The trading update for Q419 indicated an acceleration in revenue growth through the period against comparatives that became tougher. The reported l-f-l revenue growth for Q419 of 8.7%, in company-managed stores, follows 8.3% for the first six weeks of the quarter, and is against a comparative of 5.2% in Q418. The drivers of growth continue to be increased numbers of customers who are attracted to the stores given the product innovations and increased convenience. To celebrate the very strong growth, management has announced a one-off bonus for staff of £7m, c £300 per employee. Given the strong FY19 revenue performance, management expects FY19 underlying profit to be slightly higher than previous expectations. 

As expected, management highlights the cost headwinds from the National Living Wage increase from 1 April 2020 and the cost of pork, which has risen significantly and has been a headwind through H219. The National Living Wage increase of 6.2%, mainly for store staff, represents total staff cost inflation of c 4.5% in FY20 versus c 4% in a typical year. Further guidance on the outlook for pork inflation will be given at the preliminary results in March as the market is volatile, making it difficult to fix prices. The company is operating with price visibility of roughly three months versus 4-6 months typically. Management remains confident of mitigating cost inflation through business efficiencies and selective price inflation, as in previous years, as well as c £10m of benefits from costs for initiatives in FY19, including the £7m bonus above, that will not recur or will start to contribute revenue.

Our profit forecasts for FY19 and FY20, at the high end of consensus, remain broadly unchanged. For FY19, the revenue uplift from the better revenue performance in Q4 is offset by the new bonus. For FY20, we lower our gross margin assumption by 40bp to a decline of 30bp y-o-y, offset by the higher revenue and cost mitigation. Our DCF-based valuation of 2,096p is broadly unchanged.