Greggs: announces FY 2015 preliminary results

Newcastle upon Tyne / UK. (gs) British Greggs PLC announced its preliminary results for the 52 weeks ended 02 January 2016 (2014: 53 weeks to 03 January 2015). As at 02 January 2016, the leading bakery food-on-the-go retailer in the UK counts 1’698 retail outlets throughout the country. Overview:

2015 Financial Highlights

Total sales up 5.2 percent to 835.7 million GBP (excluding 53rd week in 2014)
Company-managed shop like-for-like sales up 4.7 percent (2014: 4.5 percent)
Pre-tax profit excluding exceptional items up 25.4 percent to 73.0 million GBP (2014: 58.3 million GBP)
Strong cash generation supported capital investment and 20 million GBP special dividend
Total ordinary dividend per share up 30.0 percent to 28.6 Pence (2014: 22.0 Pence)

Strategic Progress

Growth driven by our strategy to focus on the growing food-on-the-go market
Further improvements to product range launched, including «heat-to-eat» sandwich range and extended breakfast menu
«Balanced Choice» range of healthier options now accounts for 10 percent of total sales
202 shop refurbishments plus 20 café conversions
122 new shops opened, 74 closures; 1’698 shops trading at 02 January 2016
Investment in systems to simplify processes and improve efficiency on track
Planned 100 million GBP investment in manufacturing and distribution operations over the next five years

Chief Executive Roger Whiteside: «In 2015 we delivered another excellent performance in the second year of our strategy to transform Greggs from a traditional bakery business into a modern, attractive food-on-the-go retailer. We have made significant progress across the business change programme, consequently our estate is stronger and our products, value and service are all improving the experience for customers. This year has started well and the consumer outlook remains positive with disposable incomes expected to grow further in 2016. Overall 2016 will be another year of significant change as we advance with our strategic plan and propose major investment in our supply chain. Alongside this we are confident of delivering a further year of underlying growth».

Chairman’s statement

In 2015 Greggs delivered an excellent operational and financial performance whilst also making good progress against its longer-term strategic plan. Trading conditions have continued to be supportive but the food-on-the-go market remains competitive and fast-moving, and so must Greggs. The excellent outcome in 2015 gives us confidence as we go into what we expect to be another busy year, says Chairman Ian Durant in his statement as follows:

Overview

In 2015 Greggs made further progress in executing the strategic plan outlined in 2013, which focused the business on the growing food-on-the-go market. This is bringing about significant changes to the quality and relevance of our product offer as well as the positioning and condition of the Greggs shop estate. We are also two years into a significant change programme, with ongoing investment in processes and systems delivering benefits in terms of efficiency and greater agility. The result has been another excellent financial performance, founded on strong like-for-like sales growth and leveraging the vertical integration of the Greggs business model.

The Chief Executive’s report provides greater detail on performance in 2015, progress against our strategic plan and key targets.

Our people and values

As a Board we believe that the Greggs culture and heritage is a key component of how the brand is perceived and cherished by our customers. The ongoing success of our business requires constant embracing of change but the way in which we implement changes is very much informed by our values and the long-term mind-set that has served the business so well.

I would like to thank everyone who has worked for Greggs during the past year and contributed to its success. We are proud of our achievements and have delivered an excellent financial performance whilst ensuring that Greggs remains an engaging place to work and a positive contributor to the communities in which we trade.

The Board

There were no changes in the composition of the Board in 2015, following a number of appointments in 2014. We completed our first independent Board evaluation in the year; the results were reassuring in terms of the effectiveness of the Board and have given us a number of actions for further improvement in the year ahead.

Board members are encouraged to spend time in the business, exploring its operations and talking with staff (for my part this included a night shift in South Wales) in order to inform our discussions about the business. Our aspiration is to maintain an open and constructive dialogue with a management team which values the contributions of the Non-Executive Directors. Our discussions are often lively and, whilst mutually respectful, a diversity of views is considered a strength.

The Board’s priorities in the past year have included oversight of the programme of process and systems change, people development, and increasing our understanding of customer needs. In addition, we have spent a significant amount of time considering plans to invest in the Company’s internal supply chain, including the acquisition of an additional distribution facility in north London and the other proposals outlined in the Chief Executive’s report.

