Greggs’ interims show a company in balance in several ways. First, operational and site development initiatives are driving consistent sales growth despite a challenging market. Second, the balance between low-price value and perceived quality is allowing it to cover peak input cost increases without a serious impact on margins. Third, the financial model is operating to support the dividend with a stable balance sheet.
Total sales grew 7.3%, and like-for-like sales grew 3.4%, comparing well against FY16. Operating profit pre-exceptionals and property profit, at £27.6m, was slightly ahead of H116, against flat guidance for FY17. Gross margin improved 10bp over a year ago, reflecting successful pricing and menu mix action counteracting peak ingredient inflation of 7%. Overall, pre-exceptional operating profit was only down 5% at £27.9m because of last year’s abnormal property gains.
Greggs’ continued sales growth suggests its blend of quality and value is going down well with price-conscious consumers. The company reports increasing demand for its hot sandwich, breakfast and coffee offers, as well as its traditional ranges of savoury foods
In the half, another planned bakery closure was completed and a consolidated production initiative was initiated. But the period was dominated by Greggs’ biggest operational change ever, the system-wide roll-out of its central stock forecasting and replenishment system. Despite some initial costs, stock availability benefits are already being seen.
Greggs has opportunities in new locations, including areas of the country where it is not represented. It is progressing in moving its location base off the high street, and is now being invited into shopping developments by landlords. In terms of dayparts, with new formats such as drive-through and transport hubs, there is no reason why Greggs should not eventually expand into the evening market.
Guidance is unchanged for the year, and we are not materially changing our forecasts. Consistent with that, we retain our valuation of 1,226p per share.