Greggs PLC: announces good H1-2016 performance

Newcastle upon Tyne / UK. (gs) British Greggs PLC announced its interim results for the 26 weeks ended 02 July 2016. The leading bakery food-on-the-go retailer with almost 1’700 retail outlets throughout the country reported a good performance.

Financial highlights

• Total sales up 6.0 percent to GBP 422 million
• Company-managed shop like-for-like sales up 3.8 percent
• Operating profit excluding property gains and exceptional charge* up 6.7 percent to GBP 27.2 million (2015: GBP 25.5 million)
• Property disposal gains of GBP 2.2 million (2015: GBP 0.1 million)
• Diluted earnings per share excluding exceptional charge* 22.3p (2015: 19.5p)
• Pre-tax profit including property profits and exceptional charges GBP 25.4 million
• Continued strong cash generation: GBP 44.7 million net inflow from operating activities
• Ordinary interim dividend per share of 9.5p (2015: 7.4p)
  (*) before exceptional pre-tax charge of GBP 4.0 million (2015: GBP nil) in relation to previously announced restructuring

Operational highlights

• Good results from sales initiatives:
  – strengthening of «Balanced Choice» range
  – further development of breakfast and hot drinks offer
  – successful launch of improved Greggs Rewards app
• Shop refurbishment programme progressing well:
  – 86 shop refurbishments completed year-to-date, planning 200 for the year
• 68 new shops opened, 36 closures; expect around 70 net new shops in the year
• 1’730 shops trading as at 2 July 2016

Chief Executive Roger Whiteside: «In the first half of 2016 we delivered good like-for-like growth by reinforcing the freshness and value of our offer in line with changing trends in the food-on-the-go market. We added to our “Balanced Choice” range with sales growing strongly as more and more of our customers recognise the quality, range and value we offer in these healthier food choices.

«We have made an encouraging start to the second half of the year and are alert to any change in consumer demand that may result from the current economic uncertainty. Overall, we expect to deliver full-year growth in line with our previous expectations as well as further progress against our strategic plan».

The business has traded well, and in line with Greggs’ plans, during the first half of the year. Total sales for the 26 weeks to 2 July 2016 grew by 6.0 percent to GBP 422 million, with like-for-like sales in company-managed shops up by 3.8 percent. Operating profit before property gains and exceptional items grew by 6.7 percent to GBP 27.2 million (2015: GBP 25.5 million).

Operational review

In the first half of 2016 we delivered good like-for-like growth by reinforcing the freshness and value of our offer in line with changing trends in the food-on-the-go market. We added to our «Balanced Choice» range with sales growing strongly as more and more of our customers recognise the quality, range and value we offer in these healthier food choices. As an example our new Chargrill Chicken Salad is freshly prepared in our shops and contains just 200 calories. Breakfast remains our fastest-growing part of the day and we have successfully broadened our coffee range and invested in improved service levels to meet growing demand.

We re-launched the Greggs Rewards app in the period, introducing a simplified registration process and improved payment compatibility. Membership has grown quickly since launch of the improved app and this will help us to understand consumer needs better whilst rewarding loyal customers.

We continue to invest in the transformation of our shop estate and in the period we completed 86 shop refurbishments to our latest «bakery food-on-the-go» format; we have continued to see the expected positive impact from this programme. Over the year as a whole we plan to update around 200 shops. In the first half of 2016 we also opened 68 new shops (including 31 franchise units) and closed 36 shops, giving a total of 1’730 shops (of which 136 are franchise units) trading at 2 July 2016. We have a strong pipeline of openings, weighted towards the end of the second half, and now expect to open around 70 net new shops over the year as a whole.

Our plans to invest in the transformation and development of our supply chain are progressing well. We expect that our new distribution facility in Enfield will be operational in October allowing us to complete the closure of our existing Twickenham bakery in the fourth quarter as planned. In addition, planning permission has been secured for the extension of our Clydesmill bakery in Glasgow which will enable us to close our Edinburgh bakery during the second quarter of 2017, as previously announced. We are now planning the next phase of investment in our remaining sites, which will increase logistics capacity and consolidate manufacturing, with benefits in product quality, consistency and efficiency.

In April this year we went live with the implementation of SAP to handle our core finance processes. The migration has gone well and will provide the platform on which we will build a suite of new capabilities across logistics, procurement, product lifecycle management and centralised ranging, forecasting and replenishment. We are on track to trial improved processes around shop stock replenishment in the second half of the year.

Financial performance

Food and packaging input costs continued to be deflationary in the first half, however we are now seeing the expected increased inflationary pressure in wage costs as the «national living wage» increases take effect. Indirect currency impacts are likely to affect input costs towards the end of 2016 but we have forward cover for most of the second half. Freehold property disposals realised profits of GBP 2.2 million in the period (2015: GBP 0.1 million) and we incurred a net exceptional charge of GBP 4.0 million (2015: GBP nil) as described below. Pre-tax profit including property profits and exceptional charges was GBP 25.4 million (2015: GBP 25.6 million). Excluding the exceptional charge diluted earnings per share were 22.3 pence (2015: 19.5 pence), with reported diluted earnings per share (including exceptional items) of 19.3 pence (2015: 19.5 pence).

Exceptional items

At the time of our preliminary results announcement in March of this year we outlined plans to invest substantially in our manufacturing and distribution operations to reshape them for future growth. The initial phase of this plan involves the closure of three bakery manufacturing sites with associated one-off costs expected to be GBP 7.6 million. GBP 4.8 million of this cost has been recognised in the first half of the year and this, combined with a GBP 0.8 million exceptional credit related to the release of historical shop closure provisions, resulted in a net exceptional charge of GBP 4.0 million in the period. The overall cost and exceptional charges expected to arise from the plan remain in line with previous guidance.

Dividend

In setting the interim ordinary dividend the Board intends, going forward, to apply 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 9.5 pence per share (2015: 7.4 pence). 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 7 October 2016 to those shareholders on the register at the close of business on 9 September 2016.

Financial position

Capital expenditure during the first half was GBP 31.2 million (2015: GBP 31.3 million). We continue to see a strong return on investment in our shop estate and are progressing well with the transformation of our systems platform. The conversion of our new distribution facility in Enfield is under way and we continue to expect total capital expenditure in 2016 to be approximately GBP 85 million (2015: GBP 71.7 million). 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 GBP 44.7 million (2015: GBP 34.6 million) and we ended the period with a cash balance of GBP 35.0 million (4 July 2015: GBP 41.4 million).

Outlook

We have made an encouraging start to the second half of the year and are alert to any change in consumer demand that may result from the current economic uncertainty. We remain confident in the quality and value of the Greggs brand and will continue with our long-term strategic investment programme to transform the business from traditional bakery to a growing food-on-the-go brand. We continue to manage a significant change agenda that will benefit the capacity and cost structure of the business in the longer term. Overall, we expect to deliver full-year growth in line with our previous expectations as well as further progress against our strategic plan.