Dividend policy and capital structure

Our progressive dividend policy targets an ordinary dividend that is two times covered by earnings, with any further surplus capital being returned by way of special dividends.
In line with its progressive dividend policy the Board intends to recommend at the AGM a final dividend of 21.2 Pence per share (2014: 16.0 Pence), giving a total ordinary dividend for the year of 28.6 Pence (2014: 22.0 Pence), an increase of 30.0 percent.

During 2015 the Board carried out a review of the appropriate capital structure of the Group, including consultation with some shareholders on different options for returning surplus capital. Given the leasehold nature of the shop portfolio the Board concluded that it is not currently appropriate to take on structural debt and intends to maintain a net cash position.

In 2015 the Group paid its first special dividend of 20.0p per share (a total of 20.2 million GBP), in addition to ordinary dividends paid in the year totalling 23.4 Pence per share. Our Finance Director, Richard Hutton, outlines the expected application of the distribution policy in more detail in the Financial review.

Looking ahead

We have made great progress in executing the strategic realignment of the business and, in the year ahead, will continue to make changes to improve further in all areas. This is expected to include major investment and change in our supply chain, which will involve some proposed bakery closures, as detailed in the Chief Executive’s report. We realise that this will be difficult for the people impacted but is essential to support growth and the long-term competitiveness of the business.

High quality delivery of our change programme and operational plans has resulted in a strong business performance over the last two years. I am confident that we can make further progress in the year ahead.

Chief Executive’s report

In 2015 we delivered another excellent performance in the second year of implementation of our strategy to transform Greggs from a traditional bakery business into a modern, attractive food-on-the-go retailer. We have made significant progress across all areas of our strategic plan, with the result that our estate is stronger and our products, value and service are all improving the experience for customers. Trading conditions have continued to be favourable and we have grown sales whilst continuing to drive efficiencies in our operations, resulting in a second consecutive year of record profits – says Chief Executive Roger Whiteside in his statement as follows:

Financial performance

Total sales grew to 835.7 million GBP in 2015, up 5.2 percent on a comparable 52 week basis and up 3.7 percent when compared to the 53 week financial year in 2014. Company-managed shop like-for-like sales grew by 4.7 percent and our franchised shops continued to perform well.

Operating profit (before exceptional items in 2014) grew by 25.9 percent to 73.1 million GBP and pre-tax profit (before exceptional items in 2014) grew by 25.4 percent to 73.0 million GBP. Our Finance Director, Richard Hutton, comments on financial performance in more detail in the Financial review.

Market background: Growing food-on-the-go market

Market conditions continued to be favourable during 2015, with low inflation leading to further rises in real disposable consumer income. We saw strong growth throughout the year, although customer footfall in some shopping locations was subdued in the final quarter, resulting in slower growth in this period. The market for food-on-the-go remains highly competitive but our like-for-like sales performance demonstrates the strength of the Greggs brand, its quality and its differentiated offer. Greggs appeals to a broad customer base and we saw increased numbers of customer visits as well as growth in average transaction values in the year.

Strategic direction: Focus on food-on-the-go

Our strategic plan, announced in 2013, focuses on growing like-for-like sales by improving the customer proposition and the quality of our existing estate and making our operations simpler and more efficient. The plan has four key pillars:

Great-tasting fresh food
A great shopping experience
Simple and efficient operations
Improvement through change

These pillars are all supported by our approach to keeping our people, communities and values at the heart of our business.

