Greggs’ interim results, against a backdrop of extreme weather conditions, reinforce progress with the strategic transformation of the brand into a leading ‘food-on-the-go’ format. Innovative new product ranges, a reduced dependence on high street footfall and a major overhaul of the supply chain are creating a solid platform for the next stage of the journey. We forecast strong cash generation and a return to earnings growth in 2019.
Greggs’ revamped summer menu and a wider choice of value meal deals appear to have caught the eye of the cost-conscious consumer in the relentless heat. Following on from the heavy snow disruption earlier in the year, the company reported first half like-for-like sales growth of 1.5%, implying a stronger second quarter at around 1.8% compared with 1.3% in the first quarter. Total sales rose by 5.2% to £476m, while underlying operating profit of £25.7m declined by 7% yearon-year, largely attributable to the adverse winter weather. Strong operating cash flows resulted in a net cash position of £43.5m (H117: £19.9m).
The company has adjusted its guidance for store openings, down from 110-130 to about 100 net new stores this year. The emphasis for new outlets remains focused on locations that capture work, travel and leisure-related footfall, thus reducing the chain’s high street exposure. 35% of stores now service non-retail trade and the company expects that proportion to rise to approximately 50% over the longer term.
As the brand transformation continues to gather momentum, a next logical step would be to develop the digital platform, both in store and for customers to place advance orders for delivery or collection. The fact that Greggs prepares much of its food freshly on site each day and has the ability to tailor orders to meet individual customer requirements is a clear differentiator. Plans are underway to trial the first ‘click-and-collect’ store towards the end of the year.
Despite an improved sales performance in the second quarter, we are mindful of the general weakness in consumer sentiment and ongoing inflationary cost pressures. As such, we are not materially changing our 2018 forecast for broadly flat underlying profit growth year-on-year, consistent with company guidance. We retain our valuation of 1,360p per share.