (2017: 34.0 million GBP) and we ended the period with a cash balance of 43.5 million GBP (1 July 2017: 19.9 million GBP).

Outlook

Greggs has delivered a resilient performance despite challenging market conditions and we have continued to make good progress with our strategic investment programme to transform the business into the customers’ favourite for food-on-the-go. While we remain cautious in respect of the outlook for sales in the balance of the year given the consumer backdrop, we are confident in the medium and long-term growth potential for the business, supported by customers’ response to our initiatives, our strong cash generation and the ongoing strategic investments that we are making.

Over the year as a whole we continue to believe that underlying profits (before exceptional costs) are likely to be at a similar level to 2017.