The strategic plan represents a major programme of change over a period of up to five years and we are tracking progress against a number of key targets:

Driving like-for-like sales growth
Achieving targeted returns on our transformational investment in shop refits
Delivery of operational and supply chain efficiencies
Achieving the planned benefits from our investment in processes and systems

In 2015 we once again met our objectives in all of these areas:

A second consecutive year of strong like-for-like sales growth
Refit investment returns exceeded our hurdle
A second year of significant cost efficiencies
Process and systems investment benefits ahead of plan

(…)

Estate changes and refurbishments

The food-on-the-go market continues to grow, offering exciting opportunities to increase our estate to substantially more than 2’000 shops, particularly in new locations away from high streets. 2015 saw us return to net shop growth, opening 122 new shops (including 61 franchised units and our first in Northern Ireland) in the year and closing 74, resulting in 1’698 shops trading at 02 January 2016. 90 percent of our new shop locations were away from high streets in areas such as retail and industrial parks, motorway service stations and travel hubs. At the end of 2015 we had 105 franchised shops operating in travel and other convenience locations, with a particular focus on motorway services and petrol forecourts.

We completed 202 shop refurbishments during the year and converted a further 20 existing bakery cafés to our bakery food-on-the-go format. These investments are transformational and allow our shops to really focus on the food-on-the-go customer. By the end of 2015 82 percent of our shops had been converted to the food-on-the-go format and in the year ahead we anticipate progressing with this refurbishment programme at a similar rate.

In 2016 we again expect to open 100 to 120 shops, including further development of our franchise partnerships, and to close 50 to 60 shops. With our leasehold property structure we have the flexibility to relocate as customer trends move and our new shop opening programme is steadily shifting the balance of the estate, increasing our presence in travel, leisure and work-centred catchments. In 2013 only 20 percent of our estate was located in these location types and by the end of 2015 this proportion had risen to 27 percent. This, coupled with our refit investment programme, is progressively improving the quality and performance of our shop estate.

(…)

Outlook 2016

100 million GBP investment programme: As part of our strategic plan to grow Greggs and transform it from a decentralised traditional bakery business into a centrally-run modern food-on-the-go brand we have been reviewing our manufacturing and distribution operations. Greggs is unusual in this sector in that it is vertically-integrated, owning and operating manufacturing facilities and its logistics network.

Following a lengthy and detailed review we have concluded that this integrated business model gives us competitive advantage, lying at the heart of our ability to offer outstanding quality and value. We intend to invest substantially to support growth and reshape the supply chain in order to compete more effectively in the food-on-the-go market. This requires an investment of around 100 million GBP in a major programme over the next five years to create additional manufacturing centres of excellence and increase capacity to support shop expansion substantially beyond 2,000 outlets in the UK.

Greggs currently operates from 12 bakeries; unfortunately not all are suitable for long-term investment due to their location and size. As a result we are proposing to close three bakeries and use the disposal proceeds to contribute to the investment in our remaining bakeries over the course of the five-year programme.

The bakeries proposed for closure are Twickenham, Edinburgh and Sleaford, and we aim to agree a programme to transfer production and distribution operations from these sites to other bakeries in our network over the next year. Alongside these proposed changes in our bakeries we have further steps to take in the centralisation of support services which we believe will require some restructuring amongst our teams deployed in the regions. We will be entering into consultation shortly to work with trade unions and employee representatives of those affected to refine and develop these proposals.

This may result in a total of 355 roles becoming redundant. These are difficult changes that we believe are needed to support the long-term growth of the business; however our immediate priority is to work to minimise the negative impact on our people, many of whom have worked in these roles for a significant number of years. Wherever possible we would look to offer alternative employment to affected employees but, due to the location of our sites, we anticipate that unfortunately many will leave the business.

Our recently-acquired distribution facility in London will enable us to invest in our Enfield bakery to create a manufacturing centre of excellence in the south east region and we now propose to invest in the extension of our Clydesmill bakery in Glasgow to create a centre of excellence in Scotland. These investments will mark the first phase of our five-year programme to transform our supply chain.

Trading: This year has started well and like-for-like sales in the eight weeks to 27 February 2016 have grown by 4.2 percent, with total sales up 6.8 percent. The consumer outlook remains positive with disposable incomes expected to grow further in 2016.

Costs were well controlled in 2015 and we will drive further efficiencies in the year ahead. Wage costs will increase above the rate of general inflation but food input costs are again likely to be deflationary for the first half of the year. In order to protect our reputation as an attractive employer we have agreed a wage increase of 5 percent for our shop team members, lifting our hourly rate to 7.47 GBP and retaining a premium over the statutory minimum.

Overall 2016 will be another year of significant change as we advance with our strategic plan and propose major investment in our supply chain. Alongside this we are confident of delivering a further year of underlying growth. The Board’s expectations for the year ahead remain unchanged.

Financial Review

In 2015 we delivered an excellent financial performance, combining good sales growth with strong returns on investment and firm cost control. Strong cash generation allowed us to invest in the business for future growth whilst making record dividend distributions to shareholders, says Finance Director Richard Hutton in his statement as follows:

Sales

Total Group sales for the 52 weeks ended 02 January 2016 were 835.7 million GBP (2014: 806.1 million GBP), an increase of 3.7 percent. Excluding the impact of the additional week in 2014 the growth in total Group sales compared with the same 52 weeks in 2014 was 5.2 percent. Company-managed shop like-for-like sales grew by 4.7 percent across the year as a whole, measured on a consistent 52 week basis.

Profit

Operating profit was 73.1 million GBP (2014: 58.0 million GBP before exceptional items), a 25.9 percent increase on an underlying basis. The result reflects further good like-for-like sales growth combined with significant savings arising from structural changes and our investment in better processes and systems.

After net finance costs of 0.1 million GBP (2014: 0.2 million GBP income) pre-tax profit was 73.0 million GBP (2014: 49.7 million GBP, 58.3 million GBP excluding exceptional items).

Operating margin

Operating margin was 8.7 percent (2014: 7.2 percent before exceptional items).
Within this gross margin increased to 63.5 percent (2014: 62.2 percent excluding exceptional items) reflecting structural changes made in 2014 and the operational gearing impact of strong like-for-like sales growth in the absence of significant inflationary pressure. Whilst the outlook for ingredient costs remains deflationary we have agreed enhanced pay awards for our retail colleagues in the year ahead. The cost of these awards, in excess of the annual award agreed for all other employees, will amount to 3 million GBP annually.

We continued to seek efficiencies from our cost base in 2015 and realised further benefits from our significant programme of investment in better processes and systems. Including the annualisation of our restructuring activity from 2014 we realised total cost reduction benefits of 12 million GBP in 2015, helping to fund the investment required for the future whilst also enhancing our operating margin.

In 2015 we recognised gains on the disposal of freehold properties totalling 1.2 million GBP (2014: 1.5 million GBP) largely as a result of the sale of freehold shops on closure. On the basis of our pipeline of activity for 2016 we expect property gains to make a similar contribution in the year ahead.

Financing charges

There was a net financing expense of 0.1 million GBP in the year (2014: 0.2 million GBP income) reflecting finance income of 0.2 million GBP and a 0.3 million GBP charge in respect of the funding position of the defined benefit pension scheme. In the year ahead we expect to incur a small financing expense relating to the net liability of the pension scheme at the end of the year.

Taxation

The Group’s effective tax rate was 21.1 percent (2014: 24.0 percent before exceptional items). The effective rate primarily reflected reductions in the headline rate of corporation tax and the impact of the Group’s share price on allowances for share scheme costs. We expect the effective rate for 2016 to be around 22 percent, and to remain around two percent above the headline corporation tax rate going forward.

Earnings per share

Diluted earnings per share were 55.8 Pence (2014: 43.4 Pence before exceptional items), an increase of 28.6 percent. Basic earnings per share were 57.3 Pence (2014: 44.0 Pence before exceptional items).

Dividend

The Board recommends a final ordinary dividend of 21.2 Pence per share (2014: 16.0 Pence). Together with the interim dividend of 7.4 Pence (2014: 6.0 Pence) paid in October 2015, this makes a total ordinary dividend for the year of 28.6 Pence (2014: 22.0 Pence). This is covered two times by diluted earnings per share in line with our progressive dividend policy. In addition in July 2015 the Group paid a special dividend of 20.0 Pence per share. Total dividends paid in the year therefore amounted to 43.7 million GBP (2014: 19.6 million GBP).

Subject to the approval of shareholders at the Annual General Meeting, the final dividend will be paid on 20 May 2016 to shareholders on the register on 22 April 2016.